MIFIDPRU 7.9 ICARA process: firms forming part of a group

1This section contains:

1. (1)

   a requirement for individual MIFIDPRU investment firms to take into account group risk as part of their ICARA process;

2. (1A)

   2guidance on the extent to which an investment firm group may operate an ICARA process on a consolidated basis;

3. (2)

   rules and guidance on the extent to which an investment firm group may manage risks on a group basis and may operate a group ICARA process; and

4. (3)

   rules and guidance on the extent to which the position of multiple MIFIDPRU investment firms may be combined with a single ICARA document.

1The requirement in MIFIDPRU 7.9.2R applies in relation to:

1. (1)

   any group, irrespective of whether that group is an investment firm group; and

2. (2)

   any relationship that the firm has with any member of that group, irrespective of whether the other entity is an authorised person.

1. (1)

   1An investment firm group to which MIFIDPRU 2.5 (Prudential consolidation) applies is not normally required to operate an ICARA process on a consolidated basis.

2. (2)

   However, on a case-by-case basis, 2the FCA may determine that a particular investment firm group should operate an ICARA process on a consolidated basis (ie, as if the overall financial adequacy rule applied to the consolidated situation, so that the UK parent entity and the relevant financial undertakings in the investment firm group were treated as a single MIFIDPRU investment firm). (2A) includes examples of such cases. 2 Therefore, in appropriate cases, the FCA may:

   1. (a)

      invite a UK parent entity to apply for the imposition of a requirement to operate a consolidated ICARA process under section 55L(5) or section 143K(1) of the Act; or

   2. (b)

      impose a requirement on the FCA’s own initiative on a UK parent entity to operate a consolidated ICARA process under section 55L(3) or section 143K(3) of the Act.

3. (2A)

   2For the purposes of (2), examples of such cases may include where the FCA concludes that:

   1. (a)

      the individual ICARA process operated by a MIFIDPRU investment firm within an investment firm group, or the group ICARA process operated by an investment firm group, does not adequately reflect certain material risks that arise in the context of the investment firm group as a whole;

   2. (b)

      the operation of a group or an individual ICARA process does not enable the FCA to effectively supervise the compliance of the investment firm group, or any of the individual MIFIDPRU investment firms within it, with the obligations in MIFIDPRU 7, due to the structure of the investment firm group;

   3. (c)

      authorised persons (other than MIFIDPRU investment firms) within the investment firm group conduct a material amount of business and the individual or group ICARA process does not adequately reflect the impact of this business;

   4. (d)

      a MIFIDPRU investment firm within the investment firm group is materially dependent on a relevant financial undertaking (other than a MIFIDPRU investment firm) within the investment firm group for either revenue or services;

   5. (e)

      the financial resilience of the investment firm group could adversely affect the ongoing financial resilience of the MIFIDPRU investment firms within the investment firm group (for example, due to significant levels of goodwill); and

   6. (f)

      there are significant amounts of on- and off-balance sheet claims or liabilities (excluding own funds) between one or more MIFIDPRU investment firms and other relevant financial undertakings within the investment firm group, and they are not short-term or non-recurring.

4. (3)

   Where the FCA decides to impose a requirement on a UK parent entity to operate an ICARA process on a consolidated basis, it will normally discuss its expectations around the operation of that ICARA process in further detail with the UK parent entity.

5. (4)

   In appropriate cases, the FCA may specify that a particular entity (whether or not it is an authorised person) should be excluded from the consolidated situation. Where this is the case, the consolidated ICARA process should reflect the modified scope of the consolidated situation. The FCA may adopt this approach where, for example, the inclusion of the entity within the consolidated situation would result in a misleading assessment of the financial resources available to, or the harms posed by, the relevant investment firm group.

6. (5)

   2An ICARA process operated by an investment firm group on a consolidated basis is in addition to the individual ICARA process operated by a MIFIDPRU investment firm within an investment firm group, or to the group ICARA process operated by an investment firm group.

3This guidance provision covers the following practical aspects in relation to the group ICARA process:

1. (1)

   1Under MIFIDPRU 7.9.7R, if an investment firm group is operating a group ICARA process that is inadequate to address the potential harms arising from its business, the FCA may direct all members of the investment firm group, or individual MIFIDPRU investment firms within it, to apply the ICARA process on an individual basis.

2. (2)

   In addition, a group ICARA process must satisfy the requirements in MIFIDPRU 7.9.5R on an ongoing basis. If any of the conditions in that rule for the use of the group ICARA process are not met, all MIFIDPRU investment firms covered by that group ICARA process must operate individual ICARA processes instead.

3. (3)

   Under a group ICARA process, the risk management and analysis of the financial impact of the risks is carried out at the level of the investment firm group (either by the UK parent entity or by a MIFIDPRU investment firm (MIFIDPRU 7.9.5R(6))3. Each firm in the investment firm group is then allocated on a reasonable basis the assessment of own funds or liquid assets that are required to cover identified risks.

4. (3A)

   3Where the assessment of own funds or liquid assets uses a methodology that includes intra-group netting or offsets, the amount allocated from such assessment of own funds and liquid assets to each firm should be adjusted to remove any benefit which may otherwise have been applied at the level of the investment firm group.

5. (3B)

   3In addition, each MIFIDPRU investment firm in the investment firm group must comply with the overall financial adequacy rule on an individual basis.

6. (3C)

   3An investment firm group that wishes to operate a group ICARA process must therefore ensure that its risk management processes are sufficiently robust to satisfy the requirements in MIFIDPRU 7.9.5R and that there is appropriate accountability of the responsible governing body in accordance with the requirements of that rule.

7. (4)

   The FCA considers that it is important that there is a proper analysis of how the overall financial adequacy rule and wind-down planning arrangements apply to each individual MIFIDPRU investment firm within the investment firm group. This reflects the fact that the solvency of firms must be assessed on an individual basis and legal entities must be wound down separately.

1The effect of MIFIDPRU 7.9.10R is that even where an investment firm group does not operate a group ICARA process, a single ICARA document can be used to document the individual ICARA processes operated by multiple MIFIDPRU investment firms within that investment firm group. However, the single ICARA document must clearly explain how each MIFIDPRU investment firm meets the applicable requirements on an individual basis.