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IPRU-INV 12.1 APPLICATION AND PURPOSE

Application

IPRU-INV 12.1.1 R
IPRU-INV 12.1.2 G

This chapter amplifies the threshold condition 2D (Appropriate resources) by providing that a firm must meet, on a continuing basis, a basic solvency requirement. This chapter also builds on Principle 4 which requires a firm to maintain adequate financial resources1 by setting out appropriate requirements for a firm according to what type of firm it is.

IPRU-INV 12.1.3 G

Prudential standards have an important role in minimising the risk of harm to consumers by requiring a firm to behave prudently in monitoring and managing business and financial risks.

IPRU-INV 12.1.4 G

More generally, having adequate financial resources1 gives the firm a degree of resilience and some indication to consumers of creditworthiness, substance and the commitment of its owners. The rules in this chapter aim to ensure that a firm has financial resources1 which can provide cover for operational and compliance failures and pay redress, as well as reducing the possibility of a shortfall in funds and providing a cushion against disruption if the firm ceases to trade.

Relevant accounting principles

IPRU-INV 12.1.5 R

A firm must recognise an asset or liability, and measure its amount, in accordance with the relevant accounting principles applicable to it for the purpose of preparing its annual financial statements unless a rule requires otherwise.

Actions for damages

IPRU-INV 12.1.6 R

A contravention of the rules in this chapter does not give rise to a right of action by a private person under section 138D of the Act (and each of those rules is specified under section 138D(3) of the Act as a provision giving rise to no such right of action).

Interpretation

IPRU-INV 12.1.7 R

1The definitions in the glossary at IPRU-INV 12 Appendix 1 apply to terms shown in bold type this chapter. Where the term is italicised, the FCA HandbookGlossary definition applies.

IPRU-INV 12.2 FINANCIAL RESOURCES REQUIREMENTS

General solvency requirement

IPRU-INV 12.2.1 R

A firm must at all times be able to meet its liabilities as they fall due.

General financial resource requirement

IPRU-INV 12.2.2 R

A firm must ensure that at all times its financial resources1 are not less than its financial resources requirement1.

Financial resources requirement: firms carrying on other regulated activities

IPRU-INV 12.2.3 R

The financial resources requirement1 for a firm carrying on one or more regulated activities in addition to operating an electronic system in relation to lending, is the higher of:

  1. (1)

    the financial resources requirement1 which is applied by this chapter; and

  2. (2)

    the financial resources or own funds requirement which is applied by another rule or by directly applicable legislation of the EU to the firm.

Financial resources requirement

IPRU-INV 12.2.4 R

On its accounting reference date in each year, a firm must calculate:

  1. (1)

    the total value of loaned funds outstanding on that date; and

  2. (2)

    the sum of:

    1. (a)

      0.2% of the first £50 million of that total value;

    2. (b)

      0.15% of the next £200 million of that total value;

    3. (c)

      0.1% of the next £250 million of that total value; and

    4. (d)

      0.05% of any remaining total value.

IPRU-INV 12.2.5 R

The total value of loaned funds outstanding is the total amount of funds that are currently being provided to borrowers under P2P agreements through an operator of an electronic system in relation to lending.

IPRU-INV 12.2.6 R

The financial resources requirement1 for a firm to which this chapter applies is the higher of:

  1. (1)

    £50,000; and

  2. (2)

    the sum calculated in accordance with IPRU-INV 12.2.4R(2) for the period until (subject to IPRU-INV 12.2.9R) its next accounting reference date.

IPRU-INV 12.2.7 R

To determine a firm’sfinancial resources requirement1 for the period beginning on the date on which it obtains a Part 4A permission and ending on the day before its next accounting reference date, the firm must carry out the calculation in IPRU-INV 12.2.4R(2) on the basis of the total value of loaned funds the firm projects will be outstanding on the day before its next accounting reference date.

Determining the financial resources requirement

IPRU-INV 12.2.8 G

If the firm has 30,000 individuals each lending £100,000, the total value of the firm’s1loaned funds outstanding is £3,000,000,000. If the firm does not carry on any other regulated activity to which another higher financial resources or own funds requirement applies, its financial resources requirement1 is £1,900,000. This is calculated as follows:

  1. (1)

    0.2% x £50,000,000 = £100,000;

  2. (2)

    0.15% x £200,000,000 = £300,000;

  3. (3)

    0.1% x £250,000,000 = £250,000;

  4. (4)

    0.05% x £2,500,000,000 = £1,250,000.

Recalculating the financial resources requirement

IPRU-INV 12.2.9 R

If the firm experiences a greater than 25% increase in the total value of loaned funds outstanding compared to the value used in its last financial resources requirement1 calculation, it must recalculate its financial resources requirement1 using the higher total value of loaned funds outstanding.

IPRU-INV 12.2.10 R

A firm must notify the FCA of any change, or any likely change, in its financial resources requirement1 within 14 days of that change, or it becoming aware that the change is likely, whichever is the earlier.

IPRU-INV 12.3 CALCULATION OF FINANCIAL RESOURCES

IPRU-INV 12.3.1 R
  1. (1)

    A firm must at all times have available the amount and type of financial resources1 required by this chapter (see IPRU-INV 12.3.2R).

  2. (2)

    In arriving at its calculation of its financial resources1, a firm must deduct certain items (see IPRU-INV 12.3.3R).

IPRU-INV 12.3.2 R

Table: Items which are eligible to contribute to the financial resources of a firm

Item

Additional explanation

1.

Share capital

This must be fully paid and may include:

(1)

ordinary share capital; or

(2)

preference share capital (excluding preference shares redeemable by shareholders within two years).

2.

Capital other than share capital (for example, the capital of a sole trader, partnership or limited liability partnership)

The capital of a sole trader is the net balance on the firm's capital account and current account. The capital of a partnership is the capital made up of the partners':

(1)

capital account, that is the account:

(a)

into which capital contributed by the partners is paid; and

(b)

from which, under the terms of the partnership agreement, an amount representing capital may be withdrawn by a partner only if:

( i) he ceases to be a partner and an equal amount is transferred to another such account by his former partners or any person replacing him as their partner; or

(ii) the partnership is otherwise dissolved or wound up; and

(2)

current accounts according to the most recent financial statement.

For the purpose of the calculation of financial resources1, in respect of a defined benefit occupational pension scheme:

(1)

a firm must derecognise any defined benefit asset;

(2)

a firm may substitute for a defined benefit liability the firm'sdeficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

3.

Reserves (Note 1)

These are, subject to Note 1, the audited accumulated profits retained by the firm (after deduction of tax, dividends and proprietors' or partners' drawings) and other reserves created by appropriations of share premiums and similar realised appropriations. Reserves also include gifts of capital, for example, from a parent undertaking.

For the purposes of calculating financial resources1, a firm must make the following adjustments to its reserves, where appropriate:

(1)

a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on debt instruments held, or formerly held, in the available-for-sale financial assets category;

(2)

a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on cash flow hedges of financial instruments measured at cost or amortised cost;

(3)

in respect of a defined benefit occupational pension scheme:

(a)

a firm must derecognise any defined benefit asset;

(b)

a firm may substitute for a defined benefit liability the firm'sdeficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

4.

Interim net profits (Note 1)

If a firm seeks to include interim net profits in the calculation of its financial resources1, the profits have, subject to Note 1, to be verified by the firm's external auditor, net of tax, anticipated dividends or proprietors' drawings and other appropriations.

5.

Revaluation reserves

6.

Subordinated loans/debt

Subordinated loans/debt must be included in financial resources1 on the basis of the provisions in this chapter that apply to subordinated loans/debt.

Note:

1

Reserves must be audited and interim net profits, general and collective provisions must be verified by the firm's external auditor unless the firm is exempt from the provisions of Part VII of the Companies Act 1985 (section 249A (Exemptions from audit)) or, where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit)) relating to the audit of accounts.

IPRU-INV 12.3.3 R

Table: Items which must be deducted in arriving at financial resources

1

Investments in own shares

2

Investments in subsidiaries (Note 1)

3

Intangible assets (Note 2)

4

Interim net losses (Note 3)

5

Excess of drawings over profits for a sole trader or a partnership (Note 3)

Notes

1. Investments in subsidiaries are the full balance sheet value.

2. Intangible assets are the full balance sheet value of goodwill, capitalised development costs, brand names, trademarks and similar rights and licences.

3. The interim net losses in row 4, and the excess of drawings in row 5, are in relation to the period following the date as at which the capital resources are being computed.

Subordinated loans/debt

IPRU-INV 12.3.4 R

A subordinated loan/debt must not form part of the financial resources1 of the firm unless it meets the following conditions:

  1. (1)

    it has an original maturity of:

    1. (a)

      at least five years; or

    2. (b)

      it is subject to five years’ notice of repayment;

  2. (2)

    the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;

  3. (3)

    the only events of default must be non-payment of any interest or principal under the debt agreement or the winding up of the firm and such event of default must not prejudice the subordination in (2);

  4. (4)

    the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated loan/debt must be limited to petitioning for the winding up of the firm or proving the debt and claiming in the liquidation of the firm;

  5. (5)

    the subordinated loan/debt must not become due and payable before its stated final maturity date except on an event of default complying with (3);

  6. (6)

    the agreement and the debt are governed by the law of England and Wales, or of Scotland or of Northern Ireland;

  7. (7)

    to the fullest extent permitted under the rules of the relevant jurisdiction, creditors must waive their right to set off amounts they owe the firm against subordinated amounts owed to them by the firm;

  8. (8)

    the terms of the subordinated loan/debt must be set out in a written agreement that contains terms that provide for the conditions set out in this rule; and

  9. (9)

    the loan/debt must be unsecured and fully paid up.

IPRU-INV 12.3.5 G

When calculating its financial resources1, the firm must exclude any amount by which the aggregate amount of its subordinated loans/debts exceeds the amount calculated as follows:

a – b

where:

a

=

Items 1 -5 in the table of items which are eligible to contribute to a firm’sfinancial resources1 (see IPRU-INV 12.3.2R)

b

=

Items 1- 5 in the table of items which must be deducted from a firm’sfinancial resources1 (see IPRU-INV 12.3.3R)

IPRU-INV 12.3.6 G

IPRU-INV 12.3.5R can be illustrated as follows:

1

    Share Capital

    £20,000

    Reserves

    £30,000

    Subordinated loans/debts

    £10,000

    Intangible Assets

    £10,000

    As subordinated loans/debts (£10,000) are less than the total of share capital + reserves – intangible assets (£40,000) the firm need not exclude any of its subordinated loans/debts pursuant to IPRU-INV 12.3.5R. Therefore, total financial resources1 will be £50,000.

    Share Capital

    £20,000

    Reserves

    £30,000

    Subordinated loans/debts

    £60,000

    Intangible Assets

    £10,000

    As subordinated loans/debts (£60,000) exceed the total of share capital + reserves – intangible assets (£40,000) by £20,000, the firm should exclude £20,000 of its subordinated loans/debts when calculating its financial resources1. Therefore, total financial resources1 will be £80,000.

IPRU-INV 12.4 NOTIFICATION REQUIREMENTS

IPRU-INV 12.4.1 G

Handbook reference

Matter to be notified

Contents of notification

Trigger event

Time allowed

IPRU-INV 12.2.10R

A change or likely change, in a firm’sfinancial resources requirement 1

The financial resources requirement 1 as recalculated

A greater than 25% increase in the firm’s total value of the amount of loaned funds outstanding compared to the value used in its last financial resources requirement 1 calculation

Within 14 days of the trigger event