Challenges Faced When Implementing An ICARA

The Internal Capital Adequacy and Risk Assessment (“ICARA”) was designed under the Investment Firm Prudential Regime (IFPR) to supplement FCA-regulated entities’ own funds requirements and allow the identification, monitoring and mitigation of all material potential harms that could result from the ongoing activity of the regulated firm. The new capital adequacy assessment, ICARA, requires regulated firms to identify and monitor potential harms from both their market and clients, by analysing the appropriateness of their internal systems and realistic risk-appetite.

In accordance with the FCA’s Overall Financial Adequacy Rule, regulated firms must hold own funds and liquid assets which are adequate to ensure that the entity is able to remain viable during the economic cycle. A thorough review of harm mitigation processes is required, as well as the address of a business model assessment, planning and forecasting in order to implement appropriate recovery actions. Such recovery actions are, under ICARA, a compulsory component of the documentation. Hence, firms will need to review their recovery strategies in the instance of significant business disruptions, including timelines and trigger points for when and how to execute this plan.

In addition, under ICARA it is now required that firms create a realistic wind-down plan – a requirement that did not formally exist under ICAAP. As noted in the Handbook, the reasoning behind the arrangement of a wind-down plan is “to assess if the firm would have adequate resources to wind down in an orderly manner, especially under challenging circumstances”. Regulated entities are required to envisage their short and mid-term results in the event of sudden disruption. Stress testing is thus required to be performed regarding the relevant firm’s specific risks, as entities need to acknowledge the ease with which they can convert liquid assets into cash under stressed scenarios.

It is essential to consider the relevant regulated firm’s structure to appropriately estimate potential risks and publicly exposed activity held by the relevant entity. A wide range of cross-sectoral tests are required to be covered when implementing the new ICARA – to name a few, the following areas need be covered: predicted balance sheet, cash flow and profit and loss accounts (including eligible deductions) for the next fiscal years; K-factors data (if relevant); additional harms exercise; a suitable wind-down plan; and the analysis of a liquidity stress test.

As detailed above, the correct implementation of ICARA requires very specific knowledge and awareness of the FCA’s expectations. Firms may encounter several challenges when complying with the new risk assessment, as the adequacy of the relevant entity’s own funds and liquid assets needs to be monitored and fully evaluated in consensus.

In fact, if compared with the previous ICAAP, ICARA requires an increased amount of effort and input from senior management, accounting, legal, and in particular, those in charge of the firm’s regulatory compliance. That increased coordination often poses major challenges to the relevant teams involved in the completion of the assessment, which might trigger the application of it. Regulated firms hence need to be consistent and have sufficient knowledge to implement the new rules introduced under ICARA.

If you are interested in seeing how Complyport can support your firm in preparing an ICARA or are looking for support with financial returns, please contact Jan Hagen via

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