ICAAP Preparation & Review

The FCA’s Internal Capital Adequacy Assessment Process (ICAAP) rules require firms to assess the level of capital that adequately addresses relevant current and future risks in their business.

Investment firms in the European Union must carry out and document an ICAAP. And with reasonable (but not extensive) notice, the FCA can scrutinise, in granular detail, a firm’s ICAAP under its Supervisory Review and Evaluation Process (SREP).

In line with SREP guidance issued by the European Banking Authority (EBA), UK investment firms can expect to have their ICAAP reviewed at least once every three years. This is troublesome for firms who have not had an SREP before.

The challenge

A read through the FCA’s handbook explains what is required, but not necessarily what the FCA expects, or how to conduct and document an ICAAP – and it is these that count. Principally, it has emerged that the FCA expects Pillar 2 capital (i.e. specific to a firm’s risks and controls) to be higher than the more formulaic minimum capital requirements calculated under the Pillar 1 rules.

UK firms do not submit an ICAAP report to the FCA but are held to account by the requirement to submit, once a year, a questionnaire via the regulator’s GABRIEL system. For many firms that are not supervised on a relationship basis, GABRIEL submissions are the only communication they have with the regulator, so they need to be right.

How we can help

Wheelhouse Advisors’ ICAAP experts assist clients in developing, implementing and documenting robust ICAAP processes, including:

  • Assistance with developing and/or documenting a risk management framework, including:
    • Risk appetite, identification, and assessment.
    • Mapping to effective policies and procedures.
  • Robust monitoring, reporting and escalation protocols.
  • Orderly wind-down planning.
  • Production of financial and regulatory capital forecasts.
  • Pillar 2A assessment quantifying additional risks not fully covered under Pillar 1.
  • Pillar 2B assessment - stress and scenario testing.
  • Production of a final ICAAP Report.

Why Wheelhouse Advisors

We can support your business in the way that suits your requirements best. From ad-hoc hourly support through to our fully outsourced service we will work with you to scope a relationship based on your needs, not our products.

We will provide you with access to prudential expertise that will help you identify, assess and document major sources of risks and quantify risk appetite. Our ICAAP reporting services provide relief from time and effort spent on your ICAAP report.

Our consultants can advise you on how to best prepare for a potential SREP review and/or visit from the FCA. We can provide direction on how to avoid potential Pillar 2 capital breaches and problematic notifications to the regulator by keeping on top of your current Pillar 1 and Pillar 2 capital requirements. And we can provide help in preparing financial forecasts and stress testing scenarios, creating a winddown plan and associated calculations.

Notes

Under the Basel Accords framework:

  • Pillar 1 requires that a firm must maintain at all times financial resources equal to or greater than capital requirements based on a variety of calculations driven by the activities it conducts.
  • Pillar 2A covers the need to hold capital against risks that are not covered, or not fully covered, under the Pillar 1 calculations.
  • Pillar 2B assesses the need to hold additional capital resources to protect against potential future risks outside of the firm’s control.