Navigating the IFPR & prepping for the looming deadline
The new Investment Firm Prudential Regime will bring significant changes to the way investment firms assess and mitigate risk when it is introduced on 1 January, 2022. Among other changes, it will introduce new capital and liquidity calculations, and increase reporting and disclosure requirements.
The new Investment Firm Prudential Regime (IFPR) will bring significant changes to the way investment firms assess and mitigate risk when it is introduced on 1 January, 2022. Among other changes, it will introduce new capital and liquidity calculations, and increase reporting and disclosure requirements for many different firm types.
The IFPR will apply to MiFID investment firms authorised and regulated by the FCA; Collective Portfolio Management Investment Firms (CPMIs); and regulated and unregulated holding companies of groups that contain either of the above.
As fund managers begin, or continue, to work their way through this latest in a line of complex regulations, we spoke to Michael Chambers, Head of Prudential at Wheelhouse Advisors, and a member of the IFPR committee of the Investment Association. Wheelhouse Advisors recently carried out in-depth research with affected firms, and shared some of the findings exclusively with HFM.
What were some of the key findings/most interesting results from the report?
There really is a whole range of issues, from those many firms which don’t realise they’re in scope of the IFPR or aren’t aware that the rules are changing so drastically, to those which have completed some initial analysis and found the devil in the detail in certain areas. It’s a real gamechanger for a significant number of businesses.
Capital requirements, capital resources, liquidity and how firms report are all part of the significant changes being made through the IFPR. For the vast majority of firms that we assessed (71%) there will be no action required with regards to liquidity. We believe 5% of the firms assessed may require close monitoring and we have identified 14% of firms that we believe should seek to hold more cash on the balance sheet to satisfy the impending rules around liquidity.
The findings present a huge challenge to exempt-CAD firms who will feel the biggest impact, as capital requirements increase from a standard £42k pre-IFPR to varying figures ranging from £173k to £1.2m – which could feasibly be higher depending on the expenditure going through the P&L or types and levels of regulated activity.
There are a lot of different elements to consider with this regulation; public disclosures, renumeration, capital requirements and liquidity are just a few of the areas that the new rules focus on and require updated reporting around.
Which firms have the most work to do between now and January?
For certain types of firms, the impact is fairly nuanced.
For example, we have observed some fund managers experiencing less of an impact on capital requirements compared to other firm types, so the complexity will be around the implementation of the ICARA and other detailed governance requirements.
The work required to be IFPR-ready will be completely dependent on each individual manager’s requirements. From a formulaic perspective, fund managers which also manage client portfolios in segregated accounts would likely have higher capital requirements than those without. Beyond this it will all be dependent a firm’s own assessment of its risks and adequacy of financial and non-financial resources.
At the other end of the scale, exempt CAD firms will be affected more significantly as they’re adversely affected by the rules – they’re starting furthest away from the finish line, so have a lot to do between now and January. Match principal brokers will have their trading book exemptions removed, making the process of prudential monitoring more onerous.
What changes will the new ICARA process bring?
One significant part of this regulation is the replacement of the current Internal Capital Adequacy Assessment Process (ICAAP) with a new Internal Capital and Risk Assessment (ICARA) process. The ICARA process will change how investment firms should consider and manage risk.
Our report showed that 100% of firms have work to do in order to be prepared for the ICARA process. Based on our more detailed assessments of the individual ICAAP reports, we were able to break this down to 57% with, in our view, some work to do, and 19% with, in our view, significant work to do, with 24% starting from scratch.
The FCA has seemingly been fairly flexible about when the first ICARA report and approval event should take place, but firms should be considering the implications of this and look at their next ICAAP as their last. We’re working with firms to prepare a kind of hybrid ICAAP/ICARA policy this year to prepare for the move over in 2022.
What should fund managers be focused on between now and January?
All managers need to understand the potential impact to their firm. Develop a plan to implement the new rules; understand the key changes, deal with the financial impact and plan around that. This legislation works in tandem with the SM&CR, so work out the key points for the people that will be responsible for the implementation, and get senior management and board director buy in, so that they’re comfortable signing off any new processes.
The January 2022 deadline will also mean that reporting frequency for managers increases, content becomes more complex, and there will be less time to report before each deadline. Firms should therefore work on establishing the lines of communication for data, creating workings papers and agreeing review and approval processes to ensure they hit the ground running in the first reporting period.
Finally, Firms should plan for the establishment the new processes and frameworks for ICARA compliance as soon as possible, to work out any early issues and ensure all key stakeholders are aware of the critical timeline.
What long-term changes might managers need to make in-house to accommodate this extra regulatory burden?
Firms might need to bolster their teams to deliver the more frequent reporting requirements, and they should consider outsourcing to a specialist provider. The research we carried out suggested that 100% of firms assessed will see their reporting requirement becoming more complex, with 24% of those seeing significantly more complex reporting requirements.
Previously, the front and middle offices have been largely kept away from regulatory compliance issues, but the FCA has long been keen to improve the culture of compliance throughout the firms it regulates. For risk takers in the business, the IFPR in combination with the Senior Managers and Certification Regime (SMCR), is a tangible example of the sorts of obligations designed to embed that culture of responsibility and accountability. It’s a good opportunity for firms to pivot their front and middle offices in instilling that compliance attitude and culture across the entire firm.