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IFPRU 8.1 Prudential consolidation

Application

IFPRU 8.1.1 R RP
  1. (1)

    This section applies to an IFPRU investment firm.

  2. (2)

    This section does not apply to an exempt IFPRU commodities firm if the conditions in (2) are met.

  3. (3)

    The conditions are:

    1. (a)

      article 498 of the EU CRR (Exemptions for commodities dealers) applies to it;

    2. (b)

      the exempt IFPRU commodities firm is not a member of a FCAconsolidation group or non-EEA sub-group;

    3. (c)

      each investment firm in the group that the exempt IFPRU commodities firm belongs to meets the conditions in article 498 of the EU CRR; and

    4. (d)

      any investment firm in the group that the exempt IFPRU commodities firm belongs to whose head office is outside the EEA would have been a firm to whom article 498 would have applied if its head office had been in an EEA State.

Purpose

IFPRU 8.1.2 G RP

This section contains:

  1. (1)

    rules that exercise the discretion afforded to the FCA as competent authority under article 18 of the EU CRR (Methods of prudential consolidation); and

  2. (2)

    guidance on the criteria that the FCA will take into account when considering whether to grant a permission to a firm on a case-by-case basis for the individual consolidation method under article 9 of the EUCRR (Individual consolidation method).

Methods of prudential consolidation: proportional consolidation

IFPRU 8.1.3 R RP
  1. (1)

    In carrying out the calculations for the purposes of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation), a firm must include the relevant proportion of an undertaking with whom it has:

    1. (a)

      a consolidation Article 12(1) relationship; or

    2. (b)

      an article 18(6) relationship.

  2. (2)

    In (1), the relevant proportion is such proportion (if any) as stated in a requirement imposed on the firm.

[Note: article 18(3) and (6) of the EU CRR]

IFPRU 8.1.4 R RP

In carrying out the calculations for the purposes of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation), a firm (for whom the FCA is the consolidating supervisor) must include the proportion according to the share of capital held of participations in institutions and financial institutions managed by an undertaking included in the consolidation together with one or more undertakings not included in the consolidation, where those undertakings' liability is limited to the share of capital they hold.

[Note: article 18(4) of the EU CRR]

IFPRU 8.1.5 R RP

In carrying out the calculations for the purposes of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation), a firm (for whom the FCA is the consolidating supervisor) must carry out a full consolidation of any undertaking with whom it has an article 18(5) relationship.

[Note: article 18(5) of the EU CRR]

Individual consolidation method

IFPRU 8.1.6 G RP

Article 9(2) of the EU CRR (Individual consolidation method) requires a firm, which is a parent institution, to demonstrate fully to the FCA, as competent authority, that there are no material practical or legal impediments to the prompt transfer of own funds of the subsidiary referred to in article 9(1) of the EUCRR, or repayment of liabilities when due by that subsidiary to the firm.

IFPRU 8.1.7 G RP

The FCA will assess an application for individual consolidation against articles 9 and 396(2) (Compliance with large exposure requirements) of the EU CRR on a case-by-case basis. The FCA will assess whether it is still appropriate to permit the treatment if doing so risks conflict with its statutory objectives. The FCA will apply a high level of scrutiny to applications under article 9 of the EU CRR, consistent with the previous solo consolidation regime.

Application of criteria for individual consolidation method

IFPRU 8.1.8 G RP

When making its assessment, the FCA will consider whether any minority interest may represent an impediment of any kind to the prompt transfer of own funds or repayment of liabilities from the subsidiary to the parent undertaking. To reassure the FCA, the parent institution should demonstrate that any minority interest in a subsidiary will not result in the potential blocking or delay of prompt transfer of own funds or repayment of liabilities. Therefore, it may be possible for a firm to meet the condition in article 7(1)(d) of the EU CRR but not meet the condition in article 9(2).

IFPRU 8.1.9 G RP

The FCA will consider the non-exhaustive criteria below when determining whether the condition in article 9(2) of the EU CRR is met:

  1. (1)

    the speed with which funds can be transferred or liabilities repaid to the firm and the simplicity of the method for the transfer or repayment;

  2. (2)

    whether there are any interests other than those of the firm in the subsidiary and what impact those other interests may have on the firm's control over the subsidiary and the ability of the firm to require a transfer of funds or repayment of liabilities. As part of the FCA's overall assessment, it would consider ownership of 75% or more of the subsidiary as one of the indicators that prompt transfer of own funds is likely to be achieved;

  3. (3)

    whether the prompt transfer of funds or repayment of liabilities to the firm might harm the reputation of the firm or its subsidiary;

  4. (4)

    whether there are any tax disadvantages for the firm or the subsidiary as a result of the transfer of funds or repayment of liabilities;

  5. (5)

    whether there are any exchange controls that may have an impact on the transfer of funds or repayment of liabilities;

  6. (6)

    whether there are assets in the subsidiary available either to be transferred or liquidated for the purposes of the transfer of funds or repayment of liabilities;

  7. (7)

    whether any regulatory requirements impact on the ability of the subsidiary to transfer funds or repay liabilities promptly;

  8. (8)

    whether the purpose of the subsidiary prejudices the prompt transfer of funds or repayment of liabilities;

  9. (9)

    whether the legal structure of the subsidiary prejudices the prompt transfer of funds or repayment of liabilities;

  10. (10)

    whether the contractual relationships of the subsidiary with the firm and other third parties prejudices the prompt transfer of funds or repayment of liabilities;

  11. (11)

    whether past and proposed flows of funds between the subsidiary and the firm demonstrate the ability to make prompt transfer of funds or repayment of liabilities; and

  12. (12)

    whether the degree of individual consolidation by the firm undermines the FCA's ability to assess the soundness of the firm as a legal entity (taking into account any other subsidiary to which the individual consolidation method under article 9(1) of the EU CRR is being applied).

Entities excluded from the scope of prudential consolidation

IFPRU 8.1.10 G RP

The FCA will assess applications to exclude entities from the scope of prudential consolidation against article 19(2) of the EU CRR on a case-by-case basis. The FCA will only grant this treatment with respect to undertakings where one of the conditions in article 19(2) is met. The FCA will still make a judgement as to whether it is appropriate to grant this treatment even where one of the conditions in article 19(2) is met.

Application of criteria for exclusion

IFPRU 8.1.11 G RP

Article 19(2) of the EU CRR allows the consolidating supervisor to decide in the following cases that an institution, financial institution or ancillary servicesundertaking which is a subsidiary or in which a participation is held need not be included in the consolidation in the following cases:

  1. (1)

    where the undertaking concerned is situated in a third country where there are legal impediments to the transfer of necessary information;

  2. (2)

    where the undertaking concerned is of negligible interest only with respect to the objectives of monitoring institutions;

  3. (3)

    where, in the opinion of the competent authorities responsible for exercising supervision on a consolidated basis, the consolidation of the financial situation of the undertaking concerned would be inappropriate or misleading as far as the objectives of the supervision of credit institutions are concerned.

IFPRU 8.1.12 G RP

If several undertakings meet the criteria in IFPRU 8.1.11 G (2) and are collectively of non-negligible interest with respect to the specified objectives, the FCA will not agree to exclude them all from the consolidation.

IFPRU 8.1.13 G RP

The FCA may request a firm to provide information about the undertakings excluded from consolidation.

Core UK groups

IFPRU 8.1.14 G RP

Article 113(6) of the EU CRR (Intra-group credit risk exemption) permits a firm, subject to conditions, to apply a 0% risk-weighting for exposures to certain entities within its FCAconsolidation group, namely its parent undertaking, its own subsidiaries and subsidiaries of its parent undertaking. Article 400(1)(f) of the EU CRR then fully exempts such exposures from the large exposures limit stipulated in article 395(1) of the EUCRR (Limits to large exposures).

IFPRU 8.1.15 G RP

The FCA will assess core UK group applications against article 113(6) on a case-by-case basis. The FCA expects to approve this treatment for core UK groupundertakings if the conditions stipulated in article 113(6) are met. A firm should note that the FCA will still make a wider judgement whether it is appropriate to grant this treatment even where the conditions in article 113(6) are met. It is the FCA's intention to continue to apply a high level of scrutiny to applications under this article.

IFPRU 8.1.16 G RP

In relation to article 113(6)(d), the FCA expects the condition to be satisfied if the counterparty is:

  1. (1)

    incorporated in the UK; or

  2. (2)

    an undertaking of a type that falls within the scope of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC) and it is established in the UK other than by incorporation, and if the firm can demonstrate that the counterparty's centre of main interests is situated in the UK within the meaning of that Regulation.

IFPRU 8.1.17 G RP

In relation to article 113(6)(e), the FCA will consider the following non-exhaustive criteria when assessing whether this condition has been met:

  1. (1)

    the speed with which funds can be transferred or liabilities repaid to the firm and the simplicity of the method for the transfer or repayment. As part of the FCA's overall assessment, it would consider ownership of 100% of the subsidiary as one of the indicators that prompt transfer of own funds is likely to be achieved;

  2. (2)

    whether there are any interests other than those of the firm in undertaking and what impact those other interests may have on the firm's control over the undertaking and the ability of the firm to require a transfer of funds or repayment of liabilities;

  3. (3)

    whether there are any tax disadvantages for the firm or the counterparty as a result of the transfer of funds or repayment of liabilities;

  4. (4)

    whether the purpose of the undertaking prejudices the prompt transfer of funds or repayment of liabilities;

  5. (5)

    whether the legal structure of the undertaking prejudices the prompt transfer of funds or repayment of liabilities;

  6. (6)

    whether the contractual relationships of the undertaking with the firm and other third parties prejudices the prompt transfer of funds or repayment of liabilities; and

  7. (7)

    whether past and proposed flows of funds between the undertaking and the firm demonstrate the ability to make prompt transfer of funds or repayment of liabilities.

IFPRU 8.1.18 G RP

For the purpose of article 113(6)(e) of the EU CRR, for an undertaking that is a firm, the requirement for the prompt transfer of funds refers to own funds in excess of the capital and financial resources requirements to which it is subject under the regulatory system.

IFPRU 8.1.19 G RP

When demonstrating how article 113(6)(e) of the EU CRR is met, the FCA considers that, for a counterparty which is not a firm, the application should include a legally binding agreement between the firm and the counterparty. This agreement will be to promptly, on demand, by the firm increase the firm'sown funds by an amount required to ensure that the firm complies with the provisions contained in Part Two of the EU CRR (Own funds) and any other requirements relating to capital resources concentration risk imposed on the firm by, or under, the regulatory system.

IFPRU 8.1.20 G RP

For the purpose of article 113(6)(e), the FCA considers that the agreement to increase the firm'sown funds may be limited to capital resources available to the undertaking and may reasonably exclude such amount of capital resources that, if transferred to the firm, would cause the undertaking to become balance sheet insolvent in the manner contemplated in section 123(2) of the Insolvency Act 1986.

IFPRU 8.1.21 G RP

The FCA will expect a firm to which this section applies not to use any member of its core UK group (which is not a firm) to route lending or to have exposures to any third party in excess of the limits stipulated in article 395(1) of the EU CRR (Limits to large exposures).

IFPRU 8.2 Large Exposures

Application

IFPRU 8.2.1 R RP

This section applies to an IFPRU investment firm, unless it is an exempt IFPRU commodities firm to which article 493 of the EU CRR applies.

IFPRU 8.2.2 R RP

This section does not apply to a FCAconsolidation group on the basis of its consolidated situation if the group only contains limited activity firms or limited licence firms.

Purpose

IFPRU 8.2.3 G RP

This section contains the rules that exercise the discretion afforded to the FCA as competent authority under article 400(2)(c) and (3) of the EU CRR (Large exposures: exemptions). The FCA does not intend to exercise its discretion for any of the other exemptions in article 400(2).

Intra-group exposures: non-core large exposures group

IFPRU 8.2.4 G RP

Article 400(2) of the EU CRR permits the FCA to fully or partially exempt exposures incurred by a firm to intra-group undertakings that meet the specified criteria from the limit stipulated in article 395(1) of the EU CRR in relation to a firm's group of connected clients that represent its wider group. The FCA will consider exempting non-trading book and trading book exposures to intra-group undertakings if specified conditions throughout IFPRU 8.2 are met.

IFPRU 8.2.5 G RP

The FCA expects that applications for exemptions under article 400(2)(c) of the EU CRR will be for firms established in the UK where the intra-group undertakings to which they have exposures meet the criteria for the core UK group in article 113(6) of the EU CRR, except for article 113(6)(d) (established in the same EEA State as the firm).

IFPRU 8.2.6 R RP

A firm with a non-core large exposures grouppermission may (in line with that permission) exempt, from the application of article 395(1) of the EU CRR (Limits to large exposures), exposures, including participations or other kinds of holdings, incurred by a firm to:

  1. (1)

    its parent undertaking; or

  2. (2)

    other subsidiary undertakings of that parent undertaking; or

  3. (3)

    its own subsidiary undertakings;

in so far as those undertakings are covered by the supervision on a consolidated basis to which the firm itself is subject, in accordance with the EU CRR, Directive 2002/87/EC regarding the supplementary supervision of financial entities in a financial conglomerate or with equivalent standards in force in a third country; exposures that do not meet these criteria, whether or not exempted from article 395(1), shall be treated as exposures to a third party.

[Note: article 400(2) of the EU CRR]

IFPRU 8.2.7 R RP

A firm may only make use of the non-core large exposure group exemption where the following conditions are met:

  1. (1)

    the total amount of the non-trading book exposures from the firm to its non-core large exposures group does not exceed 100% of the firm'seligible capital; or

    (if the firm has a core UK grouppermission) the total amount of non-trading book exposures from its core UK group (including the firm) to its non-core large exposures group does not exceed 100% of the core UK groupeligible capital;

  2. (2)

    the total amount of trading book exposures from the firm to its non-core large exposures group does not exceed 500% of the firm's eligible capital; or

    (if the firm has a core UK grouppermission) the total amount of trading bookexposures from its core UK group (including the firm) to its non-core large exposures group does not exceed 500% of the core UK groupeligible capital;

  3. (3)

    (if the firm has a core UK grouppermission) it gives the FCA prior written notice if it intends to concentrate its intra-group exposure to a particular member of its non-core large exposures group in excess of 25% of core UK groupeligible capital.

    The written notice must contain the following:

    1. (a)

      an explanation of how the firm will ensure that it will still meet the condition in (1) on a continuing basis;

    2. (b)

      details of the counterparty, the size of the exposure and the expected duration of the exposure; and

    3. (c)

      an explanation of the reason for the exposure;

  4. (4)

    if the firm stops concentrating its intra-group exposure to a particular member of its non-core large exposures group in excess of 25% of core UK groupeligible capital, it gives the FCA prior written notice as set out in (3) if it intends to start to do so again; and

  5. (5)

    the firm submits FSA018 under SUP 16.12 (Integrated regulatory reporting) as applicable to it.

[Note: article 400(2)(c) of the EU CRR]

IFPRU 8.2.8 R RP

A firm may calculate limits in IFPRU 8.2.7 R after taking into account the effect of credit risk mitigation in line with articles 399 to 403 of the EU CRR.

Core UK group eligible capital

IFPRU 8.2.9 R RP

For the purposes of the conditions in IFPRU 8.2.7 R, a firm must calculate core UK groupeligible capital in line with the deduction and aggregation method in IFPRU 8.2.10 R.

IFPRU 8.2.10 R RP
  1. (1)

    Core UK groupeligible capital is equal to the sum of the following amounts for each member of the core UK group and the firm (the sub-group):

    1. (a)

      for ultimate parent undertaking of the sub-group, the amount calculated in line with article 6 of the EUCRR (or other prudential requirements that apply);

    2. (b)

      for any other member of the sub-group, the amount calculated in line with article 6 of the EUCRR (or other prudential requirements that apply) less the book value of the sub-group's holdings of capital instruments in that member, to the extent not already deducted in calculations in line with article 6 of the EUCRR (or other prudential requirements that apply) for:

      1. (i)

        the ultimate parent undertaking of the sub-group; or

      2. (ii)

        any other member of the sub-group.

    3. (c)

      The deduction in (1)(b) must be carried out separately for each type of capital instrument eligible as own funds.

IFPRU 8.2.11 G RP

The FCA will assess core UK group and non-core large exposure group applications against article 400(2)(c) on a case-by-case basis. The FCA will only approve this treatment for non-core large exposure group undertakings where the conditions in article 400(2)(c) are met. A firm should note that the FCA will still make a wider judgement whether it is appropriate to grant this treatment even where the conditions in article 400(2)(c) are met.

Notification

IFPRU 8.2.12 R RP

A firm must immediately notify the FCA in writing if it becomes aware that any exposure that it has treated as exempt under IFPRU 8.2.6 R or any counterparty that it has been treating as a member of its non-core large exposures group has ceased to meet the conditions for application of the treatment in this section.

Conditions for exemptions

IFPRU 8.2.13 R RP

A firm may only make use of the exemptions provided in this section where the following conditions are met:

  1. (1)

    the specific nature of the exposure, the counterparty or the relationship between the firm and the counterparty eliminate or reduce the risk of the exposure; and

  2. (2)

    any remaining concentration risk can be addressed by other equally effective means, such as the arrangements, processes and mechanisms in article 81 of CRD (Concentration risk).

[Note: article 400(3) of the EU CRR]

Exposures to trustees

IFPRU 8.2.14 G RP

If a firm has an exposure to a person ('A') when A is acting on his own behalf, and also an exposure to A when A acts in his capacity as trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or a similar fund (a "fund"), the firm may treat the latter exposure as if it was to the fund, unless such a treatment would be misleading.

IFPRU 8.2.15 G RP

When considering whether the treatment described is misleading, factors a firm should consider include:

  1. (1)

    the degree of independence of control of the fund, including the relation of the fund's board and senior management to the firm or to other funds or to both;

  2. (2)

    the terms on which the counterparty, when acting as trustee, is able to satisfy its obligation to the firm out of the fund of which it is trustee;

  3. (3)

    whether the beneficial owners of the fund are connected to the firm, or related to other funds managed within the firm's group, or both; and

  4. (4)

    for a counterparty that is connected to the firm itself, whether the exposure arises from a transaction entered into on an arm's length basis.

IFPRU 8.2.16 G RP

In deciding whether a transaction is at arm's length, the following factors should be taken into account:

  1. (1)

    the extent to which the person to whom the firm has an exposure ('A') can influence the firm's operations through, for example, the exercise of voting rights;

  2. (2)

    the management role of A where A is also a director of the firm; and

  3. (3)

    whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.