How to Structure a MIFIDPRU ICARA That Withstands FCA Scrutiny

The ICARA is not an ICAAP with the serial numbers filed off. The FCA built MIFIDPRU around a different question: what harm does this firm pose to clients, markets and itself, and does it hold enough capital and liquidity to absorb that harm or wind down in an orderly way. Firms that treat the ICARA as a capital calculation exercise, rather than a harm identification exercise, produce documents that read as compliant but do not survive supervisory challenge.

Start with harm, not capital

The ICARA process begins with identifying the harms the firm can cause: to clients, to market integrity, and to the firm itself. These are not generic risk categories. They are specific, firm-level harms arising from the business model. A discretionary wealth manager poses different harms than a proprietary trading firm or a corporate finance boutique. If your harms analysis could be lifted into another firm's ICARA without edits, it is not doing the work.

For each material harm, you need: a clear description of the mechanism, the controls that mitigate it, the residual exposure, and the capital or liquidity consequence. The FCA will test whether the harms you have identified match the business they see in your regulatory returns, your client complaints data, and your recent incidents.

Treat the K-factor and fixed overhead requirements as the floor

Own funds and liquid asset threshold requirements under MIFIDPRU 4 and 6 are the minimum. The ICARA exists to determine whether that minimum is adequate for your firm. If your conclusion is that the Pillar 1 equivalent is sufficient, you need to show the analytical work that led there, not assert it. Where you hold additional own funds or liquid assets against identified harms, the link between the harm, the quantification method and the amount held must be explicit and defensible.

Build a wind-down plan that someone could actually execute

This is where most ICARAs weaken. A credible wind-down plan identifies the trigger points that would initiate wind-down, the sequence of actions, the people responsible, the time required, and the cash and capital consumed during the process. It accounts for client asset return, contract novation, staff retention, systems costs and professional fees. It assumes a stressed environment, not a benign one.

The common failure is a wind-down cost estimate that is too low because it assumes everything goes smoothly. Stress it. Model a scenario where key staff leave, where a counterparty disputes, where the FCA requires accelerated client communication. If the wind-down trigger framework has never been discussed at board level, that will show.

Make stress testing specific and reverse

Reverse stress testing is a genuine analytical tool, not a box to tick. Identify the scenarios that would render the business model unviable, then work back to the conditions required. If the answer is implausible, your reverse stress test is not calibrated correctly. The scenarios should connect to the harms analysis: a major client loss, a conduct event, a market dislocation affecting a concentrated revenue line.

Show the governance on the page

The FCA reads ICARAs for evidence that the board and senior management have genuinely engaged. That means visible challenge: minutes referenced, assumptions questioned, prior year conclusions revisited. A document that arrives at the board fully formed and is approved without amendment tells the supervisor something unhelpful.

What good looks like

A strong ICARA reads as the firm thinking out loud about its own fragility. It is honest about uncertainty, specific about mitigation, and clear about the judgements made. It connects to the firm's risk appetite, its recovery options and its wind-down plan as a coherent set of documents, not three parallel exercises.

The next action: before the next review cycle, ask whether your harms analysis would be recognisable to a supervisor who already knows your business. If not, start there.

Frequently Asked Questions

How often should the ICARA be reviewed?

At least annually, and whenever there is a material change in business model, risk profile, or operating environment. A new product line, an acquisition, or a significant conduct event should trigger an interim review, not a note in next year's document.

Who should own the ICARA internally?

The SMF holder responsible for the prudential risk framework, typically the CFO or CRO, owns the document. But the ICARA is a board document. The board must be able to speak to its contents, not just approve them.

What triggers FCA follow-up on an ICARA?

Inconsistency with regulatory returns, weak wind-down analysis, generic harms sections, and evidence that the document has not changed meaningfully year on year. Supervisors also probe where the firm's own funds or liquid assets held sit close to the threshold requirement without clear justification.

How detailed should the wind-down cost analysis be?

Detailed enough that a reader can trace each cost line to an assumption and each assumption to evidence. Round numbers without supporting workings signal that the analysis has not been done.

Does the ICARA need to address group risks?

Yes, where the firm is part of a group, intra-group dependencies, funding arrangements and shared services must be analysed for their impact on the firm's standalone viability and wind-down.