Prudential regimes define the financial and risk management standards that firms must meet to operate safely within the financial system. These regimes determine how much capital a firm should hold, how it assesses risk, and how it prepares for financial stress or exit scenarios. In the UK, the Investment Firms Prudential Regime (IFPR) represents a significant evolution in this area, particularly for investment firms applying for FCA authorisation. Understanding and preparing for IFPR is now a core component of the application process.
What is IFPR?
The IFPR is a UK-specific prudential framework that came into force in January 2022. Developed by the Financial Conduct Authority (FCA), IFPR applies to all FCA-authorised investment firms, including new applicants, and replaces previous prudential rules derived from the EU’s MiFID framework. The goal of IFPR is to simplify and streamline the prudential standards applicable to investment firms, aligning them more closely with each firm’s size, structure, and risk profile. By adopting a risk-based and proportionate approach, IFPR moves away from a one-size-fits-all regime and instead focuses on how firms operate.
What does IFPR mean for Authorisation?
IFPR introduces a more structured and granular set of requirements for authorisation. Firms must be prepared to demonstrate how they meet the regime’s expectations across several dimensions:
- Capital and Liquidity Planning: Firms must hold sufficient capital and liquid assets to meet their fixed overhead requirements and cover potential losses
- Risk Assessment: Applicants are expected to have conducted internal assessments of their financial and operational risk, including third-party liabilities
- Group Consolidation: The FCA may assess prudential requirements on a consolidated basis if firms are part of a wider group, particularly where risks are shared across entities
- Governance and Controls: An increased emphasis on governance requires applicants to demonstrate robust internal controls, clear reporting lines, and effective oversight mechanisms
The IFPR is designed to be proportionate with requirements that scale according to the firm’s size, structure, and risk profile. Smaller, non-interconnected firms (SNIs) benefit from simplified obligations, while more complex firms will face enhanced requirements aligned to their potential for harm.
Understanding ICARA
A central element of IFPR is the Internal Capital and Risk Assessment (ICARA) process, which replaces the previous ICAAP (Internal Capital Adequacy Assessment Process) for investment management firms. ICARA is an effective capital planning tool, intended to drive internal discussions around risk, resilience, and the firm’s ability to manage stress. Firms must demonstrate that they:
- Assess and hold capital and liquidity appropriate to their business model and risk exposures
- Can wind down their business in an orderly way without causing harm to clients or markets
- Have considered a range of plausible stresses and defined credible mitigation strategies
ICARA should not be treated as a one-off exercise. The FCA expects the ICARA process to be fully embedded into the firm’s broader governance and risk management cycle, including board oversight, strategic planning, and regular reviews. New applicants will be expected to have a working ICARA framework in place at the point of application or a clear plan, timeline and structure for implementing one. The FCA will expect to see a realistic, well-documented plan with board-level engagement from the outset. The IFPR regime goes beyond basic compliance, requiring firms to demonstrate financial resilience, operational discipline, and credible planning for adverse scenarios. Capital and liquidity requirements, strong governance controls, and a well-integrated ICARA process are all essential for a successful application. New applicants should treat IFPR compliance as a strategic foundation for long-term stability. Early investment in risk management, capital planning, and internal governance will provide a smoother authorisation process, and support more sustainable growth.
