The Financial Conduct Authority has laid out its expectations for investment firms in understanding the reporting requirements under its Investment Firms Prudential Regime (IFPR), and said there is still room for improvement.
The regulator has today (27 November) published its multi-firm review into how investment firms that fall under the MIFIDPRU category can improve the implementation of the internal capital adequacy and risk assessment (ICARA) process and reporting requirements under IFPR.
The IFPR regime came into force on 1 January 2022.
This is the final report from the FCA on the implementation of IFPR. The city watchdog did release an initial observation in February 2023 on the matter.
The regulator found that firms have made progress in understanding the requirements and it has seen a “deliberate shift toward considering and seeking to mitigate the harm the firm can pose, particularly to consumers and markets”.
The FCA did, however, find different areas for improvement with certain firms having “insufficient consideration” of cashflows and liquidity stresses, which led to an “inadequate assessment” of liquid asset requirements.
“These firms were at risk of running out of cash in stressed conditions, which could have resulted in firm failure,” the regulator said.
Also, “numerous firms” were not structured in a way that would ensure that actions would be triggered in a timely fashion to “mitigate harm”, particularly from firm failure.
Additionally, some firms showed “significant failings” in the application of capital models for operational risk.
The FCA added: “Firms should consider these [issues] and how they can strengthen their processes.”
The report focuses on where firms have performed well and badly whilst implementing the IFPR rules and where firms can improve.
The IFPR applies to investment firms engaged in MiFID (Markets in Financial Instruments Directive) activities such as fund managers, asset managers, investment platforms, firms which deal on their own account, depositaries, and securities brokers.
The FCA focused on capital adequacy, liquidity adequacy and wind-down planning under the ICARA process whilst ensuring firms have plans in place to deal with such risks.
The FCA said: “If these are appropriately considered, managed, and structured, customers and financial markets can have greater confidence that firms can address harms from their operations, mitigate them and reduce harm in firm failure.
“The review supports our commitment within our three-year strategy to reduce and prevent serious harm and to reduce harm in firm failure.”
