The Investment Firms’ Prudential Regime, or IFPR for short, has proportionality in mind in addressing risk faced and posed by investment management firms.

At the core of the regime is the Internal Capital Adequacy and Risk Assessment, or ICARA process.  This builds on the formulaic requirements set by the regime on capital and liquidity.

The ICARA process encompasses aspects of internal governance with a particular focus on risk management systems, processes and controls and a thorough assessment of financial resources.

It should be the centrepiece of a continuous risk management process.

This starts with Business model assessment, planning and forecasting.

Firms should be able to forecast capital and liquidity needs, both on an ongoing basis and in the event of winding-down.

They need to demonstrate an understanding of the risks to their profit making abilities.

And they should be able to look ahead and evaluate how plausible scenarios could affect their ability to maintain sufficient capital and liquidity resources.

Firms should be able to outline the systems and controls they have in place to identify, monitor and mitigate harms.

Firms should include an assessment of capital and liquidity requirements, where these are not adequately mitigated through systems and controls. Are additional capital and liquidity resources required? They should also consider the risks caused by the whole business – including non-MIFD activities.

Recovery Action Planning should be included. The FCA wants to see evidence that firms have early warning indicators and triggers, with plans in place to restore capital or liquid resources should thresholds be at risk of breach.

Firms should also include comprehensive wind down plans with triggers, timelines and scenarios where different resources might be needed.

The ICARA process is detailed and important to get right. As the central part of the whole regime, it’s worth spending time and effort to get the underlying processes right.