‘Compliance complacency’ danger as IFPR deadline looms, KPMG report warns

  • Majority of firms (54%) that have assessed their ICARA capital requirements don’t believe the new reforms will have a notable impact
  • Nearly a fifth (18%) of respondents haven’t yet started Pillar 1 calculations
  • Almost all surveyed firms (97%) haven’t agreed new ratio requirements for remuneration structures  

KPMG UK has warned against complacency after its research showed many investment firms haven’t started some of the fundamental calculations required ahead of the implementation of the new IFPR rules in just a few weeks.

The assessment comes as the business advisory firm publishes its 7th Risk and ICAAP Benchmarking Report titled, Taking a Different Perspective.

KPMG UK surveyed 40 firms of various scale across the investment management industry on their approach to and readiness for IFPR, which is the new set of rules which will greatly affect capital and liquidity requirements, risk management frameworks and remuneration. The regulation, which replaces ICAAP with the new Internal Capital Adequacy and Risk Assessment (ICARA) review, comes into force 1 January 2022, with the Financial Conduct Authority expecting compliance from ‘day one’.

The survey found that while most respondents (82%) have made some sort of quantification of their minimum capital requirements using the new Pillar 1 rules, the majority of firms (54%) have said there hadn’t been any notable impact on their own assessments of capital under the ICARA compared to the previous requirements under the ICAAP.

KPMG’s asset management practice has highlighted that these statistics reveal two pressing challenges. First, that nearly a fifth (18%) of firms hadn’t yet performed their Pillar 1 calculations with only weeks to go until IFPR begins. Second, that a significant proportion of firms could still see changes in their own assessments of capital requirements in the ICARA. Where firms have performed an assessment of their ICARA requirement, 16% have seen a change in their requirements of greater than 10% in either direction. 

Of the respondents that have not completed their Pillar 1 calculations, the majority (86%) are smaller firms. And despite the significant complex data requirements that can be needed for compliance, nearly half of respondents across the survey (45%) said they were calculating their requirements manually. 

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David Yim, Asset Management Partner, KPMG UK, and author of the report, said:

“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. 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.

“Fundamentally, you have to do the calculations to see where you sit in this new world and we expect many firms are only making their way through Pillar 1 now and have yet to tackle Pillar 2, which requires more judgement and may make for a challenging period ahead.”

The survey also found that firms expect IFPR to have only a moderate impact across their organisation – particularly in areas such as Governance and Prudential Consolidation. Surprisingly, half of respondents (50%) said that they don’t intend to change their risk framework – suggesting either many are comfortable with the work they’ve already done or are underestimating the potential changes required.

Rob Crawford, senior manager in the Financial Risk Management practice at KPMG UK and co-author of the report said: “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.

“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.”

Remuneration requirement marks fresh battle line in war for talent

The KPMG UK report found that leadership teams in the industry are holding out on implementing new regulatory requirements for remuneration policies and practices.

These include rules for the largest firms which require the payment of 50% of variable remuneration in non-cash instruments and the deferral of at least 40% of variable remuneration over three years. All larger firms will be required to set out a ratio of fixed to variable remuneration but there is no maximum to this ratio, unlike the equivalent regime for banks.

The research found that nearly all (97%) haven’t agreed on the appropriate ratio to use for fixed to variable remuneration. 

David Yim added: “With only weeks to go to the regime coming into force, it is surprising that almost all firms continue to be undecided on their approach to identifying an appropriate ratio for fixed and variable remuneration. We found that many firms intend to adopt a flexible approach to this requirement, primarily led by a review of their current reward structures and the level of variable remuneration within these. Clearly, firms are waiting to see who blinks first as IFPR adds a new dynamic to the war of talent in the industry.”

 

-Ends-

Media contact:

Alastair Henry, Citypress (on behalf of KPMG UK)

Alastair.henry@Citypress.co.uk / 0161 235 0320

 

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 21 offices across the UK with approximately 16,000 partners and staff.  The UK firm recorded a revenue of £2.3 billion in the year ended 30 September 2020.

KPMG is a global organization of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.

KPMG Law has over 2850 legal professionals operating across 81 countries.

 

Alastair Henry

Director

Citypress

T: +44 (0)161 235 0320

M: +44 (0)7738 206 847