For many firms, the prospect of completing an ICARA for the first time is daunting. It need not be.

Overall expectation: a process not a document

The ICARA should pass a simple use test:

• is the firm’s senior management actively using the ICARA to ensure that the firm maintains adequate financial resource considering its strategy and day-to-day operations?

If the answer to this question is “yes”, this is a strong indicator the firm is fully engaged with the ICARA process.

Conversely, if the ICARA is perceived to be:

• an annual chore;
• the responsibility of control functions alone; and/or
• something that sits in the bottom drawer unless requested by the regulator

then it will not pass the use test.

Key elements

The ICARA should account for:

• all business that a firm is engaged in, MiFiD or non-MiFID;
• the potential harm arising from each business activity, including to:
  • customers;
  • markets;
  • other stakeholders; and
  • the firm itself;
• the most material risks posed by, or that threaten, the firm’s activities.

Keep it proportionate

The FCA does not expect:

• the ICARA to constitute an exhaustive list of every single risk that a firm could encounter in carrying out its activities. This is neither practical nor realistic; or
• firms with a relatively straightforward business profile to engage in complex modelling.

If an ICARA is too unwieldy it is unlikely to pass the use test. Keep it simple.

No templates

The FCA will not be publishing any template ICARAs or wind down plans. This is because the FCA expects an ICARA to be customised to address the idiosyncrasies in each firm’s business model, and the risks arising therefrom.

If a firm has previously engaged in the Internal Capital Adequacy Assessment Process (“ICAAP”) many elements of this should be transferable (if done well!). However, the ICARA places a greater emphasis on harm to customers and markets.

A team effort

A firm should ensure that all its key players are on the pitch when developing its ICARA. Representatives from all core business functions should have input into scoping risks and testing assumptions. Leaving the ICARA process to control functions is likely to risk the emergence of blind spots.

The importance of good governance

Challenge. This was critical in the performance of the ICAAP. The ICARA is no different.

Consistent with the Senior Managers Regime, a firm’s senior management is ultimately responsible for ensuring its ICARA process is comprehensive and effective. If the ICARA is found to be deficient, senior management needs to take action to rectify this. Moreover, senior management needs to be able to demonstrate that it has “signed off” the ICARA process in a documented forum that has scrutinised the robustness of:

• planning;
• forecasting;
• risk identification;
• risk mitigation; and
• recovery and wind down planning.

As with the ICAAP, non-executive directors are expected to offer a constructive critique of a firm’s ICARA process and suggest revisions or the procurement of additional resources where required.

If a firm is producing high quality: (a) management information; and (b) minutes of meetings, this will go some way to demonstrating good governance.

The importance of testing wind-down plans

Most firms will be used to testing their business continuity plans. The FCA also expects firms to test their wind-down plans to ensure:

• key staff are aware of their responsibilities during a wind-down;
• communications channels operate effectively; and
• any fundamental flaws in the planning have been identified and addressed.

The importance of data quality

The hackneyed phrase “rubbish in, rubbish out” obviously applies to the ICARA process.

Perhaps less obvious is the time elapsed between underlying data and the submission of MIF007 (the annual ICARA questionnaire) to the FCA. If too long, the FCA may question whether the data continues to be reflective of the firm’s business and operating environment.

Some useful resources

The following resources will help a firm get its ICARA process off to a good start:

• Investment Firms Prudential Regime resource page
• FG20/1: Assessing adequate financial resources
• Wind-down Planning Guide
• TR22/1: Observations on wind-down planning: liquidity, triggers & intragroup dependencies
• “Dear CEO” letter: Quality of prudential regulatory returns

In addition to the above, the FCA is likely to publish observations after it has received the initial MIF007 returns so it is worth subscribing to the IFPR newsletter for updates.

Summary

To summarise, through the ICARA, the FCA is seeking to understand how a firm identifies and manages risk. If a firm can articulate this as realistically as possible, it won’t go far wrong.

Originally published by Thomson Reuters © Thomson Reuters

About

A.C.Culley & Co. has extensive of governance and operational risk management processes. A.C.Culley & Co. can assist firms in developing and maintaining their ICARA processes. For more information, please contact us.