What Is IFPR?

IFPR came into force on 1 January 2022, replacing the earlier capital rules for most FCA-regulated investment firms. Its rules are in the MIFIDPRU sourcebook of the FCA Handbook, and the FCA’s IFPR pages summarise them. It applies to MIFIDPRU investment firms, which include investment managers, wealth managers with MiFID permissions, brokers and certain other investment firms.

IFPR is designed around harm: the potential harm a firm’s failure or poor conduct could cause to clients, markets and the firm itself. Capital and liquidity requirements are set with that harm in mind, rather than borrowing rules designed for banks.

SNI and Non-SNI Firms

IFPR divides firms into two groups:

A firm’s classification affects its capital calculation, its remuneration rules, its disclosure obligations and, for larger firms, whether it must have board committees. Firms should check their position against the current MIFIDPRU thresholds regularly, especially as they grow.

Own Funds and Liquidity Requirements

These are the minimums. The ICARA decides whether the firm needs more.

What Is the ICARA?

The ICARA is a continuous process, not a single document. Through it, a firm must:

• identify and monitor the potential for harm from its business and operations
• put in place systems and controls to reduce that harm
• assess whether it holds enough own funds and liquid assets, under the overall financial adequacy rule, to cover its risks and to wind down in an orderly way
• plan for recovery actions if resources fall, and for an orderly wind-down if needed
• stress test its capital and liquidity against severe but plausible scenarios

The firm must review its ICARA at least annually, and whenever there’s a material change in its business. It must also submit an annual ICARA questionnaire to the FCA through its regulatory reporting.

The Board’s Role

The firm’s governing body is responsible for the ICARA. In practice, the board should:

• approve the ICARA and its conclusions on capital and liquidity, at least annually
• challenge the harm assessment and stress scenarios, rather than accepting a template
• agree recovery triggers and the wind-down plan
• receive regular management information on capital and liquidity against agreed thresholds
• make sure the ICARA reflects business changes, such as new products, acquisitions or rapid growth

The FCA has repeatedly found ICARAs that were generic, poorly linked to the firm’s actual business, or prepared by consultants with little board engagement. A board that can’t explain its own ICARA is a warning sign for supervisors.

Senior Managers and the ICARA

IFPR doesn’t create a separate Senior Manager Function, but ICARA responsibility usually sits with:

• the chief finance officer or finance director, who owns the capital and liquidity calculations, often holding SMF2 or SMF3
• the chief risk officer, at firms large enough to have one, who leads the harm assessment and stress testing. See SMF4 explained
• the chief executive, who owns the business model the ICARA assesses

The Responsibilities Map and Statements of Responsibilities should make clear who owns each part. Our Statement of Responsibilities template helps document this.

Governance, Remuneration and Disclosure

Non-SNI firms face further requirements:

• Committees: larger non-SNI firms must have risk, remuneration and nomination committees, with chairs who may hold Senior Manager Functions. See chair and committee chair recruitment.
• Remuneration: the MIFIDPRU Remuneration Code in SYSC 19G, with additional rules for larger firms.
• Public disclosure: information on risk management, own funds, governance and remuneration.

Wind-Down Planning

Every investment firm must plan how it would wind down in an orderly way, without causing undue harm to clients or markets. A credible wind-down plan sets out the triggers that would start it, the steps involved, how long it would take, and what it would cost, including staff, systems, client transfers and the return of client money and assets. The costs feed directly into the firm’s assessment of how much capital and liquidity it needs.

The board should test the plan, not just approve it. Questions worth asking include whether key staff would stay through a wind-down, whether third-party providers could be relied on, and how long transferring clients would realistically take.

Common ICARA Weaknesses

• harm assessments copied from templates rather than built from the firm’s business
• wind-down plans that underestimate costs or time
• stress tests that aren’t severe enough
• no clear link between the ICARA and the firm’s risk appetite and management information
• a board that approves the ICARA without challenge

The People Investment Firms Need

SMF Capital recruits the Senior Managers and board members accountable for the ICARA. For finance directors and CFOs, FD Capital, a sister practice, specialises in fractional, interim and permanent finance leadership. Our article on regulatory reporting support covers the reporting team.

Frequently Asked Questions

What does ICARA stand for?

Internal Capital Adequacy and Risk Assessment.

What does IFPR stand for?

Investment Firms Prudential Regime, which came into force on 1 January 2022.

How often must the ICARA be reviewed?

At least annually, and whenever there’s a material change in the firm’s business or operating model.

Who approves the ICARA?

The firm’s governing body, usually the board.

Does IFPR apply to all FCA firms?

No. It applies to MIFIDPRU investment firms. Other firms, such as banks, insurers and consumer credit firms, are subject to different prudential rules.