Risk Advisory · ICARA
RiskTAE’s ICARA service writes, reviews or rebuilds the Internal Capital Adequacy and Risk Assessment process for MIFIDPRU investment firms: the harms assessment, the stress tests, the wind-down plan and the own funds and liquid assets threshold requirements, documented so the governing body can approve it and the FCA can read it.
Practitioners who have run risk functions do the work and hand the document and the model to your team.
You get an ICARA that explains its own numbers, a wind-down plan that starts from a real stress, and a MIF007 return that reconciles to both.
By Mark Dougherty, CPA (CAN)Updated
Definition
The ICARA, or Internal Capital Adequacy and Risk Assessment process, is the FCA’s requirement that a MIFIDPRU investment firm assesses for itself the own funds and liquid assets it needs. It sits under the Investment Firms Prudential Regime in MIFIDPRU 7 of the FCA Handbook, and it serves the overall financial adequacy rule: a firm must hold own funds and liquid assets adequate to remain financially viable throughout the economic cycle and to be wound down in an orderly manner.
Every MIFIDPRU investment firm runs an ICARA process, whether it is a small and non-interconnected firm or a larger firm with a consolidated group assessment. The process is the firm’s own: the FCA sets the questions, and the governing body owns the answers.
Banks and building societies run the equivalent assessments for the PRA, the ICAAP for capital and the ILAAP for liquidity. The ICARA combines both into one process and adds an explicit wind-down plan.
Sources: FCA Handbook, MIFIDPRU 7, rules 7.4.7R and 7.4.13R.
Contents
The right-hand column is what the FCA found when it reviewed firms’ first ICARAs.
| Element | What the rule asks for | What the FCA found in practice |
|---|---|---|
| Business model and risk appetite | A clearly articulated business model and strategy, and a risk appetite consistent with it (MIFIDPRU 7.5.2R). | Boards engaging to differing degrees, with some giving little challenge to the assumptions they approved. |
| Harms | Identification of all material harms from the ongoing operation of the business and from winding it down (MIFIDPRU 7.4.13R). | Risk capital reduced from the previous regime without explanation, with some risk types left out altogether. |
| Stress testing | Severe but plausible stresses, and whether the firm would still hold adequate resources under them (MIFIDPRU 7.5.2R(5)). | Wind-down estimates built without a starting scenario of stress or a sudden trigger event. |
| Wind-down planning | The steps and resources needed for an orderly wind-down, and the harms a wind-down would cause (MIFIDPRU 7.5.7R). | Group dependencies and the cost of unwinding them left out, so resources were understated. |
| Threshold requirements | An own funds threshold requirement (MIFIDPRU 7.6.2R) and a liquid assets threshold requirement (MIFIDPRU 7.7.2R) for the harms not otherwise mitigated. | Group figures taken from a consolidated view without removing intragroup offsets, and few solo assessments alongside the group one. |
| Documentation and reporting | An ICARA document describing the business model and how the firm meets the overall financial adequacy rule (MIFIDPRU 7.8.7R), and the MIF007 questionnaire on the firm’s notified date (MIFIDPRU 7.8.4R). | Inaccurate or incomplete data submissions, which the FCA read as a sign of weak controls. |
Sources: FCA Handbook, MIFIDPRU 7; FCA, IFPR implementation observations, 27 February 2023.
Thresholds
The threshold requirements are the ICARA’s output. The own funds threshold requirement is the firm’s estimate of the own funds it needs to cover the material harms it has identified and not otherwise mitigated, from running the business and from winding it down. The liquid assets threshold requirement is the same assessment for liquid assets. Each sits above the firm’s permanent minimum and K-factor or fixed overheads requirements where the harms assessment says it should.
The FCA’s review found firms cutting capital against the previous regime without saying why. Its point was simple: unless the business model has changed, the firm faces the same risks. A threshold requirement should trace each pound back to a harm, a scenario or a wind-down cost, and the ICARA document should show that trace.
We build the threshold calculation in open Excel beside the document, so the board can see which harm drives which number and the MIF007 return reconciles to both.
Sources: FCA Handbook, MIFIDPRU 7, rules 7.6.2R and 7.7.2R; FCA, IFPR implementation observations, 27 February 2023.
Wind-down planning
MIFIDPRU 7.5.7R requires the firm to identify the steps and resources an orderly wind-down would need and to evaluate the harms a wind-down would cause. The FCA’s Wind-down Planning Guide describes the process: the governing body identifies the steps and resources it needs to wind the business down, especially where resources are limited, and evaluates the risks and impact of doing so. The plan runs from the formal decision to wind down to the cancellation of the firm’s Part 4A permission, and it is approved by the governing body, with a named person responsible for keeping it under review.
The weakest plans the FCA saw assumed a calm, well-resourced wind-down. A credible plan starts from the stress that caused it, counts the staff, systems, contracts and intragroup services it would still need to pay for, and sets the point at which the board decides. We cover wind-down planning in depth, including the PRA’s solvent exit rules for banks and insurers, on the wind-down planning page.
Sources: FCA Handbook, MIFIDPRU 7.5.7R; FCA, Wind-down Planning Guide, WDPG 3.1.1, 3.1.4, 3.2.2 and 3.2.3; FCA, IFPR implementation observations, 27 February 2023.
How we help
Take one, or combine them.
We hold the pen: harms workshop with your executives, stress scenarios agreed with the board, the wind-down plan built from a real trigger, the threshold requirements calculated in open Excel, and the document taken to the governing body for approval. Your team works alongside us, so the next review is theirs.
You keep the pen. We test the draft against MIFIDPRU 7 and the FCA’s published observations and give the board a written gap report, each gap ranked by how likely the FCA is to raise it, with the fix.
Where the calculation is the weak point: harms mapped to capital and liquidity, stresses that move the numbers, intragroup offsets removed, and a model your validators and internal audit can test line by line.
For investment firm groups, the consolidated ICARA and the solo assessment each firm still needs, with the dependencies between them written down rather than assumed.
Credentials
The work is led by Mark Dougherty, CPA (CAN), our technical lead, and done by senior practitioners who have held the roles: former chief risk officers and heads of risk, former regulators and interim executives, with model and quant specialists.
The same team writes ICAAPs and ILAAPs for banks and ORSAs for insurers, so the ICARA draws on the same stress testing and capital planning methods, sized for an investment firm. The team works across Risk Advisory. An investment firm that needs a chief risk officer for part of the week can use a fractional CRO.
FAQ
At least once every 12 months, and again after any material change in the firm’s business model or operating model, under MIFIDPRU 7.8.2R. After a material change, the MIF007 questionnaire is due within 20 business days of the governing body approving the ICARA document (MIFIDPRU 7.8.6R).
The FCA’s review noted that few firms completed solo ICARA processes alongside the consolidated assessment where both were required, and that consolidated figures were not adjusted for intragroup offsets. We prepare both where the rules call for them.
Yes. We test the draft against MIFIDPRU 7 and the FCA’s observations and give the governing body a written gap report before it approves the document.
Insights
An ICARA, or Internal Capital Adequacy and Risk Assessment, is the process an FCA investment firm under MIFIDPRU uses to identify the harms its business could cause, decide the own funds and liquid assets it needs to cover them and to wind down in an orderly way, and record the result for its board and the FCA.
By Mark Dougherty, CPA (CAN) · 9 min read
A wind-down plan sets out how an FCA-regulated firm would close its business in an orderly way, with enough money and people to return client assets and settle what it owes without harming customers or markets. This template follows the FCA's Wind-down Planning Guide section by section, with the MIFIDPRU and payments rules that sit alongside it.
By Mark Dougherty, CPA (CAN) · 8 min read
Which prudential assessment a firm needs depends on its regulator and its business. UK banks and building societies write an ICAAP, an ILAAP and a recovery plan, plus a solvent exit analysis if non-systemic; FCA investment firms run an ICARA; Solvency UK insurers write an ORSA; and the FCA expects payment and e-money firms to keep a wind-down plan.
By Mark Dougherty, CPA (CAN) · 7 min readNext step
Tell us your ICARA reporting date and where the document stands. We will tell you what it would take to finish it, and whether you need us to write it, review it or rebuild the numbers.
Tell us what needs doing and by when. A partner will come back to you. Treated in confidence.
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