A key requirement under the IFPR is the Internal Capital Adequacy and Risk Assessment (ICARA) process. All investment firms will have to complete the ICARA process, which will replace the Internal Capital Adequacy Assessment Process (ICAAP) for those firms that previously had to complete it.
The ICARA process encompasses various aspects of internal governance with a particular focus on internal risk management systems, processes and controls, and an in-depth assessment of the financial impact of potential risks compared to the financial resources available.
Although generally, the ICARA documentation will need to be submitted to the GFSC on an annual basis, the ICARA process should be the centrepiece of a continuous, holistic risk management process. It must demonstrate that the firm:
- complies with the Overall Financial Adequacy Rule;
- remains financially viable throughout the economic cycle, with the ability to address any potential harms that may result from its ongoing activities (both regulated and unregulated);
- has financial resources that are sufficient for the business it carries out;
- has appropriate systems and controls in place to identify, monitor, and, if appropriate, reduce all material potential harms that the ongoing operation of its business may cause to the firm itself, its clients and counterparties, and/or the markets in which the firm operates; and
- has provisions in place to ensure an orderly wind-down while mitigating/minimising any harms that may remain to its consumers or to other market participants.
More specifically, the ICARA document(s) must include the following:
- A description of the firm’s business model and strategy, with an explanation of the activities carried on by the firm and a focus on the most material activities.
- An analysis of the effectiveness of the firm’s risk management processes during the period covered by the review.
- A clear explanation of why the firm concludes that that its ICARA process is fit for purpose, or where this is not the case, an explanation of the deficiencies identified, the steps taken to remedy them, who is responsible for implementing these remedies and the relevant timescales.
- An explanation of any other changes to the firm’s ICARA process that have occurred following the review and the reasons for those changes.
- A summary of the material harms identified by the firm and any steps taken to mitigate them.
- A clear explanation of how the firm is complying with the OFAR, including a clear breakdown of available own funds, available liquid assets and the firm’s assessment of its threshold requirements.
- A summary of any stress testing and reverse stress testing carried out by the firm.
- The levels of own funds and liquid assets that, if reached, the firm has identified may indicate that there is a credible risk that it will breach its threshold requirements, together with the potential recovery actions that the firm has identified.
- An overview of the firm’s wind-down planning, including any required actions, the anticipated timelines for actions to be taken and any key assumptions or qualifications.
Overall Financial Adequacy Rule
The Overall Financial Adequacy Rule (OFAR) requires firms to hold sufficient own funds and liquid assets both in terms of amount and quality. This is to ensure that firms:
- remain financially viable throughout the economic cycle
- can address any material potential harm that may result from their ongoing activities and
- if necessary, can be wound down in an orderly fashion.
Firms should use the ICARA process to identify compliance with the OFAR and to establish their own funds and liquid assets threshold requirements.