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A prudential end of year to-do list

With calendar year end right around the corner, now is a good time to think ahead about the annual review of your firm’s prudential governance arrangements. It’s a good time to sit down with a cup of coffee and reflect on the FCA’s consultation paper (or “CP”) from earlier this year; ‘Consultation 19/20: Our framework: assessing adequate financial resources’.

The regulator doesn’t seek to introduce any new rules with its CP, rather reinforce its expectations when it comes to pre-existing core rules.  So with this in mind we think there are four key areas to focus on:

Financial Planning – For example, all firms are supposed to undertake financial forecasting with a three-year outlook. This forecast needs to consider core underlying assumptions in both a conservative base case and perhaps more pessimistic cases too. At the moment practice around financial planning – what actually happens in the “real world” – varies widely so, it’s a good idea to review your firm’s practice and what can be evidenced, and what may be needed to bring it in line with the FCA’s expectations.

Regulatory reporting – Double check to be sure that the firm’s GABRIEL schedule is correct. Incorrect GABRIEL schedules are a common issue – they could either have been set up the wrong way to begin with, or they may have been incorrectly  amended after the fact. Either way, it remains a firm’s responsibility to ensure that returns are correct and understand that there is a real danger that firms could submit incorrect returns to the FCA. The relevant rules are located in the FCA’s Supervision (or “SUP”) Handbook.

Capital adequacy assessments – It’s also a good time to review the firm’s approach to its capital adequacy assessment to see if it needs to be strengthened or updated. For firms required to conduct a formal Internal Capital Adequacy Assessment Process (or “ICAAP”) a busy period following the financial year-end means limited or no time to make any identified enhancements to the underlying processes. For other firms, capital adequacy assessment requirements are less stringent, but the regulator’s CP reminds all firms of their commitment to adhere to threshold conditions and core principles for business – together mandating appropriate resources and adequate financial resources.  For all firms, adherence to the formula-driven minimum capital requirements is not enough and  should seek to ensure sufficient risk-based capital is held – particularly with respect to the expected cost of executing an orderly wind-down.

Regulatory change – Getting to grips with upcoming regulatory change well in advance is also time well spent. In particular, the EU’s Investment Firms Review will have differing impacts on CAD-exempt firms, commodity firms, and MiFID managers. For some firms, the financial impact of the new regime, in terms of increased capital, could be significant. The associated directive and regulation are expected to be finalised by the end of this year. This means that this economic cycle could be the last opportunity for firms to adjust dividends or distribution policies to set aside some much-needed capital. Forward planning around this regulatory change will be very important for some firms.

Overall, there are many reasons why firms need to refresh their prudential regulatory program – for example, many firms who experience rapid growth may need to ensure their compliance process can keep up. Taking the opportunity to pause, take a step back and review what may need updating can save on time, resources and expenses – and many firms have benefited from an outsourced model in some or all areas, bringing in the expertise from specialists saving themselves from developing the niche skillset internally. While it’s unlikely the FCA is going to launch an enforcement crackdown in these areas soon, the release of CP 19/20 indicates that they want the industry to have a firm understanding of what their expectations of firms are, and meet those standards.

 

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Michael Chambers

Michael Chambers

Director - Head of Prudential

ACA Compliance Group

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13 Mar

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London

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