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

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.

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.

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.

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.

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.