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FCA: The ICARA – How the process should work

Posted on: 22nd August 2022 | 4 min

The prudential regime for investment firms has been in effect since January 2022, and the impact of the new requirements around capital, liquidity and reporting and other areas has been felt by different firms to varying degrees. The ICARA has entailed a significant amount of output from firms who have already submitted theirs to the FCA, while other firms who have delayed their submission date need to decide how best to complete the ICARA. Some firms have considered an ICARA template; the reality is using such a tool does not necessarily reduce workload or cost, both financially and in time, for the firm itself.

The Wheelhouse ICARA Framework

The ICARA process encompasses various aspects of internal governance with a particular focus on risk management systems, processes and controls and a thorough assessment of the financial impact of potential risks compared to the financial resources available. Wheelhouse Advisors has developed a framework to encompass all firms that have an ICARA requirement. An ICARA template, while offering guidance for a firm, cannot deliver on experience.

Our framework is based on the following core areas:

  1. Financial Forecasts
  2. Material harms / risk matrix
  3. Scenario and stress testing
  4. Wind-down plan
  5. ICARA Document

Over 2022, we have run several workshops allowing us to incorporate feedback from firms on where they see roadblocks to completing the ICARA successfully and why an ICARA template does not satisfy their reporting and regulatory needs.

Wheelhouse Advisors, with the benefit of experience, have created a framework for our clients, with clear steps to work through, creating a financial forecast and risk matrix supported by stress testing and wind down planning, resulting in a comprehensive and factually accurate ICARA submission.

Key principles of the ICARA process

Before you can understand the ICARA process, you must consider the key principles. Some of these are summarised as follows:

How should the ICARA process work?

The ICARA process should be the centrepiece of a continuous risk management process, which should incorporate:

  1. Business model assessment, planning and forecasting 
    • Forecasting capital and liquidity needs, both on an ongoing basis and in the event of winding-down.
    • Essential understanding of vulnerabilities as a profit-generating operation. This helps to identify risks and conflicts of interest which have the potential to cause harm.
    • Forward-looking planning and assessment of capital and liquidity are also integral to understanding how severe but plausible scenarios could affect a firms’ ability to maintain sufficient capital and liquidity resources.
  2. Identification and monitoring harms 
    • Systems and controls to identify and monitor all material potential harm.
  3. Harm mitigation 
    • Appropriate mitigants to minimise the likelihood or impact of the material harm.
  4. Assessment of capital and liquidity requirements 
    • For harms not adequately mitigated through systems and controls, assess whether additional capital resources and/or liquid assets are required.
    • Could apply where risk and unusual or potential impact is particularly severe or driven by an activity not covered by the K-Factor Own Funds Requirement.
    • Firms should consider risks caused by the activities of the whole business, including activities regulated outside of MiFID and unregulated activities.
    • Larger or more complex firms should also conduct reverse stress testing.
  5. Recovery action planning 
    • Determine appropriate recovery actions to restore capital and/or liquid resources to avoid breaching threshold requirements.
    • Develop appropriate early warning indicators to assist firms that might soon be in financial difficulty and set out credible actions to help reverse or repair any adverse trends.
  6. Undertake wind down planning 
    • Wind-down plans should include timelines. Firms should consider different scenarios that could cause a need to wind down the business. These underlying drivers could result in the need for different resources (financial and non-financial) during the wind-down period.
    • Consider the concepts of an ‘own funds wind-down trigger’ and a ‘liquid assets wind-down trigger’. Firms should ringfence resources so that sufficient capital and liquid assets are available at all times to enable an orderly wind-down. As a minimum, these will be the FOR and liquid assets requirement respectively, but a firm or the FCA may identify reasons for these triggers to be set at a higher level.

Wheelhouse Advisors can guide you through clear steps that you need to take to complete your ICARA successfully, using our tested framework. We will ask you to review and approve each step of the process, with the conclusion being your firm fulfils the FCA reporting requirements succinctly and without undue pressure on your own internal resources. If you would like to understand in more detail how our ICARA template reporting and methodology works, please contact mchambers@wheelhouse-advisors.com


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