Which firms must run an ICARA process?
Every MIFIDPRU investment firm, whether it is a small and non-interconnected (SNI) firm or not. MIFIDPRU 7.1.3R applies the ICARA sections, MIFIDPRU 7.4 to 7.8, to SNI and non-SNI firms alike, and the process covers the firm’s entire business, including activities that are not MiFID business and activities that are not regulated at all (MIFIDPRU 7.4.9R(3)).
An investment firm group can run one group ICARA process instead of separate ones, but only on conditions (MIFIDPRU 7.9.5R). Each firm in the group must still meet the overall financial adequacy rule on its own, keep its own wind-down plan, apply its own wind-down triggers and submit its own MIF007 return. A consolidated ICARA process, which the FCA can require of a group case by case, runs in addition to the individual or group ICARA process (7.9.4G(2) and (5)). In its February 2023 implementation observations the FCA found that, where a consolidated ICARA process was completed, there were “only a few cases where solo ICARA processes were also completed” (IFPR implementation observations, 27 February 2023).
What does MIFIDPRU 7 require?
It requires the firm to meet the overall financial adequacy rule and to run systems that show it does. MIFIDPRU 7.4.7R says a firm “must, at all times, hold own funds and liquid assets which are adequate, both as to their amount and their quality”, so that it can remain financially viable through the economic cycle and its business “can be wound down in an orderly manner, minimising harm to consumers or to other market participants”.
The ICARA process is the set of systems and controls the firm uses to identify, monitor and, where proportionate, reduce all material potential harms, both those its ongoing business could cause and those a wind-down could cause (MIFIDPRU 7.4.9R). It must be proportionate (7.4.10R) and its inputs and conclusions must hang together (7.4.11R). Within it the firm must articulate its business model, strategy and risk appetite, look forward at the own funds and liquid assets it will need, and run severe but plausible stresses (7.5.2R). It must also set the levels of own funds and liquid assets that would signal a credible risk of breaching its threshold requirements, and the recovery actions it would take (7.5.5R). Firms with more complex businesses should add reverse stress testing (7.5.4G).
The starting point is harm to others as well as to the firm. MIFIDPRU 7.4.9R names three places harm can land, the firm’s clients and counterparties, the markets it operates in and the firm itself, and a fourth source in winding down. Annex 1G gives examples:
| Source of harm | Examples the FCA gives | Where in MIFIDPRU 7 |
|---|---|---|
| Clients and the market | Breach of an investment mandate; trading or dealing errors; unsuitable advice, for example on pension transfers; failures under CASS that cause client losses; not returning title transfer collateral to a client promptly | 7.4.9R(1)(a); Annex 1.3G |
| The firm itself | Liability as principal for tied agents or appointed representatives; failure of significant clients or counterparties; failure of key systems or internal fraud; defined benefit pension obligations | 7.4.9R(1)(a)(iii); Annex 1.4G |
| Liquidity | Too few liquid assets to cover a harm, which could trigger “an unexpected insolvent wind-down”; concentrated funding; maturity mismatches; intra-day obligations and margin calls | Annex 1.5G to 1.8G |
| Winding down | Harms caused by the wind-down itself, which the firm must evaluate and plan to mitigate | 7.4.9R(1)(b); 7.4.13R; 7.5.7R |
How are the own funds threshold requirement and liquid assets threshold requirement set?
The firm sets both itself, from its harms assessment and its wind-down analysis. They are the amounts it needs at any time to comply with the overall financial adequacy rule (MIFIDPRU 7.6.4G(3) and 7.7.3G(4)), and they are built differently.
The own funds threshold requirement starts from a reasonable estimate of the own funds needed for material harms the firm has not mitigated and for harms that remain after mitigation (7.6.2R). The firm cannot assess a lower figure for an activity than the own funds requirement in MIFIDPRU 4 or 5, and it cannot use a K-factor component to cover a harm that component was not designed for (7.6.3R(2)). The result is the higher of two amounts: what the firm needs to run its business through a stress, and what it would need to wind down in an orderly way (7.6.4G(2)). At least 56% of it must be met with common equity tier 1 capital and at least 75% with common equity tier 1 and additional tier 1 together (7.6.5R).
The liquid assets threshold requirement adds up differently. The firm estimates the maximum amount of liquid assets it would need to fund its business in each quarter over the next 12 months, and to wind down in an orderly way (7.7.2R(1)). It then holds the basic liquid assets requirement plus the higher of two amounts: what the ongoing business needs, and the additional amount above the basic requirement that it would need when it starts to wind down (7.7.3G(2)). In the FCA’s own example, a firm with a £1 million basic requirement that needs £1.5 million for ongoing operations and £5 million in total for an orderly wind-down has a threshold of £5 million: the £1 million basic requirement plus the £4 million it needs on top of that for the wind-down (7.7.5G(4)). The basic liquid assets requirement, one third of the fixed overheads requirement plus 1.6% of any guarantees to clients (MIFIDPRU 6.2.1R), is there to fund the initial stages of a wind-down and cannot be counted towards the needs of the ongoing business (7.7.5G(1)). The fixed overheads requirement is one quarter of the firm’s relevant expenditure in the preceding year (MIFIDPRU 4.5.1R).
Both thresholds carry notifications. A firm must tell the FCA immediately if its own funds fall below its early warning indicator, normally 110% of the own funds threshold requirement, or below the threshold itself (7.6.11R and 7.6.12G), and if its liquid assets fall below the liquid assets threshold requirement (7.7.14R).
How does wind-down planning fit into the ICARA?
It is part of the ICARA and it sets a floor under the numbers. MIFIDPRU 7.5.7R requires the firm to identify the steps and resources needed to wind down its business “in a realistic timescale” and to evaluate the harms a wind-down would cause and how to mitigate them.
The firm then uses that analysis to set the own funds and liquid assets an orderly wind-down needs. The result cannot be lower than the fixed overheads requirement for own funds or the basic liquid assets requirement for liquid assets (7.5.9R), and never lower than the firm’s wind-down triggers (7.5.10G(2)). If the firm falls below a trigger, the FCA “would normally expect that the firm would commence winding down”, unless its governing body has determined that there is “an imminent and credible likelihood of recovery” (7.5.10G(4)).
For the plan itself MIFIDPRU points firms to the FCA’s Wind-down Planning Guide (7.5.8G). The guide starts the wind-down period when the governing body takes the formal decision to wind down and ends it when the FCA cancels the firm’s Part 4A permission (WDPG 3.2.2 and 3.2.3). Our page on wind-down planning covers the work in detail, and our wind-down plan template sets out the sections.
How often is the ICARA reviewed, and what is reported to the FCA?
At least once every 12 months, and again after any material change in the business model or operating model (MIFIDPRU 7.8.2R). The FCA’s examples of a material change include launching a material new product or business line and merging with another business (7.8.3G).
The firm documents each review in its ICARA document, which can be several documents if they are prepared on a consistent basis (7.8.7R). The contents are prescribed and include the business model and risk appetite, the material harms and how they are mitigated, the capital and liquidity planning, the stress testing, a breakdown of own funds, liquid assets and threshold requirements at the review date, the recovery levels and actions, and the wind-down plan. The governing body must review and approve the content and specifically the key assumptions (7.8.8R), and the firm keeps the records for at least three years (7.8.10R).
The ICARA document must be available to the FCA promptly if requested (7.8.7R(2)(a)). What the firm submits routinely is data item MIF007, the ICARA assessment questionnaire, on a submission date it notifies and cannot stretch to more than 12 months after the last one (7.8.4R). After a review triggered by a material change, MIF007 is due within 20 business days of the governing body approving the new ICARA document (7.8.6R). There is “no mandatory frequency” for the FCA’s own supervisory review and evaluation process (7.10.3G), and where it finds the ICARA wanting it can require the firm to hold more own funds or liquid assets (7.4.8G(6)).
How is an ICARA different from an ICAAP?
The ICARA is the FCA’s single process for investment firms; the ICAAP is the PRA’s capital assessment for banks, building societies and PRA-designated investment firms, with liquidity in a separate ILAAP and recovery in a separate plan. The other differences follow from that.
| Question | ICARA | ICAAP |
|---|---|---|
| Regulator and rules | FCA, MIFIDPRU 7 | PRA, Internal Capital Adequacy Assessment Part and SS31/15 |
| What it covers | Own funds, liquid assets and wind-down in one process | Capital; liquidity sits in the ILAAP |
| Starting point | Harm to clients, markets and the firm, and from winding down | The firm’s material risks |
| Who sets the number | The firm sets its threshold requirements; the FCA can require more after a review | The PRA sets Pillar 2A and a PRA buffer after the SREP (SS31/15 paragraphs 5.14 and 5.20) |
| Review cycle | At least every 12 months (7.8.2R) | Annually (SS31/15 paragraph 2.1); every two years for most SDDTs |
| Approval | Governing body (7.8.8R) | Management body (SS31/15 paragraph 2.2) |
Our guide to what an ICAAP is covers the bank side, and which prudential assessment your firm needs compares every assessment in one table.
Where do ICARAs usually go wrong?
The FCA published two reports on how firms implemented the ICARA, on 27 February 2023 and 27 November 2023, and the same faults run through both.
- Capital cut without a reason. Firms reduced their requirement against the previous regime and “in some cases, these reductions were not adequately explained”.
- Thresholds lifted from the rulebook. Appetite levels and triggers “merely used levels defined in MIFIDPRU without any link to the firm’s understanding of its risk”, and own funds were “confined to harms covered by K-factors”.
- A wind-down that starts on a calm day. Estimates were made “without a starting scenario of stress or a sudden trigger event”, and the later review found wind-down “assumed to take place under normal, instead of stressed, conditions”.
- Group effects left out. “Group dependencies were not comprehensively considered and assessed”, and group figures were not adjusted to eliminate intragroup offsets once allocated to individual firms.
- Liquidity measured too coarsely. Many firms with intra-day or inter-day funding gaps “used only monthly and quarterly analyses of stressed cashflows”.
- A MIF007 that tells a different story. Its contents “were inconsistent with the information provided in the ICARA”.
- Boards that approved without challenging. Some “have not provided sufficient challenge and oversight over key elements of the ICARA process”.
Our ICARA service writes, reviews or rebuilds the ICARA for MIFIDPRU firms, with the threshold calculations built in open Excel beside the document so each figure traces back to a harm, a stress or a wind-down cost.
Questions readers ask
Does an SNI firm need an ICARA?
Yes. MIFIDPRU 7.4 to 7.8, which contain the ICARA requirements, apply to SNI and non-SNI MIFIDPRU investment firms alike (MIFIDPRU 7.1.3R). The process must be proportionate to the nature, scale and complexity of the business (7.4.10R).
Who approves the ICARA?
The governing body. It must review and approve the content of the ICARA document within a reasonable period after each review, and specifically the key assumptions behind it (MIFIDPRU 7.8.8R).
Is the ICARA document sent to the FCA?
Not routinely. The firm submits MIF007, the ICARA assessment questionnaire, on its notified date (MIFIDPRU 7.8.4R), and must be able to provide the ICARA document promptly if the FCA asks (7.8.7R(2)(a)). The FCA takes the document into account when it carries out a supervisory review (7.10.4G).
Can a group run one ICARA for every firm?
Yes, if it meets the conditions in MIFIDPRU 7.9.5R. Each firm must still meet the overall financial adequacy rule individually, keep its own wind-down plan and submit its own MIF007.
Sources: FCA Handbook, MIFIDPRU 7.1, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10 and MIFIDPRU 7 Annex 1G; MIFIDPRU 6.2.1R; MIFIDPRU 4.5.1R; FCA Wind-down Planning Guide, WDPG 3.2.2 and 3.2.3; FCA, IFPR implementation observations (27 February 2023, updated 9 March 2023) and concluding report (27 November 2023); PRA SS31/15, paragraphs 2.1, 2.2, 5.14 and 5.20. Accessed 10 October 2026.
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