FCA publishes final report on IFPR implementation observations

Following the publication of initial findings earlier this year (please see EventID 19892), the Financial Conduct Authority (FCA) has recently released a final report regarding the implementation of the internal capital adequacy and risk assessment (ICARA) process and reporting requirements under the Investment Firms Prudential Regime (IFPR).
To recall, the IFPR has been in place since January 1, 2022 and requires MiFID investment firms, including „fund managers, asset managers, trading firms, depositaries, and investment platforms“, to perform an initial assessment of their capital adequacy so as to identify any shortcomings and possible risks to their operation and build up sufficient (liquid) capital to mitigate any potential risk and to enable them to perform an orderly wind-down, if so needed.
In its final report now, the FCA acknowledges that while many firms have made notable progress towards the adoption of ICARA, there are still deficiencies in the areas of cash flow analysis, liquid asset assessments, the assessment of internal early warning indicators, the implementation of adequate wind-down plans, and the determination of capital requirements based on an operational risk assessment. The key deficiencies are noted below:
– Some firms failed to apply the guidance provided by MIFIDPRU effectively, either by not considering relevant causes of stress (e.g. market volatility) or by applying only a subset of applicable stress factors to their business models in an effort to determine liquid asset needs.
– Other firms failed to regularly review and adjust their liquid asset levels to reflect the most recent assessments of liquid asset needs.
– Many firms, despite having business models with significant intra-day or inter-day funding needs during stress scenarios, only conducted monthly or quarterly cashflow analysis which is likely to result in cash-flow mismatches
– Some firms mixed up the assessment of liquid assets and requirements thereof with that of own funds, leading to an inadequate estimation of liquid assets necessary in the daily operation or in case of a wind-down.
– Firms often waited until their resources fell below the levels required for an orderly wind-down before considering activation of wind-down plans. They neglected to install adequate warning triggers and to assess an additional buffer on top of the minimum threshold.
– Some firms focused on thresholds for setting intervention points based on „mild“ stress scenarios only.
– Many firms showed deficiencies related to the handling of group relationships in wind-down planning, including the negligence of group governance dynamics, the non-consideration of group-risk taking policies, or the ignorance of group-related interdependencies.
– In same context and as already noted in the initial findings earlier this year, sometimes, firms within groups focused entirely on the risk management of the group, entirely ignoring the needs of the individual firm.
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To conclude, the FCA has enclosed some good and poor practices it has observed in relation to
– Group ICARA processes
– ICARA process
– Early warning indicators, triggers, and interventions
– Assessment of liquid asset requirements
– Operational risk capital assessments
– Wind-down planning process
– Useability of the ICARA document and process
– Data integrity
The FCA expects in-scope firms to reflect upon their own operations and implementation of ICARA and to consider „whether to apply any of these observations to their own processes“.