EMBRACE ICARA CHANGES FOR EFFECTIVE RISK MANAGEMENT

Time flies when you’re having fun! We’re already in the third year of IFPR and by now, the ICARA process should be firmly embedded in your internal systems and procedures.

OK, so completing your ICARA probably doesn’t meet the definition of ‘fun’ for most of us, but you are getting the hang of it we hope.

The FCA expects firms to review the adequacy of their ICARA process at least annually, more often if there are any material changes to your operating model. It must be a robust review and needs time to complete properly, so it is essential you have a full understanding of the specific and different purposes of the key processes.

Done properly, the result should be an evolving ICARA document that not only reflects the FCA’s changing expectations, but also your better understanding of how the process applies to your business. It should reflect the improvements you are making to your internal systems and controls to comply with the rules and the role staff play in monitoring them.

We’re not just talking about the quality of your data or reliability of your tech, but how senior managers and others monitor financial resources, assess potential harms to your business, the markets and consumers and the appropriate action required at any given intervention point.

Recent updates

Last year, the FCA issued two updates to the ICARA process, following observations made into the way firms have been quantifying threshold requirements.

After careful consideration of the points raised, we were fortunate enough to secure a direct discussion with the regulator’s financial resilience department. As a result, we’ve been able to revise our ICARA template to reflect the specific issues identified.

This latest version of the template allows firms to attest to the following good practises. We have designed it so you can modify and add to the document, so proportionality should be applied during its production.

• Scenario planning goes beyond the fall or gain in a firm’s income levels.
• You can meet your obligations as they fall due, even during times of uncertainty.
• Descriptions of stress events are included to add context to the quantifying of threshold requirements.
• If you choose to adopt cashflow modelling, clear data points are established.
• Early warning indicators are set higher than the prescribed 110%.
• Intervention points are substantiated by showing how resources behave in times of stress.
• The assessment of liquid asset threshold requirements is a regular exercise to enable resources to be adjusted to changes in the external market. This allows potential ‘peak cash requirements’ to be identified.
• Management can identify and account for peak cash requirements in scenario planning and they are aligned with their understanding of risk. Likewise, the credibility of these intervention points has been tested and is considered appropriate for the business model.
• You can evidence that the board has challenged the overall ICARA document and good record keeping is maintained of discussions regarding the adequacy of financial resources and planning.

Recovery planning:

• Responsibility is apportioned to certain individuals to communicate actions at each intervention point during a recovery phase.
• Recovery planning involves providing the firm with a sufficient buffer before a critical stress, to ensure it can absorb losses and remain solvent before needing to trigger a wind-down.

Wind-down planning:

• Your cash position and the management of personnel are closely monitored during the wind-down period.
• Activation triggers are both financial and non-financial and the impact of each is assessed in respect of the ‘domino effect.’
• Individuals are responsible for communicating each phase of the wind-down and deadlines are set for critical decisions.
• The financial resources to support a group level wind-down are allocated with a clear link to the specific actions needed to wind down individual firms.

Group ICARAs:

• A group ICARA process includes analysis of the financial risk at group level and the risk each firm faces.
• Each group entity is participating clearly and the group has taken responsibility for the collation and calculation of its element.

Clear analysis

Don’t forget you need to distinguish the analysis needed to assess the adequacy of your own funds from that used to assess liquid asset resources. The latter focuses on items that affect cash or sources of cash to support an orderly wind down, whereas own funds analysis looks at the impact on the firm’s assets, liabilities and capital accounts, without necessarily adjusting cash or sources of cash.

When assessing potential harms and the extent to which systems and controls can mitigate risk, firms serving retail clients will also need to keep their Consumer Duty obligations in mind.

As financial resilience and effective wind-down planning remain high priorities for the FCA, it is essential to understand the nature of the risks and harms impacting on your business model and maintaining an effective ICARA document is central to that process.

The regulator is increasingly flexing its supervisory muscles, so there it pays to work on the assumption that your ICARA will be reviewed at some point. With that in mind, you need to make sure senior managers have a clear understanding of the analysis that has gone into its production and are prepared to take full ownership of the results.

If you would like any help completing your next ICARA or MIF007 return, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk