There are also changes to the allowable types of capital resources, for example, tier 3 capital (short-term subordinated debt) can no longer be used as a regulatory capital resource.
When the IFPR first comes into force, existing authorised firms will have up to five years to gradually increase their funds up to the required level.
If relying on these transitional arrangements, firms still need to have a plan in place to increase capital as required over the transitional period.
Check that the new liquidity requirements can be met
At least one-third of a firm’s FOR must be held in core liquid assets. This is known as basic liquid assets requirement (BLAR).
The new rules are more definitive on what counts as a core liquid asset. For example, loans cannot be used towards the BLAR and trade receivables can only be used if they are receivable within 30 days and subject to a ‘haircut’ of at least 50 per cent.
As well as meeting its BLAR, a firm will need to determine through the internal capital adequacy and risk-assessment (ICARA) process whether it needs to hold additional liquid assets to fund its ongoing business and ensure it can be wound down in an orderly way.
Start thinking about the ICARA process
The ICARA process is an internal risk-management process that firms must operate on an ongoing basis. The FCA will hold firms’ senior management and governing bodies responsible for ensuring the ICARA process meets the FCA’s expectations.
At first glance, the ICARA may look similar to the internal capital adequacy assessment process (ICAAP) that many firms will be familiar with, but there are some important differences, such as the focus on process. The underlying processes that firms have in place to perform the ICARA are crucial here. There is also a greater emphasis on the accountability of senior managers for risk management.
Furthermore, the ICAAP has a specified list of risk categories that firms are expected to identify, assess and manage, including credit risk and market risk. The ICARA forces firms to consider their own activities, who those activities affect (clients, markets and/or the firm itself) and what could happen if things go wrong.
The ICAAP had no specific requirement for a wind-down plan, whereas the ICARA requires firms to consider and document wind-down planning in granular detail. In addition, there is a much bigger focus on liquidity.
The ICARA process explicitly builds on the FCA’s 2020 guidance on assessing adequate financial resources (FG20/1), so a good starting point is for firms to revisit their response to FG20/1.
Firms must clearly articulate their wind-down plans as part of the ICARA process. Getting wind-down plans in order is one relatively easy way for them to show that they are taking the IFPR seriously.
