How to Structure a MIFIDPRU ICARA That Withstands FCA Prudential Review

Most ICARAs fail prudential review not because the numbers are wrong, but because the document cannot explain itself. Supervisors read the ICARA looking for evidence that the firm has genuinely thought about the harms it creates, priced them, and set thresholds it can defend on a bad day. If the harm identification is generic, the scenarios are decorative, or the wind-down triggers are disconnected from the risk metrics, the FCA will conclude the process is not embedded, and a Section 55L requirement or additional own funds guidance becomes likely.

Key Executive Takeaways

• The ICARA must be organised around firm-specific harms, not risk categories borrowed from the ICAAP era, with capital and liquidity requirements traceable to each material harm.
• Wind-down analysis needs to be operationally credible: costed, sequenced, and cross-referenced to the liquid assets threshold, not a standalone appendix.
• The document should pre-empt supervisory challenge by showing the board's own dissent, calibration debates, and reverse stress test breakpoints, not just the conclusions.

Start with harm, not risk taxonomy

The MIFIDPRU framework is built around harm to clients, markets, and the firm itself. Firms that carry over their old ICAAP risk register and relabel it produce ICARAs that read as compliance exercises. Good documents open with a concise harm inventory tied to the business model: what activities generate harm, to whom, and through what mechanism. A discretionary wealth manager's harms are not the same as an arranger's or a proprietary trader's, and the ICARA should look visibly different.

For each material harm, show the mitigation, the residual exposure, and the capital or liquidity consequence. If a harm is mitigated purely through controls with no capital held, say so and defend it. Supervisors are more sceptical of harms that quietly disappear than of harms explicitly deprioritised with reasoning.

Make the threshold requirements defensible line by line

The own funds threshold requirement and liquid assets threshold requirement are the operative outputs. Both need a clear build: Pillar 1 equivalent, additional own funds for ongoing operations, and wind-down. Show the arithmetic. Where you have added a buffer, explain the calibration, ideally with reference to a scenario or historical loss data. Where you have taken credit for management actions, evidence that those actions are executable within the timeframe assumed.

The most common weakness is a wind-down cost estimate that is round, undated, and unsupported. Break it down: notice periods, regulated staff retention, IT decommissioning, professional fees, run-off insurance, client transfer costs. Sequence it monthly. Cross-reference the peak liquidity need to the LATR.

Scenarios that do actual work

Stress scenarios should be firm-specific and severe enough to bite. A 20 percent AUM fall in a wealth firm is not a stress; it is a Tuesday. Good scenarios combine a market event with an idiosyncratic operational failure, run the P&L and liquidity through the wind-down trigger point, and identify the exact metric that breaches first. Reverse stress testing should identify the business model failure point, not simply the capital exhaustion point.

The scenarios must connect to recovery actions and wind-down triggers. If your ICARA shows a scenario breaching the early warning indicator but the governance section does not describe what the board would then do, the document is not integrated.

Show the governance, not just assert it

Supervisors want evidence the board challenged the numbers. Include minutes references, record where the executive proposed a lower buffer and the board pushed back, and show the sequence of drafts. A single board approval line at the end signals rubber-stamping. Where the SMF4 has signed off, the individual's fingerprints should be visible in the calibration decisions.

What good looks like

A reviewable ICARA is typically 60 to 120 pages, harm-led, with a threshold requirement build that a supervisor can reconstruct from the document alone. It names its own weaknesses. It shows the wind-down as an operational plan, not a theoretical construct. And it demonstrates that the numbers would change if the business changed, which is the real test of embedding.

Before submission, ask one question: if the FCA sent this back with a request for the underlying working papers, would the papers match the document? If not, fix that first.

Frequently Asked Questions

How often should the ICARA be fully refreshed versus updated?

A full refresh annually, with interim updates triggered by material business change, new product lines, or breach of early warning indicators. A refresh that produces near-identical numbers year on year suggests the process is not responsive.

What triggers FCA supervisory challenge most often?

Wind-down costs that lack granularity, threshold requirements without a visible build, and scenarios calibrated below plausible severity. Missing linkage between recovery actions and liquidity is a close fourth.

Should the ICARA reference the SREP outcome or prior supervisory feedback?

Yes, explicitly. If the FCA has previously raised concerns, the document should show how they have been addressed. Silence on prior feedback is read as non-responsiveness.

How much should the board see versus the executive risk committee?

The board should see the harm inventory, threshold requirements, scenario outcomes, and wind-down summary. Technical calibration can sit with the executive committee, but the board must be able to defend the numbers if asked.