Returning from summer holidays – A prudential year-end “to do” list

Compliance teams may only just be back from their summer breaks, but the year end is right around the corner, so it’s a good time to think ahead about the annual review of the firm’s prudential governance arrangements. Leaving annual review preparations until December can create a last-minute rush of work, and result in key areas being overlooked. Taking the time to explore these areas now can mean being better prepared before the year-end holiday break.  It’s a good time to sit down with a cup of coffee and reflect on the FCA’s consultation paper (or “CP”) from earlier this year; Consultation 19/20: Our framework: assessing adequate financial resources.

Four areas to focus on include: 

Financial Planning – The regulator doesn’t seek to introduce any new rules with its CP, rather reinforce its expectations when it comes to financial planning. For example, all firms are supposed to undertake financial forecasting with a three-year outlook. This forecast needs to consider core underlying assumptions in both a conservative base case and perhaps more pessimistic cases too. At the moment practice around financial planning – what actually happens in the “real world” – varies widely so, it’s a good idea to review your firm’s practice and what can be evidenced, and what may be needed to bring it in line with the FCA’s expectations. 

Regulatory reporting – Double check to be sure that the firm’s GABRIEL schedule is correct. Incorrect GABRIEL schedules are a common issue – they could either have been set up the wrong way to begin with, or they may have been erroneously amended subsequently. Either way, it remains a firm’s responsibility to ensure returns are correct and there is a real danger that firms could submit incorrect returns to the FCA. The relevant rules are located in the FCA’s Supervision (or “SUP”) Handbook. 

Capital adequacy assessments – It’s also a good time to review the firm’s approach to its capital adequacy assessment, to see if it needs to be strengthened or updated. For firms required to conduct a formal Internal Capital Adequacy Assessment Process (or “ICAAP”) a busy period following the financial year-end means limited or no time to make any identified enhancements to the underlying processes. For other firms, capital adequacy assessment requirements are less stringent but the regulator’s CP reminds all firms of their commitment to adhere to threshold conditions and core principles for business – together mandating “appropriate resources” and “adequate financial resources”.  For all firms, adherence to the formula-driven minimum capital requirements is not enough and all should seek to ensure sufficient risk-based capital is held – particularly with respect to the expected cost of executing an orderly wind-down.

Regulatory change – Getting to grips with upcoming regulatory change well in advance is also time well spent. In particular, the EU’s Investment Firms Review will have differing impacts on CAD-exempt firms, commodity firms, and MiFID managers. For some firms, the financial impact of the new regime, in terms of increased capital, could be significant. The associated directive and regulation are expected to be finalised by the end of this year. This means that this economic cycle could be the last opportunity for firms to adjust dividends or distribution policies to keep back some much-needed capital. Forward planning around this regulatory change will be very important for some firms. 

Overall, there are many reasons why firms need to refresh their prudential regulatory program – for example, many firms who experience rapid growth may need to ensure their compliance process keep up. Taking the opportunity to step back and review what may need updating can save on time, resources and expense later in the year. While it’s unlikely the FCA is going to launch an enforcement crackdown in these areas soon, the release of CP 19/20 indicates that they want the industry to have a firm understanding of what their expectations of firms are, and to be meeting those standards. 

How ACA can help 

We have a range of solutions designed to help you meet your Investment Firm Regulation (IFR) obligations. 

These include: 

• Impact assessment – to help you understand how the new prudential framework impacts your firm. This includes categorisation, capital requirements and resources, liquidity requirement and resources, group rules, regulatory reporting, ICAAP and public disclosure. 
• Regulatory reporting – we can look after your on-going regulatory reporting burden allowing your team to focus on the day-to-day business. 
• ICAAP reporting services – all firms will be required to annually conduct and document is Internal Capital Adequacy Assessment Process (ICAAP) to assess the level of capital that adequately addresses future and current risks in their business. ACA assists firms in developing and documenting their ICAAP as well as advising how the key underlying processes can be embedded in day-to-day governance.