The purpose of the Internal Capital And Risk Assessment (ICARA) is for firms to identify in
a joined-up and consistent way their position in terms of own funds, liquid assets, wind-down
planning, and stress testing. The key is identifying and understanding the risks facing a
business and the harms it could cause by its operations or in a disorderly wind
down. Consider a SWOT analysis of your business.
Early warning indicators, triggers, and interventions
Each firm will have its own risk appetite and trigger framework for what own funds and
liquid assets it requires based on how it believes those assets and the business will behave
under stress. Consider whether a buffer is required.
One of the challenges for senior management is processing the amount of data available to
them. Firms should therefore identify relevant early warning indicators, before the point of
critical stress, when intervention may make a difference. Identify the appropriate indicators
for your firm and stress test them.
Well organised firms have developed both a recovery plan and a wind down plan – the first
being triggered when own funds and liquid asset thresholds or triggers fall to within say
120% of the minimum. This gives the firm an opportunity to make changes such as reduce
costs, increase revenue, etc. The wind down plan is actioned when it becomes clear that the
recovery one is not achieving the desired results. This requires integrity to recognise that the
firm needs to act in the best interests of its clients and the market in which it operates.
Establish appropriate trigger levels for your business and stress test them.
Assessment of liquid asset requirements
All businesses need to balance their cash requirements and the opportunities available to put
spare cash to productive use. The ICARA process challenges firms to consider both under
normal conditions and under stress how quickly they would need to realise assets.
Assessments were forward-looking as required by MIFIDPRU. Good practice is to assess
liquidity risk using detailed intra-day, inter-day, weekly, and monthly projections of cash-
flows under stress, appropriate to the firm’s business model, to identify potential cash
shortfalls and timing mismatches. Contemplate how readily you firm’s assets could be
realised in normal and stressed times.
Operational risk capital assessments
Running any business entails operational risk; people and systems don’t always behave the
way they should! Thinking about what could go wrong and how much capital should be kept
available can be challenging. Good firms create clear linkages between their enterprise risk
assessment and the controls put in place. Cyber risk is a topical example: how do you help
your teams to identify potential attacks and what would you do should the controls fail?
Consider an external validation of your business.
Wind-down planning process
Nobody goes into business expecting to fail, yet it is estimated that half do so within three
years of opening their doors. It is in that context that the FCA expects firms to have wind-
down plans which take into account realistic stress tests and are adequately resourced. Such
plans need to be sufficiently detailed to identify business as usual costs, wind-down driven
costs, and cashflow mismatches. Senior management need to be prepared to act when trigger
events occur. Establish what the trigger events are for your business and how you will
respond.
The ICARA document and process
The ICARA document should be seen as the firm’s opportunity to set out in writing what
risks it faces and how it will respond should they materialise. As outlined above, it should
clearly highlight the appetite and trigger framework used to manage financial resources, with
clear detailed discussions provided in appendices. It will provide a clear record of scenarios,
assumptions, analysis, conclusions, and decisions made. Consider whether your ICARA
would stand up to FCA scrutiny.
Data integrity
In our work we often hear the phrase ‘If it ain’t written, it didn’t happen’. This extends
beyond the ICARA itself to the way in which regulatory submissions are made, annual
reports, a firm’s accounts, internal management information, etc. Well organised firms can
clearly demonstrate with evidence that they are meeting their obligations and will be able to
do so in both normal and stressed conditions. Give thought to your record keeping.
The author, Vince Harvey, has worked in financial services for many years and has been running his compliance consultancy for more than a decade. His specialist areas within the Compliance Alliance are investment advice and management.
You can contact him on 07890311875 or at vince@compliancecubed.co.uk