Prudential
Following a turbulent few years driven by geopolitical uncertainty, financial resilience is a top priority for regulators. Accurately assessing an organisation’s financial resources is a fundamental step to ensuring financial resilience. There is an increasing demand on firms to comply with a host of different regimes and standards that require greater resources and expertise to calculate, report and ensure appropriate systems of control over their financial resources.
In the UK, attention from regulators is focused on preventing harm to consumers and markets. The FCA’s Principle 12 to ‘provide good outcomes to customers’ goes beyond managing services and products and requires firms to embed the principle into their strategy and processes – including calculating appropriate capital resources and liquidity to cover potential harm.
We are seeing the gap widen between the systems, processes and controls that organisations have in place and the raised regulatory bar on organisations’ capacity to assess capital adequacy.
ICAAP, ILAAP and ICARA
Supervisory findings, including FSMA s166 reports, consistently highlight several recurring weaknesses in how firms manage their capital and liquidity, whether subject to the more onerous ICAAP/ILAAP regime, or ICARA:
- Inadequate Stress Testing and Scenario Design: Regulators frequently find that macroeconomic scenarios and idiosyncratic stress tests are insufficiently severe, lack plausibility, or fail to capture the specific vulnerabilities of the firm’s business model.
- Weak Integration of Emerging Risks: Firms often struggle to quantify and embed non-traditional risks – such as climate change, cyber threats, and broader operational resilience failures – into their capital and liquidity calculations.
- Governance and Board Challenge: Regulatory reviews regularly expose a lack of robust challenge from the Board and Risk Committees. ICAAP and ILAAP documents are sometimes treated as compliance exercises rather than strategic tools actively used by senior management.
- Deficient Wind-Down Planning (WDP): Deposit takers often present wind-down plans that lack credible execution timelines, underestimate the capital and liquidity required to exit the market safely, or fail to align with the overarching ICAAP/ILAAP assumptions.
- Data Quality and Methodology Flaws: Poor underlying data governance and unsubstantiated methodological assumptions (e.g. regarding deposit stickiness or loan loss provisioning) can lead to inaccurate Pillar 2 capital add-ons or Liquid Asset Buffer requirements.
Our Approach
We work with firms to meet the required standards in these areas and ensure that decision making supports prudent financial planning and delivers fair outcomes to customers.
We work with our expert capital and liquidity modelling partner Monte Carlo Plus to build and assess capital and liquidity adequacy models (ICAAP/ILAAP and ICARA).
Our Services
Regulatory Reporting
- Review and reasonable assurance work in relation to both PRA and FCA regulatory reporting requirements.
- Enhancement of regulatory reporting processes and remediation of regulatory reporting issues including backlogs or persistent late reporting. Reviews of source data integrity and suitability (e.g. structure of the underlying chart of accounts to support regulatory reporting data analysis / segmentation requirements without manual intervention).
Recovery, Resolution and Wind-Down Planning Support
We design comprehensive wind-down plans and recovery frameworks that align seamlessly with your capital and liquidity assessments, ensuring realistic trigger frameworks and cost-to-exit calculations.We will assess planning adequacy and key areas including appropriate scenarios, crisis management, integration with the broader risk management framework, recovery options, indicators of stress and material relationships.
Investment Firms Prudential Regime (IFPR) Requirements and Expectations
Advice and guidance including modelling and model governance in relation to the UK prudential regime for MiFID investment firms. Effective 1 January 2022, the IFPR regime introduced more complex and onerous capital, liquidity, reporting, governance and remuneration requirements for affected firms, and are dependent on the firm's status as either small and non-interconnected (SNI) or non-SNI.
ICAAP and ILAAP Document Review and Enhancement
We can build or help revise ICAAP and ILAAP frameworks and models.We conduct independent, critical reviews of existing ICAAP and ILAAP frameworks against current PRA guidelines, providing actionable recommendations to enhance narratives, methodologies, and quantitative outputs.
Stress Testing Framework Design
We assist in developing bespoke, robust stress testing frameworks. This includes designing severe but plausible scenarios, refining financial modelling methodologies, and ensuring alignment with the PRA's latest macroeconomic guidance.
Internal Capital and Risk Assessment (ICARA)
MiFID firms are required to operate an internal risk management process on an ongoing basis, compliant with ICARA. In contrast to ICAAP, which defines a specific list of risk categories to assess against, ICARA focuses on the firm's business model. We can assist with ICARA process evaluation, specific issues (e.g. completeness of the market and client risks identified), and Model Risk Management ("MRM").
