Why Prudential Readiness Needs to Be Built Into Authorisation

  • Article
  • Crypto, FCA Authorisation, Prudential
  • Michael Strug, Elliot Mills

Whether launching a traditional investment business, expanding into private markets, or preparing to operate in digital assets and cryptoassets, firms seeking FCA authorisation face the same fundamental challenge: demonstrating they have the governance, controls, and financial resilience to operate safely.

Many firms preparing for FCA authorisation spend months developing governance frameworks, compliance policies, and operating procedures. Naturally, this is where most attention is focused.

Yet one of the most common causes of avoidable FCA scrutiny is far less discussed and often overlooked: prudential readiness.

Firms that cannot clearly demonstrate adequate capital, liquidity, and financial resilience may face avoidable delays, extensive follow-up questions, and greater scrutiny. In some cases, they may also need to revisit their business model and undertake significant remediation work.

In today’s regulatory environment, prudential planning is no longer something to consider after authorisation. It has become a critical component of the authorisation process itself. This is particularly relevant for firms carrying on regulated cryptoasset activities. The FCA has published PS26/12, A Prudential Regime for Cryptoasset Firms, which finalises the new prudential framework, including COREPRU and the sector-specific CRYPTOPRU sourcebook.

Prudential readiness is a firm’s ability to demonstrate adequate capital, liquidity, governance, risk management, and financial resilience throughout its lifecycle.

This means firms should start assessing how capital, liquidity, governance and wind-down planning will be evidenced as part of the authorisation process, rather than treating them as post-authorisation considerations.

Prudential Regulation Is a Core FCA Priority

Prudential rules have become an increasingly important component of the FCA Handbook, supervisory agenda, and wider expectations of regulated firms. Alongside conduct regulation, prudential supervision is one of the principal ways in which the FCA seeks to ensure firms operate safely and in the interests of consumers and markets.

This reflects a broader supervisory focus on financial resilience and firms’ ability to withstand adverse conditions without creating external harm.

At its core, prudential regulation aims to ensure that regulated firms remain financially sound. Firms must maintain sufficient capital and liquidity resources to absorb shocks, withstand periods of stress, and, where necessary, wind down in an orderly manner.

For investment firms, this means maintaining resources that are proportionate to the activities they undertake and the risks they generate.

What Do Prudential Requirements Include?

A common misconception is that prudential compliance simply involves determining a minimum capital figure.

We frequently encounter firms that have identified their minimum capital requirement but have not considered how delayed revenues, higher-than-expected costs, or a slower client onboarding process could affect liquidity and overall financial resilience.

These are exactly the types of questions the FCA expects firms to have considered before authorisation.

In practice, prudential regulation encompasses a much broader framework that includes:

  • Internal Capital Adequacy and Risk Assessment (ICARA)
  • Capital adequacy
  • Liquidity management
  • Risk management processes
  • Stress testing and scenario analysis
  • Regulatory reporting
  • Governance and oversight
  • Wind-down planning

Under the Investment Firm Prudential Regime (IFPR), the ICARA process sits at the centre of a firm’s prudential framework. The FCA expects firms to identify potential harms, assess financial resilience, and determine whether available capital and liquidity resources remain adequate under a range of scenarios.

The FCA’s recent consultation on Non-Handbook Guidance for COREPRU 7 (Overall Risk Assessment) further reinforces this supervisory focus. COREPRU, due to apply from 25 October 2027, will set out core prudential requirements common across the types of firms the FCA prudentially regulates. It will be supplemented, where relevant, by sector-specific prudential sourcebooks, including CRYPTOPRU for cryptoasset firms. The consultation provides useful insight into the FCA’s approach to prudential governance, risk assessment, and financial resilience for firms operating under the new cryptoasset regime.

This principle is equally relevant to firms operating in digital asset markets. The FCA’s CRYPTOPRU sourcebook is expected to mirror many of the core prudential concepts already familiar under IFPR, including capital adequacy, liquidity management, governance, financial resilience, and risk assessment requirements.

The FCA’s expectations are reflected throughout its regulatory architecture.

Firms encounter prudential considerations in:

  • Principle 4 for Businesses (maintaining adequate financial resources)
  • The Threshold Conditions, particularly those relating to appropriate resources and a sustainable business model
  • Applicable prudential sourcebooks, such as MiFID Prudential Regime (MIFIDPRU) for investment firms

Collectively, these requirements are designed to ensure firms have a robust prudential framework covering policies, systems, and controls to identify, measure, monitor, and manage prudential risks, including the risk of becoming financially unsound.

What Are Prudential Capital Requirements?

Capital requirements are intended to ensure a firm has sufficient financial resources to continue trading through adverse conditions and, if necessary, execute an orderly wind-down.

The key point is that prudential requirements are driven directly by a firm’s business model, activities, and associated risks. Changes to permissions, staffing levels, growth assumptions, or service offerings can all have implications for capital planning.

For many investment firms, the starting point is identifying their prudential classification and determining which prudential regime applies. Under IFPR, firms are typically categorised as either Small and Non-Interconnected (SNI) or non-SNI, with significantly different obligations attached to each category.

The firm’s Own Funds Requirement (OFR) is then calculated by reference to several prudential metrics, which depend on the nature, scale, and complexity of a firm’s business:

  • The Permanent Minimum Requirement (PMR)
  • The Fixed Overhead Requirement (FOR)
  • K-Factor Requirements for non-SNI firms

The OFR represents the minimum level of regulatory capital that a firm must hold. However, the FCA expects firms to always maintain their own funds above the applicable threshold and, where appropriate, hold additional capital to address material harms and meet potential wind-down costs.

This is why prudential analysis cannot be completed in isolation. It must be integrated with the firm’s proposed permissions, operating model, revenue assumptions, and strategic plans.

Why Is Liquidity Important for FCA Authorisation?

Capital and liquidity are often discussed together, but they address different risks. Capital helps absorb losses. Liquidity ensures that a firm can continue meeting its financial obligations as they fall due.

Under MIFIDPRU, firms are required to maintain liquid assets and establish systems and controls capable of managing liquidity risk effectively. The rules require firms to hold liquid assets sufficient to meet prescribed thresholds and to maintain adequate liquidity resources in periods of stress.

In practice, this means firms should be able to answer questions such as:

  • How would client obligations continue to be met during a stressed scenario?
  • What happens if projected revenues are delayed?
  • How quickly can costs be reduced?
  • What contingency funding arrangements are available?
  • How long can the business withstand adverse market conditions?

The FCA increasingly expects firms to demonstrate that these considerations have been actively modelled rather than simply acknowledged. This enables the FCA to assess whether a firm can remain financially resilient throughout the firm’s lifecycle, rather than simply meeting minimum regulatory requirements on the day it is authorised.

Prudential Planning Begins with Financial Forecasting

For firms seeking FCA authorisation, the process often starts with financial projections. Using a typical MiFID investment firm undertaking investment advice, arranging deals, or portfolio management activities as an example, the firm’s financial forecasts become the foundation upon which much of the prudential framework is built.

For example, a firm forecasting profitability within six months of launch should be able to demonstrate the assumptions underpinning projected revenue growth, client acquisition, and cost levels.

Similar prudential considerations apply to firms undertaking regulated cryptoasset activities, particularly with the UK’s newly introduced CRYPTOPRU regime. Where forecasts rely on assumptions around market adoption, transaction volumes, staking activity, or other revenue streams that may be subject to heightened volatility or evolving regulatory expectations, firms should be able to demonstrate that those assumptions are robust, evidence-based, and supported by appropriate stress testing.

Where forecasts are overly optimistic or insufficiently evidenced, the FCA is likely to challenge the credibility of the wider application. The projected profit and loss account, balance sheet, and cash flow forecasts are not merely application documents.

They directly influence:

  • Capital calculations
  • Liquidity assessments
  • Resource adequacy analysis
  • ICARA development
  • Wind-down planning
  • Regulatory reporting obligations

Poor-quality financial forecasting inevitably results in subpar prudential analysis.

What the FCA Is Looking For 

In our experience, FCA case officers place considerable emphasis on the quality and credibility of financial information submitted as part of an application. In many cases, these projections form the basis upon which the FCA assesses whether a firm’s business model is realistic, sustainable, and capable of meeting ongoing obligations.  

The FCA wants to determine whether the firm: 

  • Has a viable and sustainable business model 
  • Possesses adequate financial and non-financial resources 
  • Understands its future regulatory obligations 
  • Is ready, willing, and organised to comply with those obligations 

Where financial projections and prudential calculations cannot be traced back to a coherent business plan, further FCA challenge is often inevitable. 

Financial projections that appear overly optimistic, poorly evidenced, or inconsistent with the business plan, and that cannot be clearly traced back to underlying assumptions, are likely to trigger additional FCA scrutiny and delays in the authorisation process. 

Perhaps the most overlooked aspect of prudential regulation is that it tests the credibility of a firm’s business model. Capital adequacy, liquidity resilience, forecasting assumptions, and wind-down planning all require firms to demonstrate that their strategy is not only commercially attractive but also financially sustainable.  

In that sense, prudential readiness often provides one of the clearest indicators of whether a firm is genuinely prepared for authorisation. 

This is equally true for digital asset businesses. Whether operating in traditional financial markets or cryptoasset markets, firms must be able to demonstrate that their strategy is not only commercially attractive, but also supported by sufficient capital, liquidity, and risk management arrangements to remain sustainable over the long term. 

A well-prepared prudential framework demonstrates not only technical compliance, but also management’s understanding of the business and its risks. 

Prudential Readiness Does Not End at Authorisation

One of the most overlooked aspects of the application process is that the FCA is not assessing a point-in-time position.

The FCA is not simply assessing whether a firm satisfies prudential requirements today. It is assessing whether the firm has the governance, systems, and resources necessary to remain compliant after authorisation.

Prudential readiness therefore extends beyond the application itself and into the firm’s ongoing operating model.

When Should Prudential Planning Begin?

Creating a robust prudential framework is not a quick exercise. One of the most common mistakes firms make is treating prudential planning as the final stage of an FCA authorisation project.

By the time capital calculations, liquidity assessments, and ICARA requirements are being considered, many of the underlying business assumptions have already been fixed.

Changes to a firm’s permissions, operating model, staffing structure, revenue projections, or growth strategy can all have prudential implications that need to be understood early in the process. The more complex the proposed activities, the more important it becomes to start this work early.

For example, financial forecasting may reveal additional capital requirements, liquidity pressures during the startup phase or business model assumptions that require further evidence and refinement. Addressing these issues before submission is significantly easier than responding to them during the FCA’s review process.

For many applicants, developing financial forecasts, capital assessments, liquidity modelling, and supporting prudential documentation can take more than three weeks, with timelines heavily influenced by business complexity and the availability of internal resources.

Firms that engage with prudential planning at the outset are often able to identify weaknesses in their forecasts, challenge overly optimistic assumptions, and address potential areas of FCA scrutiny before an application is submitted.

Viewed in that context, prudential readiness is far more than a regulatory requirement. It is an opportunity to test whether a proposed business model is adequately funded, operationally viable, and capable of remaining compliant as the firm grows.

Prudential analysis should therefore inform key decisions around a firm’s business model, growth strategy, funding requirements, and operating structure from the outset, rather than being treated as a standalone compliance workstream.

Importantly, this preparation should not be viewed as a regulatory hurdle. When done properly, prudential planning provides valuable insight into the firm’s resilience, funding requirements, and long-term sustainability.

The strongest authorisation applications demonstrate that prudential readiness has been embedded into the firm’s overall strategy, giving the FCA confidence that the business is financially resilient, appropriately resourced, and prepared for long-term compliance.

FCA Authorisation Starts with Prudential Readiness

The most successful authorisation projects rarely treat prudential requirements as a final-stage compliance exercise.

Instead, they embed financial forecasting, capital planning, liquidity assessment, and ICARA development into the authorisation strategy from the outset.

As the FCA continues to place increasing emphasis on financial resilience, firms that invest in prudential readiness early are likely to experience a smoother authorisation process and build stronger foundations for long-term regulatory compliance and commercial success.

Build Prudential Readiness into Your FCA Authorisation Strategy

Whether preparing for FCA authorisation as an investment firm or getting ready for the UK’s new cryptoasset regime, firms need a prudential framework that demonstrates financial resilience from day one.

ACA helps firms build and strengthen prudential frameworks that stand up to regulatory scrutiny. Our specialists support financial forecasting, capital and liquidity assessments, ICARA development, stress testing, wind-down planning, regulatory reporting, and ongoing prudential compliance. We also help firms preparing for regulated cryptoasset activities understand how newly introduced prudential requirements may affect their operating model and long-term readiness.

Our prudential support includes:

  • FCA authorisation prudential support
  • Financial forecasting and business planning
  • Capital adequacy and liquidity assessments
  • ICARA development and review
  • Stress testing and scenario analysis
  • Wind-down planning
  • Regulatory reporting support
  • Ongoing prudential and crypto regulatory advisory

Planning for FCA authorisation or preparing for the UK’s evolving crypto prudential regime? Our specialists can help you build a prudential framework that supports both regulatory readiness and long-term resilience.

Speak to a Specialist

Frequently Asked Questions

Prudential readiness means ensuring a firm can demonstrate that it has appropriate financial resources, governance, risk management, and capital planning arrangements in place to meet regulatory expectations.

Building these foundations early in an FCA authorisation process can help avoid delays, reduce remediation efforts, and provide greater confidence that the firm’s business model is sustainable.

The newly introduced CRYPTOPRU prudential regime and accompanying COREPRU sourcebook introduces new prudential requirements for FCA-regulated cryptoasset firms.

While the proposals for COREPRU are still evolving, firms preparing for authorisation should consider how their capital planning, financial forecasting, governance, and risk management arrangements align with emerging prudential expectations.

The FCA assesses more than whether a firm meets minimum capital requirements on the day of authorisation. It also considers whether the firm’s business model is sustainable and whether it has the financial resources, governance, and risk management arrangements needed to remain compliant as it grows.

Strong prudential planning can help reduce avoidable delays and regulatory queries during the authorisation process.

The Internal Capital Adequacy and Risk Assessment (ICARA) is a core requirement of the Investment Firm Prudential Regime (IFPR) for FCA investment firms. It requires firms to identify potential harms, assess their financial resilience, and determine whether they hold sufficient capital and liquidity to support their business and execute an orderly wind-down if necessary.

Yes. As the UK’s regulatory framework for cryptoassets continues to develop, prudential requirements will play an increasingly important role. The FCA’s dedicated prudential regime, CRYPTOPRU, incorporates many of the same principles established under IFPR, including capital adequacy, liquidity management, governance, and financial resilience.

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