In an era of heightened regulatory scrutiny, market volatility, and operational disruption, the board’s role in overseeing prudential performance has never been more critical. This is especially so for FCA regulated Non SNI MiFIDPRU firms; this responsibility sits at the intersection of strategy, governance, and resilience. It’s not simply about compliance - it’s about ensuring that the firm can survive shocks, adapt to change, and grow sustainably within its risk appetite.
The Chairman of the Board is the most senior FCA approved (SMF 9) individual in an authorised firm and must show competent leadership ensuring that the Board discharges this oversight effectively.
Why Prudential Oversight Matters
The Financial Conduct Authority (FCA) has made it clear that boards are expected to own their firm’s prudential story. Whether through the Investment Firms Prudential Regime (IFPR) or broader supervisory engagement, the regulator expects senior leadership to demonstrate a deep understanding of their firm’s capital position, liquidity risk, and resilience under stress.
A robust prudential oversight framework empowers the board to confidently address four essential questions:
Is the firm's capital and liquidity position strong enough to support its strategic objectives?
Does the board have a comprehensive understanding of key prudential risks and their potential evolution?
Are we managing our financial resources in a manner that safeguards the interests of clients, markets, and shareholders?
The key term in these inquiries is "evolve." The board must not only grasp the current state of affairs but also anticipate how situations may develop over the next three years, including potential economic cycles that may emerge during this period.
The FCA’s Expectations and Accountability
The FCA’s Senior Management Arrangements, Systems and Controls sourcebook (SYSC) sets out clear expectations around governance and oversight. Under FCA SYSC 4-7, the board must ensure sound risk management systems, effective reporting, and appropriate allocation of responsibility.
For most investment firms, the Investment Firms Prudential Regime (IFPR) provides the backbone of prudential regulation. It introduces the Internal Capital Adequacy and Risk Assessment (ICARA) process - a holistic evaluation of how a firm identifies, manages, and plans for its prudential risks.
The composition of the Board must ensure that there is a collective blend of experience, knowledge, and skill to exercise appropriate judgement over all aspects of the firm’s performance including individual contributions from full time executives.
The ICARA process is forward-looking and relies on many assumptions regarding the potential impacts of external factors on the firm’s business model. The FCA expects a thorough examination and challenge of executives’ judgments concerning these assumptions.
The introduction of the IFPR in 2022 marked a significant transition from the Banking-based Internal Capital Adequacy Assessment Process (ICAAP), which was primarily focused on material risks affecting banks and credit institutions, to a more consumer-centric approach. This new framework emphasises both the potential harms to clients of investment firms and the implications for the firms themselves, as well as the broader market. As a result, it has become more relevant for investment firms.
However, there has been limited feedback from regulators regarding the effectiveness of these changes and whether they ultimately lead to a greater or lesser amount of capital required to support our investment firms. Only time will reveal the outcome.
Understanding Potential Prudential Performance in Uncertain Times
Prudential performance is built upon four interconnected pillars: capital adequacy; liquidity; risk exposure; and operational resilience.
Boards should anticipate regular prudential dashboards that incorporate essential performance indicators such as capital surplus or deficit, liquidity ratios, risk exposures, and capital planning metrics aligned with forecasts.
The presence of capable Non-Executive Board members is crucial, especially in times of uncertainty. Their insights during stress testing processes are vital to the long-term sustainability of any business. In today’s environment, numerous geopolitical risks are emerging or lurking beneath the surface, often overlooked or disregarded.
A common reverse stress-testing question is: “If the business had been wound up yesterday, what would have been the likely cause?” Over the next decade, a plausible response could be, “We were driven out of the market because we failed to adopt AI swiftly enough and lost our competitive edge.”
The Chairman's role is essential in encouraging Board members to confront challenging or unimaginable risks head-on.
The Board’s Oversight Role: From Supervision to Strategic Stewardship
Effective prudential oversight extends beyond reviewing quarterly numbers. It’s about setting the tone, asking the right questions, and ensuring that prudential performance is integrated into every major strategic decision.
Boards define prudential risk appetite, challenge assumptions, ensure information flow, and uphold accountability.
The Chairman’s Role
A strong Chairman can transform the ICARA process from a mere compliance exercise into a valuable tool for genuine sustainability. The following checklist outlines key responsibilities:
Training and Knowledge: Ensure that the Board possesses sufficient training and knowledge to contribute actively at every stage of the ICARA process.
Performance Monitoring: Regularly monitor the alignment of ICARA outputs with the firm's actual performance, and demand formal revisions when discrepancies arise.
Engagement in Preparation: Supervise the preparation for the ICARA process, ensuring that Board members, particularly those on the Board Risk Committee, are engaged and contribute meaningfully throughout the process.
Quality of Challenge: Oversee the quality of the challenge to assumptions and findings, ensuring that sufficient scrutiny is applied where necessary.
Integration into Decision-Making: Ensure that the ICARA document is actively used and influences material decision-making within the organisation.
Board Effectiveness Reviews: Ensuring formal effectiveness reviews devote enough attention to the effectiveness of the Board’s performance in relation to ICARA.
While Boards should embrace an entrepreneurial spirit, the Chairman must provide leadership that encourages timely confrontation of difficult realities.
Integrating Prudential Oversight with Strategy and Risk Appetite
Prudential soundness and business growth are not opposing goals - they are two sides of the same coin. Boards that embed prudential considerations into strategic planning create more resilient organisations.
A prudentially sound firm is one where culture and accountability reinforce each other. The Senior Managers & Certification Regime demands that every senior leader understands their individual and collective responsibilities for prudential health.
Oversight effectiveness depends on how well the board tests and improves its own prudential governance. Internal audit, board effectiveness reviews, and regulatory feedback are key tools for continuous improvement.
Common pitfalls include treating prudential reporting as a formality, poor linkage between ICARA and strategy, and weak documentation of board challenge. Best practices include deep dives into prudential risks, structured dashboards, and director training.
Conclusion
Prudential oversight is the foundation of sound governance. It gives boards the visibility, confidence, and agility to steer their firms safely through both growth and adversity. The essential task remains: to understand the prudential position, challenge it intelligently, and ensure it underpins every strategic choice.
November 2025