24 October 2018

ICAAP: Making a wrong move could cost businesses dearly

As we approach Brexit; it is even more imperative that organisations prepare for the unknown

Risk. In business, it’s not a word that business leaders take lightly.

With current market conditions as uncertain as they are as we approach Brexit; it is even more imperative that organisations prepare for the unknown.

However, many businesses are walking a fine line between being prepared for what the future might throw at them, versus having the resources at hand to handle those unknowns.

If you are one of the many regulated investment managers, fund managers or advisory firms, you’ll probably be familiar with the need for an ICAAP (Internal Capital Adequacy Assessment Process).

For those not so familiar, an ICAAP is the bedrock of a business, underpinning your duty of care and should (in reality) influence your decision making on a regular, if not daily, basis.

But for those businesses required to have one, it can often feel like a tick-box exercise to prepare and update the ICAAP annually.  It is seen as a routine matter of FCA housekeeping. As such, many are not using it as they should (as a regularly consulted valuable resource) and therefore are not getting the business benefits it can bring. Moreover, many ICAAPs that we see are not as good as they could or should be – a very risky and potentially costly move, should the FCA come calling.

The risk of getting things wrong

Ultimately, the risk of not having a high quality and up-to-date ICAAP, could mean the difference between a business continuing to trade or going under.

The ICAAP is an FCA dictated requirement and over the past few years, they have gone through a process of reviewing these for banks and larger institutions.  They can (and have) imposed significant additional capital requirements, where things have been found to be lacking.

There is a strong possibility that these reviews will be extended to cover smaller organisations in the mid-tier of financial services. For those organisations dealing with considerably smaller budgets than their bigger counterparts, being made to hold a reserve significantly larger than required could be devastating. Punitive reserve levels could be set much higher than actually needed, if the FCA finds a company has not accurately valued the risks they could face should the worst happen.

This alone means it is crucial to get the ICAAP right from the outset.

The benefit of getting things right

The ICAAP should be an exercise undertaken with thought and care.  By giving it the time and consideration that it deserves (and potentially by investing a nominal amount), a considerable sum could be saved in the long-term.

Beyond the financial benefits, a thorough ICAAP also demonstrates the value that an organisation places on compliance.

However, the ICAAP doesn’t need to be seen and used in isolation. It is possible to integrate the ICAAP process into wider risk management activities, as a way to improve controls and efficiency. This may be most easily achieved through a combination of internal and external specialist resource.