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COND 2.4 Threshold condition 4: Adequate resources

COND 2.4.1UK

Paragraph 4, Schedule 6 to the Act

7(1)

The resources of the person concerned must, in the opinion of the [FSA], be adequate in relation to the regulated activities that he seeks to carry on, or carries on.

(2)

In reaching that opinion, the [FSA] may-

(a)

take into account the person's membership of a group and any effect which that membership may have; and

(b)

have regard to-

(i)

the provision he makes and, if he is a member of a group, which other members of the group make in respect of liabilities (including contingent and future liabilities); and

(ii)

the means by which he manages and, if he is a member of a group, which other members of the group manage the incidence of risk in connection with his business.2

COND 2.4.2GRP
  1. (1)

    Threshold condition 4 (Adequate resources), requires the FSA to ensure that a firm has adequate resources in relation to the specific regulated activity or regulated activities which it seeks to carry on, or carries on.

  2. (2)

    In this context, the FSA will interpret the term 'adequate' as meaning sufficient in terms of quantity, quality and availability, and 'resources' as including all financial resources, non-financial resources and means of managing its resources; for example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.

  3. (3)

    High level systems and control requirements are in SYSC. Detailed financial resources and systems requirements are in the relevant section of the Prudential Standards part of the Handbook53, including specific provisions for particular types of regulated activity. The FSA will consider whether the firm is ready, willing and organised to comply with these requirements when assessing if it has adequate resources for the purposes of this threshold condition.

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COND 2.4.3GRP
  1. (1)

    When assessing this threshold condition, the FSA may have regard to any person appearing to it to be, or likely to be, in a relevant relationship with the firm, in accordance with section 49 of the Act (Persons connected with an applicant); for example, a firm's controllers, its directors or partners, other persons with close links to the firm (see COND 2.3), and other persons that exert influence on the firm which might pose a risk to the firm's satisfaction of the threshold conditions and would, therefore, be in a relevant relationship with the firm.

  2. (2)

    In particular, although it is the firm that is being assessed, the FSA may take into consideration the impact of other members of the firm's group on the adequacy of its resources. For example, the FSA may assess the consolidated solvency of the group. The FSA's approach to the consolidated supervision of a firm and its group, is in the relevant part of the Prudential Standards part of the Handbook53.

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COND 2.4.4GRP
  1. (1)

    When assessing whether a firm will satisfy and continue to satisfy threshold condition 4, the FSA will have regard to all relevant matters, whether arising in the United Kingdom or elsewhere.

  2. (2)

    Relevant matters may include but are not limited to:

    1. (a)

      whether there are any indications that the firm may have difficulties if the application is granted (see COND 2.4.6 G), at the time of the grant or in the future, in complying with any of the FSA'sprudential rules (see the relevant part of the Prudential Standards part of the Handbook53);

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    2. (b)

      whether there are any indications that the firm will not be able to meet its debts as they fall due;

    3. (c)

      whether there are any implications for the adequacy of the firm's resources arising from the history of the firm; for example, whether the firm has:

      1. (i)

        been adjudged bankrupt; or

      2. (ii)

        entered into liquidation; or

      3. (iii)

        been the subject of a receiving or administration order; or

      4. (iv)

        had a bankruptcy or winding-up petition served on it; or

      5. (v)

        had its estate sequestrated; or

      6. (vi)

        entered into a deed of arrangement or an individual voluntary agreement (or in Scotland, a trust deed) or other composition in favour of its creditors, or is doing so; or

      7. (vii)

        within the last ten years, failed to satisfy a judgment debt under a court order, whether in the United Kingdom or elsewhere;

    4. (d)

      whether the firm has taken reasonable steps to identify and measure any risks of regulatory concern that it may encounter in conducting its business (see COND 2.4.6 G) and has installed appropriate systems and controls and appointed appropriate human resources to measure them prudently at all times.; see SYSC 3.1 (Systems and Controls), SYSC 3.2 (Areas covered by systems and controls) and SYSC 4.1.1 R (Organisational requirements)4; and

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    5. (e)

      whether the firm has conducted enquiries into the financial services sector in which it intends to conduct business (see COND 2.4.6 G) that are sufficient to satisfy itself that:

      1. (i)

        it has access to adequate capital, by reference to the FSA's prudential requirements, to support the business including any losses which may be expected during its start-up period; and

      2. (ii)

        Client money, deposits, custody assets and policyholders' rights will not be placed at risk if the business fails.

  3. (3)

    In the context of threshold condition 4 (Adequate resources), the FSA will only take into account relevant matters which are material (see COND 1.3.3 G). The FSA will consider the materiality of each relevant matter in relation to the regulated activities for which the firm has, or will have, permission, having regard to the regulatory objectives in section 2 of the Act (The FSA's general duties). It should be noted that a series of matters may be significant when taken together, even if each of them in isolation might not be significant.

  4. (4)

    In making its assessment, the FSA will consider the individual circumstances of each firm on a case-by-case basis.1

COND 2.4.5G

In complying with SYSC44 (Systems and controls), a firm should plan its business appropriately so that it is able to identify, measure and manage the likely risks of regulatory concern it will face (SYSC 3.2.17 G (Business strategy) and SYSC 7 (Risk Control)4).

COND 2.4.6G
  1. (1)

    Any newly-formed firm can be susceptible to early difficulties. These difficulties could arise from a lack of relevant expertise and judgment, or from ill-constructed and insufficiently tested business strategies. A firm may also be susceptible to difficulties where it substantially changes its business activities.

  2. (2)

    As a result, the FSA would expect a firm which is applying for Part IV permission, or a substantial variation of that permission, to take adequate steps to satisfy itself and, if relevant, the FSA that:

    1. (a)

      it has a well constructed business plan or strategy plan for its product or service which demonstrates that it is ready, willing and organised to comply with the relevant requirements in the Prudential Standards part of the Handbook53 and SYSC that apply to the regulated activity it is seeking to carry on;

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    2. (b)

      its business plan or strategy plan has been sufficiently tested; and

    3. (c)

      the financial and other resources of the firm are commensurate with the likely risks it will face.

  3. (3)

    The FSA would expect the level of detail in a firm's business plan or strategy plan in (2) to be appropriate to the complexity of the firm's proposed regulated activities and unregulated activities and the risks of regulatory concern it is likely to face (see SYSC 3.2.11 G (Management information) and SYSC 7 (Risk control)4. Notes on the contents of a business plan are given in the business plan section of the application pack for Part IV permission. A firm requiring specific guidance on the contents and level of detail of its business plan should contact the Firm Contact Centre (020 7066 3954)6, or, if relevant, its usual supervisory contact at the FSA, or seek professional assistance.3

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