The introduction of the Investment Firms Prudential Regime (IFPR) by the Financial Conduct Authority (FCA) marked a significant evolution in the prudential oversight of UK investment firms. Central to this regime is the Internal Capital Adequacy and Risk Assessment (ICARA) process, which has superseded the former Internal Capital Adequacy Assessment Process (ICAAP). This transition represents a shift toward more dynamic, integrated and firm-specific risk management processes.
What is ICARA and How is it Different from ICAAP?
The ICARA process was introduced under the IFPR for UK investment firms and is overall more comprehensive than its predecessor. While ICAAP was quite narrowly focused on assessing regulatory capital adequacy, ICARA builds upon this by requiring a more holistic evaluation of the firm that is proportionate to its specific size, business model and overall risk profile. The ICARA process considers more than just the balance sheet of the firm and assesses the potential for harm posed to clients and the wider market. The capital adequacy assessments are integrated with forward-looking requirements for harm mitigation, robust wind-down planning and operational resilience. This multi-faceted approach creates a cohesive framework for managing prudential risk.
Key Components of the ICARA Process
The most defining feature of the ICARA process is the emphasis on embedding the process into the firm’s regular governance cycles. The FCA expects it to be a living process, not a static document, that consists of the following key components:
- Risk identification and harm mitigation - firms must assess a broad range of internal and external risks. These risks include traditional credit, market and operational considerations, but also extend to the potential harm a firm could cause. For example, an asset manager must assess the risk of harm from a significant portfolio valuation error for both the firm and the client, as well as the potential for wider market integrity risk.
- Capital and liquidity assessments - this process will now require firms to align financial resources to their specific risk profile. Firms are now responsible for calculating their thresholds based on the risks and potential harms identified. This ensures that capital and liquidity levels are not just sufficient to meet baseline requirements, but are adequate to support the business through times of stress and facilitate an orderly wind-down process.
- Wind-down planning - this is a critical component that demands a realistic, fully costed and regularly reviewed plan to be used in the event of a firm having to wind down due to liquidity issues. The FCA expects firms to demonstrate a practice strategy which details the resources, timelines and governance arrangements required to effectively cease regulated activities with minimal negative impact on clients and the market. This forms a core part of the firm’s recovery and resolution toolkit and is not a theoretical exercise.
- Governance and documentation - ICARA must be underpinned by a robust governance framework throughout the process. This requires active board involvement in challenging assumptions, along with clear ownership of tasks assigned to senior managers. It must be fully integrated with other key control functions such as compliance monitoring and internal audits, with documentation providing a clear audit trail for assessments.
Regulatory Expectations for ICARA Reviews
Firms must be prepared to demonstrate to the FCA that ICARA is embedded, up-to-date, and reflected in real governance decisions. The expectation of a proportional risk framework and the complexity of the ICARA should align with the scale and complexity of the firm’s operations. During supervisory reviews, the FCA may test the assumptions underpinning a firm’s calculations, review its scenario analysis for credibility or request updated wind-down plans. The outcomes of the ICARA, including the capital and liquidity thresholds, must be clearly justified and demonstrably linked to the firm’s regulatory reporting obligations under IFPR.
How can Firms Strengthen their ICARA Approach?
Firms should utilise the ICARA process as a strategic tool to improve their real-world risk capabilities, not just as a box-ticking exercise. They can do this in several ways:
- Ensure a top-down approach with demonstrable buy-in from the board and senior managers who actively challenge the process
- Review and update the ICARA regularly and in response to significant operational changes or market shifts
- Align Key Performance Indicators (KPIs) for relevant staff and functions with the key outcomes and management actions identified in the report
The ICARA process is a strategic opportunity for firms to strengthen their risk oversight and operational resilience. The comprehensive nature of the process encourages a proactive, top-down approach to managing capital, liquidity and their potential for harm. Firms that embrace the ICARA as an opportunity to embed a robust risk culture will benefit far more than those who view it only as a compliance burden. Engaging in the process with a holistic and dynamic approach is essential for achieving long-term stability while satisfying regulatory expectations. Need support enhancing your ICARA process?
Get in touch with Novatus Global today and we'll explain how we can help you align with IFPR requirements and strengthen your risk and capital management approach.
