The Internal Capital Adequacy and Risk Assessment (ICARA) process, introduced in 2022 by the Investment Firms Prudential Regime (IFPR), aims to strengthen the financial resilience of firms. Overseen by the FCA, it has now  been in effect for over two years and has become a crucial annual requirement. Firms must undertake a thorough evaluation of their risk management practices, financial adequacy and conclude on whether additional financial resources or non-financial actions are required to protect customers, the firm itself, or other market participants, based on the potential harms arising from risks it poses and faces. Whilst it is an internal process, firms must submit key outcomes annually to the regulator via a comprehensive questionnaire.

It is essential to remember that the intervals between submissions of the ICARA questionnaire must not exceed twelve months. Firms are now faced with the dual pressure of meeting regulatory deadlines while leveraging insights from the past two years to enhance their compliance strategies. Firms should therefore take this opportunity to evaluate and refine their approach to ICARA processes to ensure continued compliance and resilience against future challenges.

Key Actions to Strengthen Your ICARA Process

Published FCA feedback[1] and other observable themes across the UK investment firm sector has revealed several key areas where firms still need to improve. To address these common issues, firms should focus on the following key areas:

1. Thorough group assessment

Ensure your firm’s assessment of the group structure fully considers whether parent undertakings and connected undertakings exist, and therefore whether the FCA would expect to supervise the prudential compliance of the consolidated situation. These terms are intricately defined and even the smallest or simplest of corporate structures are likely to form a prudential group. Firms can also consider whether the ‘group capital test’ exemption, available for sufficiently simple prudential groups, can be deployed to simplify ongoing monitoring and reporting requirements.

2. Accurate metrics assessment

Two main challenges exist in this area:

1. Mapping regulated activities to IFPR metrics – some firms include activities under the wrong measurement criteria, and others mistakenly analyse their activities under different regulatory frameworks, such as MiFID AUM versus AIFMD AUM. Firms should review their interpretation of these criteria and rameworks to facilitate accurate, regular and consistent monitoring of these metrics to avoid breaches and ensure compliance.
2. Assessing IFPR metrics on a group basis – firms often limit the assessment to the standalone regulated entity, UK entities or entities within the prudential group, without considering the nature and scale of activities of the broader group. Such oversights can lead to inaccurate reporting and potential regulatory breaches. Ensure that your firm correctly identifies and assesses metrics on a group basis, where appropriate, as this can have a material impact on the outcome and may lead to different parts of the IFPR rules applying.

3. Integrated risk management

Many firms have yet to fully align their ICARA processes with their day-to-day operations. There is often a disconnect between the risk management framework and the material harms assessment, which leads to inadequate documentation and quantification of own funds and liquid assets requirements. Risk management should not be a siloed activity, but an integral part of your firm’s daily operations. Your risk management framework must be fully aligned with the ICARA process, and all risks should be thoroughly documented and assessed in relation to your firm’s overall business model.

4. Early warning indicators

Develop and implement quantitative and qualitative early warning indicators (EWIs) specific to your firm’s operations, with defined responsibilities and actions for each. Regularly monitor these indicators to identify and address potential issues before they become critical.

5. Comprehensive wind-down planning 

There are several things firms should consider with their wind-down plans:

1. Your wind-down plan should be both financially and operationally robust. Begin with a clear assessment of non-financial resources and operational considerations, using this to inform your financial modelling and ensure that all necessary resources are in place for an orderly wind-down.
2. Firms should consider all possible triggers for a wind-down, with financial considerations commencing from a resulting point of stress to fully capture the situation as it might unfold.
3. Firms operating within a group must critically assess the impact of that group membership, in most cases modelling the financial implications in the absence of group support.
4. A wind-down model should, for each scenario, separately assess the impact on liquid assets as this can often be martially different to the impact on own funds. Such analysis often leads to firms enhancing their standalone liquidity arrangements to safeguard resources for such an eventuality.

6. Recovery actions

Clearly define and document all recovery actions, including potential triggers for these actions. Quantify the risks associated with each action and ensure they are well-understood by senior management and the governing body.

Given the complexities and demands of the ICARA process, now is the time for firms to take decisive action in reviewing and refining their approach. By proactively adjusting your submission timeline, aligning risk management with everyday operations, and implementing robust planning and recovery strategies, your firm can transform ICARA from a compliance requirement into a powerful tool for strategic growth. A more integrated approach wil not only ensure you meet regulatory expectations but also strengthen your firm’s operational resilience and readiness for future challenges.

Don’t just meet the deadline—use this process to strengthen your foundation for the future.

At Centralis, we’re committed to helping firms unlock the full potential of their ICARA process. Whether you need expert advice or hands-on support, our team is here to guide you through every step. Contact us today to take the first step towards turning compliance into competitive advantage.