Many investment firms have not begun fundamental calculations needed for new IFPR rules, which take effect in just a few weeks, KPMG has warned.
The Financial Conduct Authority's (FCA) IFPR rules will replace ICAAP with an Internal Capital Adequacy and Risk Assessment (ICARA) review, which comes into force on 1 January 2022, with the regulator expecting compliance from “day one”.
This will greatly affect capital and liquidity requirements, risk management frameworks and remuneration. However, after surveying 40 firms of various scale across the investment management industry, KPMG found that 18% hadn't yet performed their Pillar 1 calculations.
Of the companies that had assessed their ICARA capital requirements, 54% said that they did not think the reforms would have a notable impact, despite 16% seeing a change in their requirements of greater than 10% in either direction.
David Yim, asset management partner at KPMG UK, warned that many firms might be underestimating the work that they still have to do, which could make for “a challenging period ahead”.
“The IFPR has created a far more suitable set of regulations for the investment management industry on capital requirements that better matches its risk profile, but there is a feeling that this is just a different and more challenging route to the same destination,” he continued.
“When you look deeper into our research, you see that while many firms may not expect much impact on their capital requirements there are still those that could have to make significant adjustments.
“The danger is that there could be a sizeable minority of firms that are in a state of compliance complacency, underestimating the work they’re required to do to comply with IFPR.”
The survey confirmed that many firms expect IFPR to have only a moderate impact across their organisation – particularly in areas such as governance and prudential consolidation.
Half of respondents said that they don’t intend to change their risk framework – suggesting that many are either comfortable with the work they’ve already done, or are underestimating the potential changes required.
Moreover, the findings show that a whopping 97% haven’t agreed new ratio requirements for remuneration structures.
“Crucially, the IFPR isn’t just about the numbers, and there will be qualitative requirements from day one, including wholesale changes to risk frameworks, remuneration and governance – essentially a fundamental shift a more outward looking and granular process that will require considerable attention for compliance,” said Rob Crawford, senior manager in the financial risk management practice at KPMG UK.
“As the industry navigates rather unpredictable times, the demand for such far-reaching financial resilience is timely and will complement upcoming reforms to operational resilience this coming spring.”
Image credit: iStock
Author: Chris Seekings
