For many, this will be the first time they have been subject to this type of requirement. However, it may be that Class 3 firms may be exempted from this requirement and this is something that is no doubt being discussed in the ongoing consultation process established by the FCA.
Class 2 and 3 investment firms will also be subject to other supervisory requirements under IFD, which for many firms will be entirely new.
Class 2 firms will have to establish internal capital and liquidity adequacy assessment processes (ICAAP/ILAAP), internal governance processes on treatment of risks, country-by-country reporting and (perhaps the most eye-catching) remuneration rules similar to the rules that apply to credit institutions.
Class 3 firms are not subject to these requirements, although their competent authority will be able to impose ICAAP/ ILAAP requirements on them as the FCA does under current BIPRU rules.
In addition, IFD envisages a more active role for competent authorities of both Class 2 and 3 investment firms, including a supervisory review and evaluation process (SREP) and the possibility for the imposition of supplementary Pillar 2 capital and liquidity requirements on those firms.
IFD also requires the EBA to submit a report (within two years after entry into force) on the introduction of criteria on environmental, social and governance (ESG) risks and how investment firms can take account of these risks in their risk management and how supervisors can assess the impact of those risks in their SREP.
Based on this report, the European Banking Authority (EBA) may choose to adopt guidelines to introduce criteria for ESG-related risks into the SREP for both Class 2 and 3 investment firms. If the EBA do this, then it is probable that the FCA will also look to do something similar in the light of the developing promotion of ESG based investments.
So where does this leave ICAAP? We believe the current ICAAP will form an integral part of any new regime.
It may be altered slightly to cover new dimensions being considered such as concentration of risk and ESG exposure.
In other words, it is highly likely the ICAAP will become more comprehensive with regard to the firm’s business activities. The FCA always intended that the ICAAP should be a “live” document that should be reviewed regularly rather than once a year.
The proposed changes will place even more emphasis on this. It is important now for all firms to evidence how they review their ICAAP; and it will be even more important in the future.
