FCA: The ICARA Thresholds
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:
- Financial Forecasts
- Material harms / risk matrix
- Scenario and stress testing
- Wind-down plan
- 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:
Own funds threshold requirement
Because the permanent minimum requirement (“PMR”), fixed overheads requirement (“FOR”) and K-factor requirement (“KFR”) may not be sufficient capital requirements to mitigate the risks that the firm faces or poses to its customers and markets, they should calculate their own fund threshold requirement. This will be driven by the higher of:
- the capital resources needed to mitigate any residual risk (having considered the assessment of risks and the firm’s ability to mitigate them); and
- the firm’s assessment of capital resources required in the event of an orderly wind down.
Once the own funds threshold requirement has been determined, firms must hold their capital resources in the same proportions as defined for the PMR, FOR and KFR.
Liquid assets threshold requirement
Firms will be required to calculate their liquid assets threshold requirement as part of their ICARA process. This is because the basic liquid assets requirement may not be sufficient in times of financial stress. The ‘liquid assets threshold requirement’ will be driven by the higher of:
- the liquid assets needed at any given point in time to fund ongoing operations as well as to mitigate any adverse trends throughout the economic cycle; and
- the firm’s assessment of liquid assets required in the event of an orderly wind down.
The FCA proposes that investment firms should assess their liquid assts needed to fund ongoing operations on a quarterly basis, to allow for the potential fluctuations in liquidity which may occur over a typical year. The ‘liquid assets threshold requirement’ should be set at the highest point determined by this quarterly split and firms are required to report projected liquid assets values for future quarters.
Once the ‘liquid assets threshold requirement’ has been determined, firms must hold their liquid assets in accordance with the same haircuts and limits as was applied in determining the basic liquid assets requirement.
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 firstname.lastname@example.org