CONRED 3.3 Asset restriction

Purpose

CONRED 3.3.1G
  1. (1)

    1The purpose of CONRED 3.3 (Asset restriction) is to maximise a firm’s ability to meet redress liabilities to consumers, by limiting its ability to dissipate assets before it has assessed and paid any redress it owes.

  2. (2)

    The asset restriction is designed only to interfere with a firm’s ability to transact in its assets to the extent necessary to protect consumers who may be owed redress. The asset restriction therefore permits any transaction, as long as a firm calculates, using the methodology in CONRED 3.2, that it will continue to be able to meet its redress liabilities immediately after the transaction.

  3. (3)

    If a firm calculates, using the methodology in CONRED 3.2, that it will not be able to meet its redress liabilities, then the asset restriction prevents the firm from carrying out any transaction unless the transaction is in the ordinary course of business.

  4. (4)

    The FCA has made rules and guidance about what the ordinary course of business means. The FCA expects that these will generally be sufficient to allow a firm to interpret the asset restriction. On occasion, however, a firm may feel the need to seek individual guidance from the FCA. Further information on seeking individual guidance is contained in SUP 9. Requests for individual guidance on the asset restriction may be directed to BSPSredress@fca.org.uk.

  5. (5)

    Where a firm wishes to make a transaction that is in the ordinary course of business but is not listed in CONRED 3.3.5R, the firm must first notify the FCA in accordance with CONRED 3.3.10R.

Responsibilities of SMF managers

CONRED 3.3.2G

1The FCA reminds SMF managers that they are personally accountable for breach of the conduct rules in COCON. For example, Senior Manager Conduct Rule 2 requires an SMF manager to take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system.

The asset restriction

CONRED 3.3.3R

1A firm must not in any way dispose of, withdraw, transfer, deal with or diminish the value of any of its own assets (whether in the United Kingdom or elsewhere), unless:

  1. (1)

    the relevant transaction occurs in the ordinary course of business of the firm; or

  2. (2)

    the firm satisfies all of the following conditions:

    1. (a)

      the firm has previously notified the FCA under CONRED 3.2.7R that it is able to meet claims for unsuitable BSPS advice under its financial resilience assessment under CONRED 3.2.2R;

    2. (b)

      since the notification in (a) was submitted, the firm has not subsequently notified the FCA under CONRED 3.2.7R that it is not able to meet claims for unsuitable BSPS advice under its financial resilience assessment under CONRED 3.2.2R; and

    3. (c)

      the firm has calculated, in accordance with CONRED 3.2.2R, that it will continue to be able to meet claims for unsuitable BSPS advice immediately after the relevant transaction.

CONRED 3.3.4G
  1. (1)

    1CONRED 3.3.3R contains a restriction (the ‘asset restriction’) that prevents a firm from undertaking transactions that could have the effect of dissipating the value of the firm’s assets, except to the extent that an exception in CONRED 3.3.3R(1) or (2) applies.

  2. (2)

    Under CONRED 3.3.3R(1), the asset restriction does not apply to a transaction that a firm undertakes in the ordinary course of business. CONRED 3.3.5R contains a non-exhaustive list of transactions that a firm may treat as being undertaken in the ordinary course of business for these purposes. CONRED 3.3.8R2 contains a list of transactions that a firm must not treat as being undertaken in the ordinary course of business.

  3. (3)

    Under CONRED 3.3.3R(2), the asset restriction does not apply to any other transaction undertaken by a firm that:

    1. (a)

      has notified the FCA that it has calculated (using the methodology in CONRED 3.2.2R) that it can meet its BSPS redress liabilities; and

    2. (b)

      has calculated (using the methodology in CONRED 3.2.2R) that it will continue to be able to meet its BSPS redress liabilities immediately after the relevant transaction occurs.

  4. (4)

    In summary, the overall effect of the provisions outlined in (1) to (3) is therefore as follows:

    1. (a)

      a firm that has calculated under CONRED 3.2.2R that it has sufficient regulatory capital to meet its BSPS redress liabilities and has notified the FCA that this is the case is not subject to the asset restriction at all, provided that the firm will continue to hold sufficient regulatory capital after any proposed transaction occurs; and

    2. (b)

      a firm that has calculated under CONRED 3.2.2R that it does not hold sufficient capital to meets its BSPS redress liabilities is subject to the asset restriction. However, the firm may continue to undertake transactions that are in the ordinary course of its business.

Transactions in the ordinary course of business

CONRED 3.3.5R
  1. (1)

    1The following is a non-exhaustive list of transactions that a firm may treat as occurring in the ordinary course of business for the purposes of CONRED 3.3.3R(1):

    1. (a)

      transactions giving effect to instructions initiated by customers;

    2. (b)

      payments to or other transactions with the firm’s counterparties in the ordinary course of operating the firm’s business and in satisfaction of the firm’s contractual obligations;

    3. (c)

      usual and proper contractual salary payments and proper payments made in connection with obligations owed to employee pension schemes;

    4. (d)

      payment of dividends or drawings that have been approved by the FCA in accordance with CONRED 3.3.6R;

    5. (e)

      payments connected to reasonable legal expenses and other reasonable expenses incurred in relation to obtaining accounting or audit advice; and

    6. (f)

      payments connected to the firm’s tax or regulatory obligations, including any payments of redress to consumers.

  2. (2)

    Where a firm intends to undertake a transaction that the firm considers is in the ordinary course of business, but which is not a type of transaction listed in (1), the firm must notify the FCA in advance under CONRED 3.3.10R.

Payment of dividends and LLP members’ drawings

CONRED 3.3.6R
  1. (1)

    1A firm may treat a dividend as being paid in the ordinary course of business for the purposes of CONRED 3.3.3R(1) if the firm has obtained prior express consent from the FCA.

  2. (2)

    To obtain the consent in (1), a firm must:

    1. (a)

      notify the FCA by email to BSPSredress@fca.org.uk, including the following information:

      1. (i)

        the value of the proposed dividend(s);

      2. (ii)

        the date on which the firm intends to pay the proposed dividend(s);

      3. (iii)

        the recipients of the proposed dividend(s);

      4. (iv)

        a clear statement of the quantified effect of the payment of the proposed dividend(s) on the firm’s regulatory capital position;

      5. (v)

        a copy of the firm’s latest management accounts; and

      6. (vi)

        an express confirmation that the payment of the proposed dividend(s) is lawful under applicable company or partnership law and insolvency law; and

    2. (b)

      as part of the notification in (1), demonstrate both of the following to the reasonable satisfaction of the FCA:

      1. (i)

        the dividend(s) will be paid in connection with services provided for or on behalf of the firm by a natural person; and

      2. (ii)

        the timing of the proposed payment and the value of the dividend(s) are consistent with the historical pattern of the payment of dividends for equivalent purposes over the immediately preceding 12 months.

  3. (3)

    For the purposes of this rule, a reference to a ‘dividend’ includes drawings paid to a member of a limited liability partnership.

CONRED 3.3.7G

1The purpose of CONRED 3.3.6R is to permit a firm that is subject to the asset restriction to pay dividends or drawings to individual shareholders or members where those individuals perform services for the firm and have historically been paid through similar dividends or drawings and prior FCA consent to the dividends or drawings has been obtained. Any dividends or drawings paid must be consistent in terms of both their value and their timing with previous dividends or drawings paid by the firm for that purpose. The firm must also confirm to the FCA that the payment of the dividend or drawings would be lawful, having regard to any relevant restrictions that may apply in areas such as company law or insolvency law. A firm may wish to obtain professional advice to confirm its analysis before giving the required confirmation.

CONRED 3.3.7AG
  1. (1)

    2As part of the notification in CONRED 3.3.6R, a firm is required to include a clear statement of the quantified effect of the payment of the proposed dividend(s) on the firm’s regulatory capital position. A firm should provide this information by:

    1. (a)

      providing financial forecasts which show the expected change in the firm’s regulatory capital over time; and

    2. (b)

      explaining the impact of proposed dividend payments on these financial forecasts.

  2. (2)

    When quantifying a proposed dividend payment, we expect a firm to consider its regulatory obligations under the threshold conditions and the principles. Dividend payments which allow a firm to increase its regulatory capital over time, and which support the firm in passing the financial resilience assessment in CONRED 3.2.2R over a reasonable time horizon, would support compliance with these obligations.

Transactions not in the ordinary course of business

CONRED 3.3.8R

1The following transactions must not be regarded as occurring in the ordinary course of business:

  1. (1)

    payments to any connected person, except to the extent that they fall within a category of transaction listed in CONRED 3.3.5R;

  2. (2)

    the making of any capital distributions, dividend payments or payment of drawings, except to the extent expressly permitted by the FCA under CONRED 3.3.5R(1)(d) and CONRED 3.3.6R;

  3. (3)

    the making of any gift or loan;

  4. (4)

    any payments or transfers made as part of any financial restructuring or reorganisation of the firm’s business (whether share or asset based) or the acquisition by the firm of part or all of another business; and

  5. (5)

    the disposal to another person of some or all of the firm’s client files or ongoing income from the client bank.

CONRED 3.3.9G

1The effect of CONRED 3.3.3R is that a firm that has not notified the FCA that it is able to meet all BSPS claims under its financial resilience assessment under CONRED 3.2.2R must not undertake any of the types of transactions listed in CONRED 3.3.8R.

Prior notification of other transactions in the ordinary course of business

CONRED 3.3.10R
  1. (1)

    1Except where (2) applies, a firm that has not assessed that it is able to meet all BSPS claims under its financial resilience assessment under CONRED 3.2.2R must notify the FCA at least 15 business days in advance of:

    1. (a)

      undertaking any transaction that the firm considers is in the ordinary course of business, but which is not listed in CONRED 3.3.5R; or

    2. (b)

      any change to its contracts with connected persons (including both variation of existing contracts and entry into new or replacement contracts) which could result in new or increased payments above the de minimis threshold specified in CONRED 3.3.12R.

  2. (2)

    If a firm needs to undertake a transaction that falls within (1)(a) in an urgent situation, the firm must still notify the FCA in advance by giving as much notice as possible, but the 15-business day period in (1) does not apply.

CONRED 3.3.11G

1The FCA expects that a firm would make a notification of the type specified in CONRED 3.3.10R(2) only in genuinely urgent cases and where it has not been possible to identify the need for the relevant transaction sufficiently in advance. In such cases, the firm must still give the FCA as much notice as possible.

CONRED 3.3.12R
  1. (1)

    1The de minimis threshold in CONRED 3.3.10R is a percentage amount equal to the latest Consumer Price Index annual rate published by the Office for National Statistics at the time at which the change in contract is proposed to occur.

  2. (2)

    In calculating whether the de minimis threshold has been exceeded, a firm must aggregate all connected payments.

CONRED 3.3.13G

1For the purposes of CONRED 3.3.12R(2), payments may be connected because they are made to the same person, or because they are made to separate persons who are connected by virtue of being close relatives, or through an agent-principal relationship or through a relationship of control.

CONRED 3.3.14R

1The notification in CONRED 3.3.10R must:

  1. (1)

    be made to BSPSredress@fca.org.uk; and

  2. (2)

    contain the following information;

    1. (a)

      an explanation of the transaction or contract change;

    2. (b)

      an explanation of the quantifiable impact on the firm’s financial resilience assessment under CONRED 3.2.2R;

    3. (c)

      an explanation of why the firm considers that the transaction or contract change occurs in the ordinary course of business and is therefore permitted;

    4. (d)

      reference to any comparable historic payments or contract changes which support the firm’s view that this occurs in the ordinary course of business; and

    5. (e)

      in the case of a notification on an urgent basis under CONRED 3.3.10R(2), an explanation of the nature of the urgency and why it has not been possible to comply with the normal 15-business day notification requirement in CONRED 3.3.10R(1).