Investment Firms

Liquidity is often overlooked by investment firms as the poor relation to capital, but from recent FCA reviews it is clear that it places equal importance on both.

All IFPRU and BIPRU investment firms need to have sufficient liquid resources to ensure that there is no significant risk they cannot meet their liabilities as they fall due. They must have in place robust strategies, policies, processes and systems that enable them to identify, measure, manage and monitor liquidity risk over an appropriate set of time horizons. They also need to have in place a contingency funding plan setting out adequate strategies and measures that can be implemented in the event of a liquidity shortfall.

You need to make sure that your ICAAP document covers your exposure to liquidity risk, including how you manage it and your stress test results. You should also consider including further useful information on your liquidity arrangements, for example information on your liquidity and funding policy. However, we have seen that many firms do not do this, nor are they updating their liquidity policy.

In addition to your ICAAP, certain firms need to carry out an ILAA (Individual Liquidity Adequacy Assessment). This assessment requires you to perform specific stress tests and, amongst other things, review your compliance with some of the FCA’s liquidity rules. Don’t forget, the FCA may also assess the adequacy of your liquidity resources through a SLRP (Supervisory Liquidity Review Process).

Banks and Building Societies

If you are a Bank or Building Society, you will have transitioned from an ILAA or ILSA to an ILAAP (Internal Liquidity Adequacy Assessment Process). This should have meant that you have had an opportunity to consider the appropriateness of your liquidity arrangements and may well have made changes – for example, to reflect the now greater focus placed by the PRA on whether you have adequate stable funding over the medium to long term.

You will need to make sure that your firm has arrangements, strategies, and processes in place to comply with the liquidity standards set out in the PRA’s ILAA rules and the CRR. And you should expect that as part of its L-SREP (Liquidity Supervisory Review and Evaluation Process), the PRA will also review your COREP liquidity returns.

How we can help

We have seen that failing to meet the requirements or falling short of the regulator’s expectations can result in you being asked to hold additional liquidity or potentially facing more severe action. To prevent it getting to this, Bovill can help firms by:

  • Assessing your liquidity requirements
  • Reviewing and advising on your liquidity risk, ILAA or ILAAP documents, your contingency funding plan or liquidity contingency plan
  • ICAAP reviews
  • Checking your COREP liquidity returns
  • Assisting you to prepare for supervisory reviews
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