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AUTH 3.8 The threshold conditions and financial resources

The threshold conditions

AUTH 3.8.1G
  1. (1)

    Under section 41(2) of the Act (The threshold conditions), the FSA is required, in giving Part IV permission or imposing any requirement, to ensure that the applicant satisfies, and will continue to satisfy, the threshold conditions in relation to all the regulated activities for which it has or will have permission. The threshold conditions are in Schedule 6 to the Act.

  2. (2)

    The FSA has provided guidance on the threshold conditions in COND. This guidance is not exhaustive and is written at a high level of generality as satisfaction of the threshold conditions is considered on a case-by-case basis, in relation to each regulated activity an applicant is seeking to carry on.

AUTH 3.8.2G
  1. (1)

    There are six threshold conditions and certain additional conditions applying to a firm with Part IV permission:13

    1. (a)

      threshold condition 1 (Legal status) sets out the legal status that the applicant must have if it wishes to carry on certain regulated activities;

    2. (b)

      threshold condition 2 (Location of offices) provides that:

      1. (i)

        a body corporate constituted under the law of any part of the United Kingdom must have its head office and, if it has one, its registered office, in the United Kingdom; and

      2. (ii)

        a non body corporate with its head office in the United Kingdom must carry on business in the United Kingdom;

    3. (c)

      threshold condition 3 (Close links) relates to the effect of close links on supervisability;

    4. (ca)

      threshold condition 2A (Appointment of claims representatives) provides that if it appears to the FSA that any person is seeking to carry on, or carrying on, motor vehicle liability insurance business, that person must have a claims representative in each EEA State other than the United Kingdom;3

    5. (d)

      threshold condition 4 (Adequate resources) relates to the adequacy of an applicant's resources;

    6. (e)

      threshold condition 5 (Suitability) relates to the suitability of the applicant;

    7. (f)

      additional conditions apply to non-EEA insurers (see COND 2.6 (Additional Conditions)).1

  2. (2)

    Threshold conditions 2A, 3, 4, and 5 enable the FSA to assess the applicant in the light of the activities it wishes to carry on and, in particular, make it clear that suitability to carry on one regulated activity does not mean that the applicant is suitable to carry on all regulated activities. Threshold conditions 3, 4 and 5 do not apply to Swiss general insurance companies. 1

  3. (3)

    An incoming firm applying for a top-up permission must also satisfy the threshold conditions with the exception of threshold condition 2 (Location of offices): see COND 1.1 Application) and paragraphs 6 and 7 of Schedule 6 to the Act.

  4. (4)

    The application of the threshold conditions to Swiss general insurance companies was varied by the Financial Services and Markets Act 2000 (Variation of Threshold Conditions) Order 2001.1

AUTH 3.8.3G

The FSA, in making a determination whether an applicant satisfies and will continue to satisfy the threshold conditions under section 41(2) of the Act, will consider whether an applicant can demonstrate that it is ready, willing and organised so as to enable it to comply with the specific regulatory obligations that will apply to the applicant if it is given Part IV permission to carry on the regulated activities referred to in its application.

Financial resources

AUTH 3.8.4G
  1. (1)

    As part of its application, an applicant will be required to demonstrate that it has adequate financial resources to meet the financial resources requirement for its prudential category.

  2. (2)

    The Single Market Directives, the Capital Adequacy Directive and the E-Money Directive set out minimum financial requirements for all firms which carry on banking, issuing e-money, insurance or investment services within the scope of the Single Market Directives and the E-Money Directive, that is, most firms that are credit institutions, financial institutions, insurance undertakings or investment firms as defined in these Directives. These requirements are reflected in PRU or in 5the relevant IPRU for each type of firm.2

AUTH 3.8.5G
  1. (1)

    An applicant will need to determine its prudential category and, in some cases, its sub-category. The application pack and AUTH 3 Annex 2 G give further details.

  2. (2)

    In determining its prudential sub-category, an applicant may need to consider whether it falls under the scope of a Single Market Directive or the E-Money Directive, for example whether it will be an investment firm as defined in the ISD.

  3. (3)

    However, an applicant which falls outside the Single Market Directive or the E-Money Directive will not have a right to passport into the EEA and will be subject to separate prudential requirements.2

AUTH 3.8.6G

An applicant in the prudential category of bank or insurer should note that the FSA will give it individual guidance on its likely capital requirements: for example, the individual capital ratios for a bank (see IPRU(BANK) CO 4.1.1 (Individual capital ratios)) or the capital resources requirements5 of an insurer (see PRU 2.1)5) during pre-application discussions (see AUTH 3.9.2 G). 4

AUTH 3.8.7G

Applicants should note that the prudential category and, where relevant, sub-category, not only determines which provisions in the relevant IPRU or PRU5 will apply, but which provisions on auditors, financial reporting and transaction reporting in SUP will apply.

AUTH 3.8.8G

An applicant that is a member of a group should note that the FSA may take into consideration the impact of other members of the group on the adequacy of its resources (see the relevant sections of PRU or 5IPRU).