Standards applied to ICAAP have risen as regulators became familiar with them and incorporated the principles into their supervisory reviewsNone of this is new. However, standards applied to ICAAP have risen as regulators became familiar with them and incorporated the principles into their supervisory reviews. The new SREP framework is only the latest supervisory approach.
The new SREP
This new approach means we are seeing more FCA ICAAP reviews and SREP visits than previously and we expect this trend to continue. Depending on a firm’s regulatory risk category, firms should expect a SREP review every two to three years.
Currently, the focus is on larger firms or those with broader FCA licences. However, it is expected that all types of investment firm will be targeted in due course.
During a SREP, the regulators may wish to discuss risk and capital management with directors, key business heads, the chief risk officer and chief financial officer, along with the key risk owners. Although the visit will be led by FCA supervisors, those involved should also expect to meet FCA risk specialists.
The FCA will also compare a firm’s Pillar 1 capital requirements to its ICAAP or Pillar 2 quantitative assessment. The Pillar 1 capital requirement is based on prescribed rules and therefore is a minimum capital requirement.
The Pillar 2 quantification should be based on a firm’s own measurement of risks. Firms will need to justify the differences between these two risk measurements for each key risk.
At the end of the SREP, the FCA will send a letter summarising its conclusions. This assessment may require a firm to hold more capital than its Pillar 1 minimum capital requirement – this is referred to as individual capital guidance (ICG).
In addition, the FCA may identify calculations that are wrong or processes that need improvement and require a firm to address those issues within a specified time.
In an extreme situation the conclusion may be that the firm will never have enough financial resources for its business and then a regulator could take early intervention measures. In practice, this is not expected although it does illustrate the need for a firm to be sufficiently prudent in its ICAAP.
| Key Points |
The FCA has refreshed its own expectations of ICAAPs. We are seeing more FCA ICAAP reviews and SREP visits than previously. In an extreme situation the conclusion may be that the regulator could take early intervention measures. |
What are the FCA’s areas of focus?
• Governance: The role of the board in overseeing a firm’s risk culture and providing appropriate challenge to management needs to be described. The ICAAP, which is board-approved, must be linked to business strategy and risk appetite.
Ultimately, the extent to which a firm’s ICAAP has been subject to appropriate discussion, review and challenge will have a significant impact. If the FCA is not satisfied with governance and oversight it may set an extra capital requirement.
