INTERNAL CAPITAL ADEQUACY AND RISK ASSESSMENT (ICARA) PROCESS

The UK Investment Firm Prudential Regime (IFPR) applies to all Investment Firms authorised by the Financial Conduct Authority (FCA) under MiFID (the Markets in Financial Instruments Directive) as well as those Firms undertaking additional MiFID activities such as Collective Portfolio Management Investment Firms (CPMIs).

Under the IFPR, all Investment Firms are categorised either as SNI or non-SNI, depending on the regulatory activities they carry out and the threshold they meet as per the provisions of MIFIDPRU 1.2. In addition, depending on their classification, Investment Firms are required to comply with specific capital and liquidity requirements, internal governance and remuneration arrangements, disclosure requirements, concentration risk requirements and other prudential regulatory requirements in accordance with the relevant regulation.

Both SNI and non-SNI MIFIDPRU Investment Firms are obliged to comply with the internal capital adequacy and risk assessment framework (ICARA) in accordance with the MIFIDPRU 7 rules. As part of the implementation of the ICARA process, Firms are required to conduct business model analysis, stress testing, recovery, and wind-down planning as well as capital and liquidity allocations to ensure that they are in compliance with the prudential requirements as per the provisions of MIFIDPRU 7.
In addition, Firms may need to submit the ICARA process documentation to the FCA as part of a supervisory review and evaluation process (SREP). In case where weaknesses are identified by the FCA as part of the SREP, additional capital or liquidity requirements over and above the overall threshold requirements can be assigned to the Firm increasing the financial resources that they need to hold.

Furthermore, the ICARA process should not be treated by Firms as another reporting obligation, but as a living document embedded within the daily operations and business of the Firm. Essentially, aside from being a regulatory requirement, the ICARA is a vital component of the Firm’s risk management function. It should be updated at least annually or whenever any underpinning assumptions used for the preparation of the report change, hence ensuring that the real-life image of the Firm’s risk profile is reflected within the ICARA process documentation. The ICARA results should be communicated to the FCA via the MIF007 – ICARA Questionnaire Return on an annual basis.
Finally, all material risk takers within a Firm should be aware of the ICARA methodologies, assumptions and outcomes to ensure efficient implementation of the process in their daily operations.