The ICARA — internal capital adequacy and risk assessment — is the document at the centre of the FCA's prudential regime for investment firms. It is where a firm sets out the harm its business could cause, how much capital and liquidity it needs to hold against that harm, and how it would wind down without disrupting clients or markets. It is also, for a great many firms, the single most heavily criticised document in their regulatory file.
What the regime asks for
Under the investment firm prudential regime, a firm must hold own funds at least equal to the highest of its permanent minimum requirement, its fixed overheads requirement — broadly a quarter of annual fixed costs — and, where applicable, its K-factor requirement, which scales with activities such as assets under management, client money held, client orders handled and daily trading flow.
Those are floors. The ICARA process is where the firm decides whether they are enough given what it actually does, and holds more where they are not. The regime is deliberately built around harm rather than risk to the firm alone: harm to clients, harm to market integrity, and harm to the firm itself.
The ICARA must be reviewed at least annually, and more often where the business changes materially. The governing body owns it — not the compliance function, and certainly not the consultant who drafted it.
The three things it must actually do
Identify and quantify harm. Not a generic risk register, but the specific ways this firm's activities could cause loss to clients or markets, with an assessment of how much capital or liquidity would be needed to cover the ones that cannot be mitigated away. The commonest failing is a harms analysis that could belong to any firm of the same type.
Set capital and liquidity based on that analysis. The output has to be a number the firm can justify, reconciled to the regulatory floors, with the reasoning visible. A document concluding that the required amount happens to equal the fixed overheads requirement, without showing why, reads as reverse-engineered — because it usually is.
Plan the wind-down. This is the section the FCA has criticised most consistently across its reviews. A credible wind-down plan sets out the trigger points at which the firm would begin, the steps in order, the time each takes, and — critically — the cost of the process and the liquid resources available to fund it. Firms routinely underestimate how long an orderly wind-down takes and assume revenue continues while it happens.
Where firms consistently fall short
- Generic harm assessment lifted from a template, with no link to the firm's actual client base, products or operating model;
- Stress testing that is not stressful — a 10% revenue reduction in a business whose largest client represents 40% of income;
- Wind-down costs understated, omitting redundancy, lease exit, professional fees, systems run-off and the cost of transferring or returning client assets;
- No liquidity analysis. The regime requires liquid assets as well as capital, and a firm with adequate own funds tied up in illiquid form cannot fund the wind-down it has planned;
- Weak governance evidence — no board challenge visible in the minutes, no record of the assumptions being tested, and a document approved in the same meeting it was first seen.
How it connects to everything else
The ICARA is not a standalone compliance artefact; it draws on and feeds the rest of the firm's framework. The own funds figure comes from the audited balance sheet, so a year-end audit adjustment changes the reported position — a common finding, and one that reaches back into regulatory returns already submitted. The harms analysis should be consistent with the firm's risk register and with its Consumer Duty outcomes work. The wind-down plan depends on the operational resilience analysis and on whether outsourced providers would continue to perform during a wind-down.
For firms holding client money or custody assets, the interaction with the CASS regime is direct: the wind-down plan has to explain how client assets would be returned, and the cost of doing so is part of the funding requirement.
Making the annual review worth doing
The review that adds value starts with what changed — new products, new client types, concentration in revenue, headcount, outsourcing arrangements — and works forward into whether the harms and the numbers still hold. It challenges at least one assumption seriously, records the challenge, and updates the wind-down cost with current figures rather than last year's.
And it produces a document a supervisor could read in an hour and understand: what this firm does, what could go wrong, what that would cost, what it holds, and how it would stop. Documents that cannot do that in that order are the ones that generate follow-up questions — and, in the more serious cases, a skilled person review.
Acumon supports investment firms on prudential and governance work through financial services audit, outsourced internal audit and risk management services. If your wind-down plan has never been costed with real numbers, that is the section a supervisor will turn to first.