What the ICARA Is

The ICARA process was introduced under the Investment Firms Prudential Regime, set out in the MIFIDPRU sourcebook. It requires investment firms to identify and assess the risks of harm their business could cause to clients, to markets and to the firm itself, and to hold enough capital and liquid assets to cover those risks. It also requires firms to plan how they would wind down in an orderly way if they had to.

The detail is in MIFIDPRU 7. In practice, the ICARA brings together several strands:

• identifying the material harms the firm’s activities could cause
• assessing the own funds and liquid assets needed to address those harms, as well as the regulatory minimums
• stress testing the business against severe but plausible scenarios
• recovery planning, including the actions the firm would take if its financial position deteriorated
• wind-down planning, showing how the firm could close in an orderly way
• documenting all of this, reviewing it at least annually and whenever the business changes materially, and reporting to the FCA.

Why the ICARA Is a Senior Management Question

The FCA has been clear that the ICARA should be embedded in how a firm is run, not produced once a year for the file. The governing body is expected to review and approve it, to challenge the assumptions behind it, and to use it in decision-making about strategy, risk appetite and capital.

That places real demands on the firm’s Senior Managers. The Chief Executive and the board need to understand the harms the business could cause and how the capital assessment reflects them. The person holding the finance function, whether that’s a designated SMF2 Chief Finance Officer or an executive director with finance responsibility, needs to own the numbers. And where the firm has a risk function, it needs to challenge the assessment rather than simply produce it.

The FCA’s reviews of ICARA documents have repeatedly found weaknesses that trace back to the senior team: assessments that don’t reflect the firm’s real business model, stress tests that are too mild, wind-down plans that underestimate costs and timelines, and boards that haven’t engaged with the document. These are governance failures as much as technical ones.

The Hires That Make the ICARA Credible

A Finance Lead Who Understands Prudential Regulation

The most important appointment is usually the senior finance lead. Many investment firms, particularly smaller ones, have strong financial controllers who manage statutory accounts and management reporting well but have limited prudential experience. The ICARA needs someone who understands own funds requirements, the K-factor calculations that apply to many firms, liquidity requirements and the link between the firm’s harms and its capital.

At firms where the role carries SMF2, the candidate will also need regulatory approval. Our sister practice FD Capital specialises in finance leadership and runs SMF2 regulated CFO searches, including fractional and interim finance directors for smaller investment firms that don’t yet need a full-time CFO.

A Risk Function That Can Challenge

The ICARA depends on a credible assessment of harms, and that requires risk expertise. Larger firms may have a Chief Risk Officer, and at Enhanced firms that can be an SMF4 Senior Manager Function. Smaller firms more often have a head of risk, a risk manager, or a combined compliance and risk role. What matters is that someone independent of the business lines can challenge the assumptions: are the harms identified the real ones, and are the stress scenarios severe enough?

Non-Executives Who Engage

The board’s review of the ICARA is only as good as the people doing it. Larger MIFIDPRU firms may be required to set up risk, remuneration and nomination committees, and even where they aren’t, an independent non-executive with prudential experience can transform the quality of the board’s challenge. At Enhanced firms, the Chair and any risk committee chair will be expected to lead that challenge.

Operations and Wind-Down Expertise

Wind-down planning is often the weakest part of an ICARA. A credible plan needs input from whoever understands the firm’s operations, client arrangements, outsourcing and technology, because those determine how long and how costly an orderly wind-down would be. At larger firms, this sits with the Chief Operations function.

Common Gaps and How Firms Fill Them

Founder-Led Firms

Many investment firms are run by portfolio managers or advisers who founded the business. They know the investment side intimately but may have less experience of prudential regulation. The ICARA can expose that gap sharply. A fractional finance director or an experienced non-executive with prudential expertise is often the most efficient way to fill it.

Growing Firms Crossing Thresholds

As firms grow, they may move from small and non-interconnected status to non-SNI status, which brings more demanding requirements, and eventually towards Enhanced status under the Senior Managers regime. Each step raises the expectations on the senior team. Firms that recruit ahead of these thresholds avoid rushed appointments. Our guide to which SMFs apply at each firm tier and our multi-SMF team build service explain what changes.

Key Person Dependency

Smaller firms often rely on one person to produce the ICARA. If that person leaves, the firm can struggle to update it or explain it to the FCA. Building the knowledge across the senior team, and documenting the methodology clearly, reduces the risk. So does planning succession for the finance and risk roles before a vacancy arises.

What Candidates Should Know

For finance and risk professionals, ICARA experience is increasingly valuable. Candidates who have led an ICARA, presented it to a board and explained it to the FCA are in demand across the investment management sector, particularly for roles carrying SMF2 or other Senior Manager Functions. When preparing for these roles, be ready to talk about specific judgements you’ve made: how you identified the harms, why you chose particular stress scenarios, and how the board challenged the result.

If you’re considering a role that would bring your first Senior Manager approval, our article on the fit and proper test explains what the regulator will assess, and you can register with SMF Capital for a confidential conversation.

The Bottom Line

The ICARA is a prudential process, but it’s also a test of the firm’s senior team. Firms that treat it as the board’s own assessment of the business, supported by a finance lead with prudential expertise, a risk function that challenges and non-executives who engage, produce documents that stand up to FCA review. Firms that leave it to one person in the finance team often find out the hard way that the regulator expected more.