Khepri's A to Z: Enhancing Implementation of the Investment Firms Prudential Regime (IFPR) - Buy and Sell-Side Compliance

Introduction

The Investment Firms Prudential Regime (IFPR), initiated on January 1, 2022, has ushered in a new era for MiFID investment firms, encompassing a broad range of entities, including fund managers, asset managers, trading firms, depositaries, and investment platforms. A central tenet of IFPR is the mandate for all firms under its purview to conduct an internal capital adequacy and risk assessment (ICARA) process. This process is aimed at identifying operational risks and providing necessary resources to mitigate harm, both in a going concern scenario and during wind-down operations.

Earlier this year, the FCA released its observations and areas for Improvement following a review of various firm’s implementation of these new rules.

Key Observations and Areas for Improvement

1. Assessment within Investment Firm Groups

Among investment firm groups, many opted for a 'group ICARA' process. However, this approach often lacked a comprehensive evaluation of firm-specific risks and harm, falling short of the individual firm requirements set by MIFIDPRU. Additionally, only a few investment firm groups conducting a 'consolidated ICARA process' independently assessed the financial resource needs of individual firms, as stipulated by MIFIDPRU. To ensure robust risk management, assessments within ICARA processes should be cohesive and fully integrated into the firm's approach, which was not consistently observed in the initial review.

2. Wind-Down Planning

Wind-down planning assessments were found to be lacking in scope and quantification, indicating an incomplete understanding of the exercise's purpose and previously provided guidance. Inadequate consideration was given to stress scenarios, which are crucial in assessing potential harm during wind-down. The absence of a group risk perspective in wind-down plans could result in critical dependencies on other entities within the group being overlooked, impacting the overall efficacy of the wind-down strategy.

3. Data Quality

Several firms submitted inaccurate or incomplete data in their regulatory reports, revealing weaknesses in their systems and controls. Data accuracy is vital for regulatory compliance, and discrepancies in submissions can breach senior managers' responsibilities under the Senior Management & Certification Regime (SM&CR). Firms should utilize the transition to IFPR as an opportunity to review their reporting practices and ensure consistency across various documents, including ICARA reports and management information.

4. Governance and Board Involvement

Differences in the level of engagement by boards and their delegated committees in the ICARA process were noted. While some exhibited a deep understanding of risks and controls, others lacked sufficient oversight, potentially leading to a lack of confidence in the risk identification and mitigation capabilities of the firm. Firms can benefit from providing comprehensive training to boards and committees on IFPR to encourage suitable challenge and diligence.

Conclusion

The initial phase of the multi-firm review highlights essential areas where investment firms can enhance their implementation of the IFPR. By addressing these observations, firms can bolster their risk management practices, regulatory compliance, and overall resilience in the ever-evolving financial landscape.

As the review continues, firms that were part of the initial phase will receive detailed feedback, and subsequent supervisory activities will follow. A concluding report will be published upon completion of the review, with interim observations potentially released as deemed appropriate. In this dynamic regulatory environment, investment firms should remain agile and proactive in their efforts to meet the requirements of the Investment Firms Prudential Regime.