Considering the Investment Firm Prudential Regime (IFPR), introduced by the FCA in January 2022, we have the privilege of speaking with Awat Rahimi, Head of Prudential Alpha FMC. Awat brings a wealth of experience, having worked inside the FCA, and is now at the forefront of understanding the implications of the new regulator's objectives and the requirements for investment firms as they navigate the Internal Capital Adequacy and Risk Assessment (ICARA) process.
Let's dive into the intricacies of these regulations and explore how data can help investment managers meet FCA requirements under the new guidelines.
Marie: Having worked inside the FCA, could you please tell us more about your role there and the highlights of your professional journey so far that led you to become a Head of Prudential for Alpha FMC?
Awat: Growing up, I was interested in a wide array of subjects, from Astronomy to Biology, History to Politics, and Languages. However, I was always interested in the big unanswered questions such as 'Why are we here? Are we alone? and how will the universe end? This led me to pursue a PhD (and a Post-doc) in Astrophysics. My research centred on how stars and galaxies formed and evolved since the Big Bang
After my Post-doc, I decided to change careers and enter finance but wanted to retain and make use of my skillset and training, so I became a quant working in mathematical finance. I worked in a fintech and a bank before joining the regulator in 2017.
At the FCA, I worked in the Prudential Specialists Department. My main responsibility was to set regulatory capital for the FCA’s largest investment firms during the SREP process. I did this by assessing firms’ AMA capital models and designing the benchmarks that the regulator uses. I helped lead the FCA’s strategic response to the pandemic by designing and implementing a data-driven automated assessment of the financial resilience of 50k firms, allowing the regulator to risk-rank and prioritise all 50k firms it is prudentially responsible for supervising.
I have been at Alpha for 1 year now and head up the Prudential team. We help firms with everything from ICARA to operational risk model reviews, including capital optimisation, SREP preparation and board training.
Marie: What are some common pitfalls that companies should avoid when adhering to the new prudential regime?
Awat: There are some common pitfalls that relate to the ICARA process assessments. The first relates to unexplained reductions in risk capital. Minimum capital requirements for credit and market risk have not been retained under IFPR. However, unless business models have changed, firms will continue to be exposed to the same risks. Therefore firms should continue to take account of risks and harms even if not specifically covered by K-factor calculations. The FCA expect firms should only stop holding capital for risk types where those risks genuinely do not flow from the business model. Other common pitfalls to avoid relating to the ICARA process assessments include not fully acting upon previous FCA feedback and having insufficient governance and Board and senior Executive involvement in the ICARA.
A major area of feedback for firms is insufficient attention to detail in wind-down plans. Some firms have initiated their wind-down plans on an un-stressed balance sheet and P&L. The start point of wind-down activities should be that at which the board confirms the wind-down stress is critical and decides to wind down the business, based on a quantified Risk Appetite statement and triggers developed using firm-wide stress tests. Firms should consult the FCA’s wind-down planning guide, FG20/1 and TR22/1 to further understand the FCA’s expectations.
Finally, firms should ensure good data quality. The FCA will consider inaccurate or incomplete regulatory data submissions to be an indicator of weaknesses in firms' systems and controls. Firms should ensure that all regulatory reporting submissions are accurate. Where relevant, these regulatory submissions should also be consistent with the ICARA, annual accounts and management information.
Marie: One of the key new requirements of the IFPR for (non-SNI) firms is the calculation of K-Factors, designed to capture the risks that investment firms pose to customers, the markets, and themselves. In your opinion, what are the main challenges investment companies face when calculating these?
Awat: When it comes to calculating K-Factors, a lot of the main challenges relate to data complexity such as gathering and processing the extensive data required. Investment firms must ensure the accuracy and completeness of data, which may involve dealing with large datasets from various sources:
1. Complexity and Granularity: Each K-Factor has its own calculation method, requiring firms to collect, maintain, and analyse detailed data with different granularity and frequency.
2. Operational Challenges: Firms may need to upgrade or overhaul existing systems to capture the required data and automate the calculation processes. The new requirements might lead to additional operational costs, both in terms of technology and human resources.
3. Data Quality and Availability: Ensuring data quality is critical for accurate K-Factor calculations, and firms may find that they currently do not store or collect certain data, or that historical data is not of sufficient quality.
4. Frequency of Calculations: Some K-Factors may require frequent updates and monitoring, placing strain on resources and systems.
5. Integration with Other Reporting: Firms may need to integrate K-Factor reporting with other existing regulatory reporting processes, ensuring consistency across all reports.
The other main challenge relates to interpretation and classification, as determining how specific activities and positions should be classified under the relevant K-Factors can be complex. The need for consistent and accurate classification is crucial to ensure compliance.
Marie: We understand that many of the new regulations arise at a time when investment firms are reviewing their internal policies with greater technology investment due to inconsistencies and inaccurate data submitted in regulatory reports. In your opinion, what role must data management solutions play in helping firms ensure that all data submitted is accurate and of high quality?
Awat: Data management solutions can be instrumental in several key ways including data validation and cleansing, data integration, data quality monitoring, data governance, data enrichment, automated reporting, scalability and risk mitigation.
In conclusion, data management solutions can play a crucial role for investment firms striving to ensure that all data submitted in regulatory reports is accurate and of high quality. They not only improve data integrity but also enhance operational efficiency, reduce compliance risks, and enable firms to make informed decisions based on reliable data.
Marie: What are the implications of the ICARA process on a consolidated basis and how can managed and professional services support this process effectively?
Awat: Under MIFIDPRU, investment firms are ordinarily required to complete an ICARA process individually. An investment firm group may alternatively choose to complete a ‘group ICARA process’. As an additional option, where appropriate, an investment firm group may operate an ICARA process on a ‘consolidated basis’. This is different from the ‘group ICARA process’ as it is based on the ‘consolidated situation’ i.e., as if the entire investment firm group were treated as forming a single hypothetical MIFIDPRU investment firm. This invitation or requirement means that each individual entity undertakes a solo ICARA process. In addition, the consolidated information for the group is used to produce at a consolidated level a single set of threshold requirements and triggers. Both consolidated and solo threshold requirements should then be monitored.
The implications of producing the ICARA on a consolidated basis include the requirement to assess risks on a consolidated basis, involving aggregating risks across entities, allocation of capital based on risk assessment and comprehensive data management from multiple entities. Managed and professional services can assist in Data Integration and Management. Technology solutions can facilitate data aggregation, risk calculation, and reporting on a consolidated basis. These solutions can streamline the ICARA process.
In summary, the ICARA process on a consolidated basis requires financial institutions to manage complex data, assess risks comprehensively, allocate capital effectively, and ensure regulatory compliance across the entire group. Managed and professional services can offer valuable support by providing expertise, technology solutions, data management, risk analysis, and regulatory guidance to streamline and enhance the ICARA process. This support is essential for maintaining capital adequacy and risk management standards in a consolidated group structure.
You can learn more about how Aiviq is helping firms meet Internal Capital Adequacy and Risk Assessment (ICARA) requirements under IFPR here.
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