One year on from the initial implementation of the Investment Firms Prudential Regime (IFPR), the FCA has published a multi-firm review looking at the approaches adopted to implement the regulation’s requirements.
The review offers an insight into how the industry navigated the changes and highlights a number of common growing pains experienced across the industry. The regulator observed a range of common errors and omissions, with the bulk of these being down to one of three causes:
Requirements not implemented correctly
Insufficient detail; and
Poor data and governance.
1. Requirements not implemented correctly
The purpose and requirements of certain aspects of the IFPR were not generally understood by firms. This greatly impacted their ability to comply with the requirements. Three core issues were highlighted by the FCA:
Integration of risk assessments – Risk assessments in the ICARA were not linked to the relevant risk management processes. There were also omissions from ICARAs; for instance, failing to use reverse stress-tests to identify the scenarios that would trigger wind-down plans.
Reductions in capital – Firms failed to demonstrate why reductions in capital (compared to previous regimes) were appropriate. Other firms decided to exclude certain types of risk as there was no mechanical formula provided - despite acknowledging that these were live risks to their business.
Group ICARA – Firms did not evidence sufficient consideration of the risks and harms sustained by each individual firm within a group structure. The FCA emphasised that the group ICARA must result in each individual firm identifying relevant threshold requirements that are appropriate to its respective operations.
2. Insufficient detail
Another point of concern was that many firms did not provide sufficient detail to address key elements of the IFPR, particularly wind-down processes. The FCA highlighted the importance of wind-down plans in ensuring that firms can exit the market with limited harm to clients. The core findings in this area cover:
Wind-down plans – It was noted that, for many firms, wind-down plans were either lacking in detail or missing entire elements. Further, it identified that financial resource requirements to support group-level wind-downs were often allocated without a clear link to the specific actions required.
Limit frameworks – The review revealed that some firms failed to align appetite thresholds to their specific risk / business profile. Some opted to simply use levels and triggers defined within MIFIDPRU. The FCA expects firms to have their own frameworks for limits and escalations with clear rationale to explain why these are appropriate.
3. Poor data and governance
The review also highlighted data management and governance more generally as a core area for improvement. Advances in these areas should help firms to meet the full requirements of the IFPR. As a result, the FCA reiterated the following:
Governance – Where ICARA processes do not face sufficient Board- and Executive-level scrutiny and challenge, firms are at danger of approving a process that does not provide confidence that risks have been adequately identified or addressed.
Data quality – Some firms provided incomplete or inaccurate data in their regulatory reports. Considering this, the FCA underlined how this could constitute a breach of senior managers’ responsibility under the SM&CR.
Next steps
The FCA will continue its review of the implementation of the IFPR and will produce a concluding report summarising its findings in due course. Firms that are in-scope of the IFPR should keep track of these developments as it will enable them to continually improve their processes. The headline findings of the review suggest that there is still a long way to go until the regulator is fully satisfied with firms’ approaches to the regime. Further, given this publication of findings, the regulator is likely to be less sympathetic to poor implementation going forward.
Novatus are experts in regulatory implementation and have supported firms who are communicating directly with the FCA via the authorisation process or external reviews to implement the IFPR. Novatus understand how to support firms in a proportionate and, importantly, compliant manner and are well-positioned to offer support across all stages of the implementation cycle. As a specialist risk and compliance advisory, we are able to leverage our experience in delivering regulatory change programmes to financial services clients of all sizes to support you in aligning proportionately with the regulation.
If you would like to discuss further, please contact Hugo Warner - hwarner@novatusadvisory.com.