28 November 2022 • Governance Risk & Compliance
It’s nearly a year since the ICARA regime was first introduced in the UK by the FCA, replacing the ICAAP framework that was part of the previous prudential regime.
The purpose of the ICARA process rules – which are applicable to MiFID investment firms – is to ensure that investment firms identify and mitigate the harms their activities potentially cause to customers, market participants and themselves through a combination of internal controls and financial resources.
Effective ICARA processes incorporate robust risk management practices and sound financial forecasting. Through a combination of stress event testing (and reverse stress testing for complex firms), scenario analysis and recovery and wind-down planning, investment firms can identify if they hold sufficient and adequate capital and liquidity not only to ensure business continuity but also an orderly wind-down of regulated activities, should the worst happen. The findings of all of the ICARA processes should be documented in the ICARA Report, which should be review, challenged and approved by a firm’s governing body at least annually.
Although the rules are sensible by nature, they have created challenges for individual asset investment firms, particularly if they were not previously required to adhere to the ICAAP regime. The UK investment firm industry is incredibly diverse, and some firms have encountered issues identifying how to design, implement and report on specific ICARA requirements in a way which is relevant to their specific business. Relative to its predecessor ICAAP, the ICARA requires increased input from front- and middle-office and is likely to consume more resources across senior management, compliance, legal, and accounting. It is essential that firms take a holistic approach towards the ICARA and its completion. The annual submission of the ICARA questionnaire is an important data point for the FCA to effectively prioritise their supervisory priorities and it is one of the few points of direct communications that many investment firms have, so best to get it right.
The key considerations and resulting process of reporting can be onerous, so the design and implementation of an effective ICARA process can require expertise from a trusted external partner; this outsourced model works well for many firms to manage both resource and expert guidance.
It is a collection of disparate processes that should involve subject matter experts from across the business and subject to governing body oversight. Harmonising these elements will deliver a holistic benefit to the firm; a platform or process management tool providing additional benefits such as permissioned user access, collaborative workflows, active/passive reporting, etc., can ensure firms maximise the value of their ICARA-related activities. This also dovetails well with other regulatory obligations such as SM&CR.
Furthermore, following on from the FCA attestations this year regarding their disappointment at the quality of regulatory reporting submissions, it is fair to assume the ICARA (and MIF007), in its first year, will attract a higher degree of scrutiny than usual. Minimising human error through the use of automation and digitised processes will improve data quality, thereby mitigating the risk of falling foul of the new regime. It also delivers efficiencies which may materialise as savings in time and/or cost.
The introduction of the ICARA regime comes at a time when asset managers are facing a number of challenging headwinds already, namely rising costs and falling margins and the pressure of increased regulatory reporting is another significant factor for firms to consider when resourcing. If firms are to effectively navigate the ICARA, engaging with a third party expert provider who has an extensive understanding and experience of the requirements if often beneficial from a time and cost perspective.
Centralis Governance, Risk & Compliance continue to lead the market in our support of investment firms and asset managers operating under the IFPR and fulfilling their ICARA obligations. We operate a people-led, tech-enabled methodology, leverage back-end automation with our client portal surpass the expectations of our clients and their regulatory supervisors. Get in touch to learn more or to ask for support.
Head of Prudential
Governance, Risk & Compliance