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MIFIDPRU 7.5 ICARA process: capital and liquidity planning, stress testing, wind-down planning and recovery planning

MIFIDPRU 7.5.1R

1This section applies to a MIFIDPRU investment firm.

Business model assessment and capital and liquidity planning

MIFIDPRU 7.5.2R

1As part of its ICARA process, a firm must:

  1. (1)

    have a clearly articulated business model and strategy;

  2. (2)

    have a clearly articulated risk appetite that is consistent with the business model and strategy identified under (1);

  3. (3)

    identify any material risks of misalignment between the firm’s business model and operating model and the interests of its clients and the wider financial markets, and evaluate whether those risks have been adequately mitigated;

  4. (4)

    consider on a forward-looking basis the own funds and liquid assets that will be required to meet the overall financial adequacy rule, taking into account any planned future growth; and

  5. (5)

    consider relevant severe but plausible stresses that could affect the firm’s business and consider whether the firm would still have sufficient own funds and liquid assets to meet the overall financial adequacy rule.

Stress testing and reverse stress testing requirement

MIFIDPRU 7.5.3G

1MIFIDPRU 7.5.2R(5) requires a firm to use stress testing to identify whether it holds sufficient own funds and liquid assets. Firms should refer to Finalised Guidance FG20/1 for specific guidance on the FCA’s expectations in relation to stress testing.

MIFIDPRU 7.5.4G
  1. (1)

    As part of their business model assessment and capital and liquidity planning under MIFIDPRU 7.5.2R, firms with more complex businesses or operating models should also undertake:

    1. (a)

      more in-depth stress testing of their business model and strategy; and

    2. (b)

      reverse stress testing.

  2. (2)

    Firms should refer to MIFIDPRU 7 Annex 1.15G to MIFIDPRU 7 Annex 1.20G for additional information about the FCA’s expectations in relation to more in-depth stress testing and reverse stress testing.

  3. (3)

    The FCA may request individual firms to carry out more in-depth stress testing or reverse stress testing. In appropriate cases, the FCA will consider whether it is necessary or desirable to impose a requirement on a firm to carry out such stress testing. This may involve inviting a firm to apply for the voluntary imposition of a requirement under section 55L(5) of the Act or the FCA imposing a requirement on the FCA’s own initiative under section 55L(3) of the Act.

Recovery actions

MIFIDPRU 7.5.5R

1As part of its ICARA process, a firm must identify:

  1. (1)

    levels of own funds and liquid assets that the firm considers, if reached, may indicate that there is a credible risk that the firm will breach its threshold requirements; and

  2. (2)

    potential recovery actions that the firm would expect to take:

    1. (a)

      to avoid a breach of the firm’s threshold requirements where the firm’s own funds or liquid assets fall below the levels identified in (1); and

    2. (b)

      to restore compliance with its threshold requirements if the firm were to breach its threshold requirements during a period of financial difficulty.

MIFIDPRU 7.5.6G
  1. (1)

    1When a firm is considering potential recovery actions that the firm may take for the purposes of MIFIDPRU 7.5.5R, it should consider at least the following:

    1. (a)

      the governance arrangements of the firm, and in particular which individuals will be responsible for taking the relevant decisions within the required timeframe;

    2. (b)

      the key business lines operated by the firm and the critical functions that the firm will need to maintain, and the steps necessary to ensure that these can continue to operate;

    3. (c)

      the level of own funds and liquid assets that the firm is likely to need to restore compliance with the threshold requirements;

    4. (d)

      the options available to the firm to raise additional own funds or liquid assets;

    5. (e)

      the options available to the firm to conserve existing own funds or liquid assets;

    6. (f)

      any significant risks that may arise in connection with proposed recovery actions; and

    7. (g)

      any material impediments that may exist to implementing proposed recovery actions and whether these can be resolved or mitigated.

  2. (2)

    A firm should adopt a proportionate approach to identifying potential recovery actions, taking into account the nature, scale and complexity of the firm’s business and operating model. The actions that the firm proposes must be credible and justifiable, taking into account the circumstances in which the actions may be likely to be required.

Wind-down planning and wind-down triggers

MIFIDPRU 7.5.7R

1As part of its ICARA process, a firm must:

  1. (1)

    identify the steps and resources that would be required to ensure the orderly wind-down and termination of the firm’s business in a realistic timescale; and

  2. (2)

    evaluate the potential harms arising from winding down the firm’s business and identify how to mitigate them.

MIFIDPRU 7.5.8G

1When carrying out a wind-down planning assessment under MIFIDPRU 7.5.7R and determining the timeline and any required actions, a firm should refer to the guidance in the FCA’s Wind-Down Planning Guide and in Finalised Guidance FG20/1.

MIFIDPRU 7.5.9R
  1. (1)

    1A firm must use its wind-down analysis under MIFIDPRU 7.5.7R to assess the amount of own funds and liquid assets that would be required to ensure an orderly wind-down of its business for the purposes of the overall financial adequacy rule.

  2. (2)

    The firm’s assessment in (1) must not result in amounts that are lower than:

    1. (a)

      in the case of own funds, the firm’s fixed overheads requirement; and

    2. (b)

      in the case of liquid assets, the firm’s basic liquid assets requirement.

MIFIDPRU 7.5.10G
  1. (1)

    1The overall financial adequacy rule requires a MIFIDPRU investment firm to hold sufficient own funds and liquid assets to ensure that it can wind-down its business in an orderly manner (as well as operate its business on an ongoing basis). MIFIDPRU 7.5.9R requires a firm to use its wind-down analysis to assess the appropriate level of own funds and liquid assets for these purposes.

  2. (2)

    A firm’s assessment of the amounts that it needs to hold under the overall financial adequacy rule to ensure that it can be wound down in an orderly manner must never be lower than its wind-down triggers. The firm may conclude that it requires amounts that are higher than these minimum amounts to ensure an orderly wind-down.

  3. (3)

    In appropriate cases, the FCA may consider that either or both of a firm’s wind-down triggers should be set at a higher level. In this case, the FCA may invite a firm to apply for a requirement under section 55L(5) of the Act, or may impose a requirement on the FCA’s own initiative under section 55L(3) of the Act, for the firm to use an alternative wind-down trigger.

  4. (4)

    If the firm’s own funds fall below the own funds wind-down trigger or if the firm’s liquid assets fall below the liquid assets wind-down trigger, the FCA would normally expect that the firm would commence winding down, unless the firm’s governing body has determined that there is an imminent and credible likelihood of recovery. The supervisory actions that the FCA may take in these circumstances are explained in further detail in MIFIDPRU 7.6 in relation to the own funds wind-down trigger and MIFIDPRU 7.7 in relation to the liquid assets wind-down trigger.

  5. (5)

    Where a firm’s own funds or liquid assets fall below the level that is required to ensure an orderly wind-down of the firm, the firm will breach the overall financial adequacy rule. However, as explained further in MIFIDPRU 7.6 in relation to own funds and MIFIDPRU 7.7 in relation to liquid assets, this does not mean that a firm must commence winding down immediately. It is only when the firm breaches one or both of the wind-down triggers that there is a general presumption that the firm should wind-down. Where the firm has breached the overall financial adequacy rule but continues to hold own funds and liquid assets that exceed the wind-down triggers, the FCA would typically take the intervention measures set out in MIFIDPRU 7.6.15G and MIFIDPRU 7.7.17G. However, there may be cases where the firm’s financial position and the projections of its likely future financial resources mean that commencing a wind-down is appropriate, even though the firm has not yet breached the wind-down triggers. The FCA will consider the appropriate supervisory actions according to the facts in each case.