Right from the start. Why investment firms need better capital adequacy assessments.

28 Pages·2015·2.53 MB·English

Right from the start
Why investment firms need better
capital adequacy assessments
Risk and ICAAP benchmarking survey 2015
kpmg.com
1
Right from
the start
Introduction 04
Uncertain appetites 09
Mitigating circumstances 11
Better risk identification 13
Orderly conclusion 17
Refining capital calculations 19
Engaging the board 23
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2
Right from
the start
operate successfully and respond to a real risk of being required to seek
Why investment firms need industry changes like new pension substantially more capital at short
better capital adequacy
rules, which compel firms to invest notice.
assessments
in innovative investment solutions
For most firms, the ICAAP
and distribution channels. Restricted
Could investment firms’ actions submission is their only opportunity
available capital will limit the ability
today be storing up problems to show the regulator they have
of firms to invest and grow.
for tomorrow? Our 2015 risk robust risk management processes
and Internal Capital Adequacy It’s not all bad news. Some of the in place. As the ICAAP is a firm’s
Assessment Process (ICAAP) 2015 findings indicate that aspects articulation of its overall approach
benchmarking survey reveals how of risk and ICAAPs are improving, to risk management, a robust
omissions or errors in the fine detail especially in terms of more framework and best-practice
of Financial Conduct Authority (FCA) widespread board ownership of the submission will not only help firms
submissions could have substantial processes, and more robust capital meet the regulator’s expectations
knock-on effects. calculations. But the overriding – it will also protect them from
feature remains that in fundamental unforeseen and damaging
In some cases, firms could be
areas – like Risk Appetite consequences.
compelled to hold up to double the
Statements (RAS), insurance
capital that they had calculated.
mitigation, and diversification –
This could restrict their ability to
current practice is exposing firms to
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
This report, which was conducted Participants manage client assets
About the research in Q3 2015, is based on a study ranging from £4bn to £300bn,
of 32 investment firms, excluding comprising institutional, retail, high
banks. Their businesses include net worth individuals, platform and
a mixture of traditional asset other similar types of asset.
management, platform, wealth
management and hedge fund Firms were split more or less
activities. Of the firms that evenly between prudential
participated, 21 provided us with sourcebook for banks, building
a copy of their ICAAP document. societies and investment firms
As most ICAAPs are developed (BIPRU) (56 percent) and prudential
for a group of companies, sourcebook for investment firms
some participants noted that (IFPRU) (44 percent), which
their primary business included includes two participants who are
more than one of the types of part of the same group (one BIPRU
businesses noted above. the other IFPRU).
Firms within the scope of BIPRU or IFPRU
17
13
2
BIPRU IFPRU IFPRU and
BIPRU
Prudential categories of participating firms
9%
16%
53%
22%
Prudential category (P1) Prudential category (P2)
Prudential category (P3) Prudential category (P4)
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
by David Yim
Introduction
Welcome to this new research the regulator’s expectations, On an overall basis the total
from KPMG. In previous years we but how to improve overall risk capital add-on given to companies
have covered risk management management processes. by the regulator (ICG, scalars
and the ICAAP as part of our and fixed add-ons) has increased
broader Financial Reporting by from prior year to current year for
Investment Managers survey. Summary of results prudential category 1 and 2 firms.
This year, however, in response to The capital add-ons across all
growing demand from our clients Of the survey participants, participants ranged from 110-440
and greater complexity in some 69 percent noted that their firm percent (2014: 130-300 percent).
areas of risk management and the was subject to a Supervisory
ICAAP, we have commissioned Review and Evaluation Process Prudential category 3 firms in
a separate report on the subject (SREP). Of these participants, the survey noted no scalars or
that drills down into more detail. 86 percent received an Individual fixed add-ons, but the question
Capital Guidance (ICG) and in is whether these firms can really
It’s clear from our findings that more than half (58 percent) take comfort in these results?
firms are taking risk management another form of capital add-on. 37 percent of the responses from
and ICAAP much more seriously firms who received an ICG were
and devoting more time and SREP reviews identified prudential category 3 firms. Of
resource to these imperatives. operational risk modelling as an these ICGs it is not clear whether
This is encouraging. But in the area of focus at 32 percent of it was provided by the FCA or
absence of formal guidance from firms reviewed, while RAS and Financial Services Authority (FSA).
the regulator, it’s important that related key risk indicators (KRIs),
firms stay on top of the issues and governance and culture were
and have the clearest possible picked up at just over a quarter
insight into best practice. of firms.
By shedding light on the latest In addition to the above, prudential
practices and offering a view category 2 firms were subject
on the most important areas to particular attention for their
of focus, this benchmarking scenario analysis, treatment of
report is intended to help firms diversification benefits and
understand not only how to meet wind-down plans.
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
What was the outcome of the last
SREP review for firms per prudential category
ICG 2 1 5
ICG with aditional 3 6 2
feedback / add-ons
No issues raised 3
2 4 6 8 10 12
P1 P2 P3
Issues identified for firms during SREP
reviews per prudential category
Operational Risk Modelling 3 4
RAS and related KRIs 3 3
Governance and culture 3 3
Scenario Analysis 1 3 1
Diversification benefit 1 4
Insurance mitigation 1 2 1
Wind down 3 1
Market Risk 1 1 2
Credit Risk 1 1 2
Pension Obligation Risk 1 1 2
Liquidity Risk 1 1 1
Other 3
Use of loss data 1 1
Stress testing 2
Risk Identification, scoring and treatment 1 1
Forward looking versus historic
1
risk assessments
Temporary risks 1
1 2 3 4 5 6 7
P1 P2 P3
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
Average ICG and scalar per prudential
category for 2014 and 2015
14%
17%
10%
s
n
o
dd- 10%
a
s/
ar
al
c
s
d
n
a
G
C
e I
g
a
nt
e
c
er
P
224% 188% 241% 223% 111% 128%
P1 P1 P2 P2 P3 P3
current year prior year current year prior year current year prior year
ICG Scalar/add-ons
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
Current practice is
exposing firms to a real
risk of being required to
seek substantially more
capital at short notice.
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
Uncertain
appetites
The RAS is a fundamental Risk appetite lacks clarity firms review their RAS annually,
building block of the risk 16 percent update it on a more
Based on the ICAAPs reviewed, frequent basis.
management framework.
52 percent did not articulate
It should clearly define and
risk appetites for individual risk
embed the firm’s attitude categories. Just under half of Feedback from the regulator
to risk. Yet we found that ICAAPs (43 percent) included
in over 50 percent of cases, neither quantitative nor qualitative Of the ICAAPs that were subject
methods. to a SREP review, 27 percent
these statements fell short
received commentary on their
of the quality and detail
RAS from the FCA.
needed to define the risk
Disconnected from the business
appetite on which the
firm’s risk management Of the ICAAPs received only
33 percent of firms had alignment
framework is based.
between the business strategy,
Without appropriate
RAS, KRIs, key risks, risk
categories and treatment of those risk appetites, firms are
risk categories in the capital
adequacy assessment process. unable to accurately
determine their capital
However scrutiny of the survey
results also reveals a positive
requirements – and
message, with 88 percent of
participants reporting that they are therefore exposed
have KRIs. Failure to include
these in the ICAAP is a missed to the risk of holding
opportunity for firms that have
insufficient capital to
limited communication with the
regulator.
cover losses.
Board ownership and
regular review
While there are clear opportunities
to improve the RAS themselves,
our study revealed that in
most cases, the board now
has ownership of the RAS,
with specific risk functions or
committees owning the RAS in
fewer than 28 percent of cases.
Another positive finding was the
frequency of which respondents
now review their RAS. While all
© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.