The Internal Capital Adequacy and Risk Assessment (ICARA) process, introduced by the Investment Firm Prudential Regime on 1st January 2022, is a comprehensive internal capital and risk assessment mechanism for investment firms. This process, overseen by the Financial Conduct Authority (FCA), aims to bolster internal governance and risk management, aligning with previously established FCA frameworks. It serves as the core of risk management for MIFID investment firms, incorporating business model assessment, forecasting, stress testing, recovery planning and wind-down planning. Central to this regime is the Overall Financial Adequacy Rule (OFAR), which mandates that firms maintain adequate financial resources.
Key Elements of the ICARA Process
- Continuing Risk Management: The ICARA process is an ongoing risk management activity, formally reviewed annually or upon significant business changes.
- Proportionality: The process should align with the firm’s business nature, scale and complexity.
- Financial Adequacy: Firms must hold sufficient financial resources as per the threshold conditions and Principle 4 of the Principles for Business.
- Identification and Mitigation of Harms: Firms must identify potential harms from their operations and wind-down processes and implement controls to mitigate these harms.
- Comprehensive Scope: Applies to all business activities, including regulated and unregulated ones, without transitional provisions.
ICARA Document Requirements
The ICARA document, essential for recording findings, can comprise multiple documents but must maintain internal consistency. The document should include the following:
- Business Model and Strategy: Clear description and alignment with risk appetite
- Activity Explanation: Focus on significant activities
- Risk Management Analysis: Effectiveness review of risk management processes
- Material Harms Summary: Identification and mitigation steps
- OFAR Compliance: Detailed breakdown of compliance
- Stress Testing Summary: Results of stress and reverse stress tests
- Own Funds and Liquid Assets Levels: Indicators of potential threshold requirement breaches
- Recovery Actions: Identified potential actions
- Wind-Down Planning Overview: Comprehensive planning details
Senior Manager Responsibilities
The firm’s governing body must review and approve the ICARA document, with senior managers playing a crucial role in the process. Their involvement ensures the meaningful integration of ICARA requirements into business areas, aligning with the Senior Managers & Certification Regime’s reasonable steps responsibility.
Practical Challenges
Firms face practical challenges in implementing the ICARA process, such as:
- Conducting harm assessments and integrating them into general risk assessments. Risk assessments must be accurate and tailored to the relevant firm’s activities. That means that sufficient resources must be allocated and efficient monitoring procedures in place to ensure healthy risk management;
- Coordinating across business units for comprehensive process documentation: This is largely an operational issue, given the difficulty in coordinating different business units within a corporate structure;
- Meeting regulator deadlines based on MIFIDPRU questionnaire data (ie MIF007 reports to be circulated on a yearly basis);
- Ensuring Senior Managers are well-briefed and able to provide necessary challenges;
- Effective recovery planning addressed for the first time given their lack of expertise/nor consider this task sufficiently important to appropriately allocate resources.; and
- Planning for plausible wind-down scenarios: This task is essential when building ICARA: It means that firms must project and quantify the potential risks/losses that may occur should they wind down their operations. In other words, this exercise requires firms to monetise their risks and project an appropriate wind-down plan.
Conclusion
Overall, the ICARA process represents a significant step towards enhanced risk management and financial adequacy for investment firms, with detailed documentation and active Senior Management involvement being critical components.
ICARA represents the core risk management procedure for regulated firms. Hence, without an effective ICARA in place, a reliable risk management function cannot be evidenced and the firm itself may risk regulatory penalties
How can Complyport help?
Complyport’s expert team of consultants can help regulated firms with:
- Analysing risks for clients and design tailored ICARA assessments on a yearly basis
- Providing relevant documentation to evidence appropriate risk management
- Assistance completing annual MIF007 submissions
- Expert consulting hours and comprehensive documentation, including customisable templates and tailored ad-hoc solutions
- Assistance with FCA correspondence as needed.
- Updating risk management documentation when regulatory changes occur
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