At the core of the Investment Firms’ Prudential Regime is the Internal Capital Adequacy and Risk Assessment, or ICARA process. This builds on the formulaic requirements set by the regime on capital and liquidity.
The ICARA process replaces the ICAAP for some firms and encompasses aspects of internal governance with a particular focus on risk management systems, processes and controls and a thorough assessment of financial resources.
It should be the centrepiece of a continuous risk management process.
Business Model Assessment, Planning and Forecasting.
Firms should be able to forecast capital and liquidity needs, both on an ongoing basis and in the event of winding-down and:
- demonstrate an understanding of the risks to their profit making abilities
- look ahead to evaluate how plausible scenarios could affect their ability to maintain sufficient capital and liquidity resources
- outline the systems and controls in place to identify, monitor and mitigate harms.
- capital and liquidity should be assessed where these are not adequately mitigated through systems and controls. Are additional capital and liquidity resources required?
- consider the risks caused by the whole business – including non-MIFD activities.
Recovery Action Planning
The FCA wants to see evidence that firms have early warning indicators and triggers, with plans in place to restore capital or liquid resources should thresholds be at risk of breach.
Firms should also include comprehensive wind down plans with triggers, timelines and scenarios where different resources might be needed.
The ICARA process is detailed and can be complex. As the central part of the whole regime, it’s worth spending time and effort to get the underlying processes right.
Wheelhouse Advisors’ ICAAP and ICARA experts assist clients in developing, implementing and documenting robust processes, including:
- Assistance with developing and/or documenting a risk management framework, including:
- Risk appetite, identification, and assessment
- Mapping to effective policies and procedures
- Robust monitoring, reporting and escalation protocols
- Orderly wind-down planning
- Production of financial and regulatory capital forecasts
- Pillar 2A assessment quantifying additional risks not fully covered under Pillar 1
- Pillar 2B assessment - stress and scenario testing
- Production of a final report