Published: 18th June 2015

On 13 May 2015, the FCA held its first ever Prudential Supervision Forum in which it reminded firms that prudential supervision is “not just about the financials”.

As such, firms should expect to be challenged by the regulator not only on the financial risks inherent within their business models but also on the quality of their systems and controls, governance arrangements, and risk management capabilities that they have in place. This includes the risk of misconduct.

Crucially, the FCA will assess how firms understand the risks that they are exposed to and how they are translating these into a robust capital and liquidity assessment which in turn will feed into their ICAAPs and Liquidity Assessments that are appropriate to firms’ business models.

Under the FCA’s risk based approach to supervision, firms which are the most prudentially significant or critical are classified for prudential purposes as P1 or P2 firms and will be supervised “proactively” by the FCA – see ‘FCA Factsheet: Supervision’ for further details.

Here, the FCA has stated that the starting point for their assessments will be a review of firms’ ICAAPs. In this respect the FCA has already found that some firms have not assessed their ICAAPs appropriately. In some cases this has led to an underestimation of the actual level of risk which the FCA has addressed by setting higher capital levels.

The FCA has stressed that in many cases firms have severely underestimated the existence of Operational Risk inherent in their business. The FCA now sees Operational Risk as the single largest risk class for the majority of solo regulated firms.

Although P3 firms are subject to a more “reactive” approach to being supervised because they are prudentially less critical and significant than P1 and P2 firms, the FCA has made clear that it will looking at the reporting submissions (e.g. COREP submission) that firms make as it is possible that some alerts raised might act as an early warning of financial stress or indicate other issues. This could lead to a follow up response from the FCA possibly in the form of a request for an explanation, resubmission or further scrutiny into firm’s business model and ICAAP.

The European Banking Authority (EBA) has published guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) – which the FCA will be using when assessing what firms need to include in their ICAAPs – which firm’s should consider. The EBA expects competent authorities to apply these guidelines by 1 January 2016.


HOW CAN WE HELP?

Complyport can assist your firm in:

  • The provision and development of a risk matrix and help identify the material risks that the firm faces to, where appropriate, the necessary additional capital required to mitigate against those risks,
  • Ensuring that your financial figures are suitably presented in the report and that the stress tests and scenario analyses are adequate for the ICAAP, and
  • Documenting the findings in the ICAAP report.

For more information contact us at info@Complyport.co.uk

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