IFPR - Consultation Paper 21/07

Consultation paper (CP) 21/07 was issued by the FCA on 19 April 2021. This is the second consultation paper on IFPR. IFPR is aimed at protecting clients, consumers and the wider market of FCA investment firms and will seek to shield them from any potential harmful impact of the firms’ activities. This paper summarises CP 21/07, with a focus on the main points relating to ICARA/wind down.

In summary, what does it say?

• It clarifies the calculation required for the Fixed Overhead Requirement (FOR) and confirms this is the minimum requirement for own funds
• It sets out the proposals for additional k-factors; assets safeguarded and administered, client money, assets under management and client orders handled
• It confirms the basic liquid capital requirement is one third of FOR
• An Overall Financial Adequacy Rule (OFAR) is introduced within the ICARA, requiring firms to set their own capital and liquidity requirements, ensuring they have enough to remain viable throughout the economic cycle and undertake an orderly wind down
• Intervention points are introduced, detailing when the FCA should be notified about capital/liquidity issues
• It confirms remuneration policies are required across all firms and it sets fixed/variable remuneration ratios for non SNI firms, whilst also reducing remuneration reporting requirements

What specific points are worth pulling out, aside from the ICARA/wind down highlights?

• It confirms firms can deduct the amortisation of software intangible assets where the assets are deducted from own funds, however doesn’t mention the deduction of the amortisation of capitalised investment management contracts
• It sets the requirements for a formal recalculation of the FOR (out with the normal reporting timelines, generally quarterly) to be when the FOR is forecast to increase by more than 30% or more than £2m
• The basic liquid asset requirement is applicable for all firms and requires the firms to hold the liquid assets themselves, however does acknowledge that in a group situation, it may be appropriate for other entities to hold on behalf of the firm and allows for an exemption to be requested in this situation
• For the basic liquid asset requirement, trade receivables can be included for some firms, however this can only make up one third of the requirement, they must be receivable within 30 days and they must have a haircut of at least 50%

What are the main points discussed in relation to ICARA/wind down?

• The ICARA process can be conducted on a group basis, with the production of one ICARA document only, however this must cover how risks are managed on a group and an individual entity basis
• The criticality of wind down plans is discussed, with each entity requiring its own specific wind down plan including wind down triggers
• Complex firms need to consider if they should review the ICARA every 6 months (rather than 12 months)
• Capital and liquidity requirements should be forward looking, as part of business and capital/ liquid assets planning
• For the liquidity requirement calculated as part of the ICARA, a wider range of non-core liquid assets can be held
• Recovery planning guidance has been issued; recovery planning aims at helping firms avoid breaching their own assessment of capital and liquidity. The wind down plan will be executed when all credible recovery actions have been exhausted without success
• Intervention points are clarified as:
  • Early warning indicators: notify the FCA if the firm is within 110% of the capital threshold
  • Threshold requirement: notify the FCA if internal capital and liquidity thresholds are breached. The focus is on recovery.
  • Wind down trigger: notify the FCA if the FOR or basic liquid assets requirements are breached

Firms are asked to respond to the consultation paper by 28 May 2021. Questions are asked by the FCA in relation to the points noted in the paper, including a specific question on agreement with the ICARA requirements in a group situation and whether the early warning trigger is appropriate.

How can we help?

Devlin Mambo have extensive experience in assessing the impact of new regulations and in assisting in their effective implementation in a controlled, measured and robust way. With a clear focus on long term partnerships, we will work hand in hand with you to help build the optimal IFPR framework for your business, with due consideration to your entity specific and consolidated requirements.

For further information contact cathy@devlinmambo.com or your usual relationship contact.