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IPRU-INV 13.1 APPLICATION, GENERAL REQUIREMENTS AND PROFESSIONAL INDEMNITY INSURANCE REQUIREMENTS

Application

IPRU-INV 13.1.1 R RP
  1. (1)

    This chapter applies to a firm which is a personal investment firm.

  2. (2)

    For a personal investment firm which is an exempt CAD firm, the following apply:

    1. (a)

      sections 13.1 and 13.1A; and

    2. (b)

      if it is not an opted-in exempt CAD firm, sections 13.2 to 13.8; or

    3. (c)

      if it is an opted-in exempt CAD firm, sections 13.9 to 13.12 (but reading references to category B firm as references to the firm).

  3. (3)

    For a personal investment firm which is a category B firm, section 13.1 and sections 13.9 to 13.12 apply.

Purpose

IPRU-INV 13.1.2 G RP

This chapter amplifies threshold condition 4 (Adequate resources) by providing that a firm must meet, on a continuing basis, a basic solvency requirement and a minimum capital resources requirement. This chapter also amplifies Principles 3 and 4 which require a firm to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems and to maintain adequate financial resources by setting out capital resources for a firm according to the regulated activity or activities it carries on.

IPRU-INV 13.1.3 G RP

Although financial resources and appropriate systems and controls can generally mitigate operational risk, professional indemnity insurance has a role in mitigating the risks a firm faces in its day-to-day operations, including those arising from not meeting the legally required standard of care when advising on investments. The purpose of the rules in this section is also to ensure that a firm has in place the type, and level, of professional indemnity insurance necessary to mitigate these risks. This includes, in the case of a UK firm exercising an EEA right, cover for breaches of obligations imposed by or under laws, or provisions having the force of law, in each EEA State in which the firm carries on business.

General Requirements

IPRU-INV 13.1.4 R RP

A firm must at all times:

  1. (1)

    have and maintain capital resources of the kinds and amounts specified in, and calculated in accordance with, the rules of this chapter; and

  2. (2)

    be able to meet its liabilities as they fall due.

Requirement to Hold Professional Indemnity Insurance

IPRU-INV 13.1.5 R RP

A firm must take out and maintain at all times professional indemnity insurance that is at least equal to the requirements in this section from:

  1. (1)

    an insurance undertaking which is authorised to transact professional indemnity insurance in the EEA; or

  2. (2)

    a person of equivalent status in:

    1. (a)

      a Zone A country;

    2. (b)

      the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

[Note:

Article 4(3) of the Insurance Mediation Directive]

IPRU-INV 13.1.6 R RP

An exempt CAD firm is not required to effect and maintain professional indemnity insurance unless it chooses this option (see 13.1A).

Comparable Guarantee

IPRU-INV 13.1.7 R RP
  1. (1)

    A firm is not required to effect or maintain professional indemnity insurance if a bank, building society or an insurer provides the firm with a comparable guarantee.

  2. (2)

    If the firm is a member of a group in which there is a bank, building society or an insurer, the firm's comparable guarantee must be from that bank, building society or insurer.

  3. (3)

    A comparable guarantee means an enforceable, written agreement on terms at least equal to those required by IPRU-INV 13.1.9R to 13.1.13R, as appropriate.

Relevant income

IPRU-INV 13.1.8 R RP

The term "relevant income" in this section refers to all income received or receivable which is commission, brokerage, fees or other related income, whether arising from the firm'spermitted activities or not, for the last accounting year prior to inception or renewal of the professional indemnity insurance policy ("the policy").

Policy Terms

IPRU-INV 13.1.9 R RP

The policy must incorporate terms which are appropriate and must make provision for cover in respect of any claim for loss or damage, for which the firm may be liable as a result of an act or omission by:

  1. (1)

    the firm; or

  2. (2)

    any person acting on behalf of the firm including employees, appointed representatives or its other agents.

Limits of Indemnity

IPRU-INV 13.1.10 R RP

If the firm is an IMD insurance intermediary, whether or not it is also an exempt CAD firm, the appropriate minimum limits of indemnity per year are no lower than:

  1. (1)

    EUR 1,120,200 for a single claim against the firm; and

  2. (2)

    EUR 1,680,300 in the aggregate.

[Note: Article 4(3) of the Insurance Mediation Directive]

IPRU-INV 13.1.11 R RP

If the firm is an exempt CAD firm that maintains professional indemnity insurance under 13.1A.3(1)(b), the appropriate minimum limits of indemnity per year are no lower than:

  1. (1)

    EUR 1,000,000 for a single claim against the firm; and

  2. (2)

    EUR 1,500,000 in the aggregate.

[Note: Article 67(3) of MiFID and article 31(1) of the CRD (see also rule 13.1A.3)]

IPRU-INV 13.1.12 R RP

If the firm is both an IMD insurance intermediary and an exempt CAD firm that maintains professional indemnity insurance under 13.1A.4(1)(b), the appropriate additional limits of indemnity to 13.1.10R per year are no lower than:

  1. (1)

    EUR 500,000 for a single claim against the firm; and

  2. (2)

    EUR 750,000 in the aggregate.

[Note: Article 67(3) of MiFID and article 31(2) of the CRD (see also rule 13.1A.4)]

IPRU-INV 13.1.13 R RP

If the firm is not an IMD insurance intermediary or an exempt CAD firm, then the following limits of indemnity apply:

  1. (1)

    if the firm has relevant income of up to £3,000,000, no lower than £500,000 for a single claim against the firm and £500,000 in the aggregate; or

  2. (2)

    if the firm has relevant income of more than £3,000,000, no lower than £650,000 for a single claim against the firm and £1,000,000 in the aggregate.

IPRU-INV 13.1.14 G RP

Article 4(7) of the Insurance Mediation Directive requires the limits of indemnity to be reviewed every five years to take into account movements in European consumer prices. These limits will therefore be subject to further adjustments on the basis of index movements advised by the European Commission.

IPRU-INV 13.1.15 R RP

If a policy is denominated in any currency other than euros, a firm must take reasonable steps to ensure that the limits of indemnity are, when the policy is effected (i.e. agreed) and at renewal, at least equivalent to those denominated in euros.

IPRU-INV 13.1.16 G RP

A firm should consider whether the overall cover is adequate taking account of 13.1.22G(2) and whether the firm should seek additional cover or legal expenses insurance. (Legal defence costs are costs of defence against claims that fall under the terms of the policy.)

IPRU-INV 13.1.17 G RP

The cover provided by the policy should be wide enough to include the liability of the firm, its appointed representatives, its tied agents, employees and its agents for breaches under the regulatory systems or civil law. If the firm operates outside the United Kingdom then the policy should cover other regulatory requirements imposed under the laws of other countries in which the firm operates.

Policies Providing for more than one Firm

IPRU-INV 13.1.18 R RP

If the policy provides cover to more than one firm then:

  1. (1)

    The relevant income for calculating the limits of indemnity is that of all the firms named in the policy combined;

  2. (2)

    each firm named in the policy must have the benefit of the minimum limits of indemnity as required in this section; and

  3. (3)

    each firm named in the policy must notify the FSA if the aggregate cover in the policy falls below the minimum limits of indemnity.

Limits of Indemnity - Additional Requirements

IPRU-INV 13.1.19 R RP

In addition to the specific requirements in

13.1.9R to 13.1.13R

, the policy must make provision for the following:

  1. (1)

    for a firm with relevant income of more than £6,000,000, the aggregate limit identified in the table below:

  2. Relevant income is (£)

    Minimum aggregate limit of indemnity

    more than

    up to

    (£)

    6,000,000

    7,000,000

    1,150,000

    7,000,000

    8,000,000

    1,300,000

    8,000,000

    9,000,000

    1,450,000

    9,000,000

    10,000,000

    1,600,000

    10,000,000

    12,500,000

    2,000,000

    12,500,000

    15,000,000

    2,400,000

    15,000,000

    17,500,000

    2,800,000

    17,500,000

    20,000,000

    3,150,000

    20,000,000

    25,000,000

    3,800,000

    25,000,000

    30,000,000

    4,250,000

    30,000,000

    35,000,000

    4,500,000

    35,000,000

    40,000,000

    4,750,000

    40,000,000

    50,000,000

    5,500,000

    50,000,000

    60,000,000

    6,000,000

    60,000,000

    70,000,000

    6,750,000

    70,000,000

    80,000,000

    7,250,000

    80,000,000

    90,000,000

    7,750,000

    90,000,000

    100,000,000

    8,500,000

    100,000,000

    150,000,000

    11,250,000

    150,000,000

    200,000,000

    14,000,000

    200,000,000

    250,000,000

    17,000,000

    250,000,000

    300,000,000

    19,750,000

    300,000,000

    n/a

    22,500,000

  3. (2)

    full retroactive cover in respect of the kinds of liabilities described in 13.1.9R for claims arising from work carried out by the firm, or on its behalf, in the past; and

  4. (3)

    cover in respect of Ombudsman awards made against the firm.

Limitations

IPRU-INV 13.1.20 R RP

The policy must not be subject to conditions or exclusions which unreasonably limit its cover (whether by exclusion of cover, by policy excesses or otherwise).

Exclusions

IPRU-INV 13.1.21 R RP

The policy must not:

  1. (1)

    exclude any type of business or activity that has been carried out by the firm in the past or will be carried out by the firm during the time for which the policy is in force; or

  2. (2)

    exclude liabilities which are identified or crystallised as a result of regulatory action against the firm (either individually or as a member of a class of authorised persons);

unless the firm holds additional capital resources, in accordance with 13.1.23R.

IPRU-INV 13.1.22 G RP
  1. (1)

    The FSA considers it reasonable for a firm's policy to exclude cover for:

    1. (a)

      specific business lines if that type of business has not been carried out by the firm in the past and will not be carried out by the firm during the life of the policy; or

    2. (b)

      specific claims that have been previously notified to the firm'sinsurer and claimed for under another policy.

  2. (2)

    The FSA does not consider it reasonable for a firm's policy to treat legal defence costs cover as part of the limits of indemnity if this reduces the cover available for any individual substantive claim.

Additional Capital Resources - Exclusions

IPRU-INV 13.1.23 R RP

The amount of additional capital resources that a firm must hold as a result of an exclusion under 13.1.21R should be calculated by referring to the firm's relevant income in the following table:

Relevant income £000s

Minimum additional capital resources

more than

up to

£000s

(Notes 1 and 2)

0

100

5

100

200

12

200

300

18

300

400

21

400

500

23

500

600

25

600

700

27

700

800

28

800

900

30

900

1,000

31

1,000

1,500

37

1,500

2,000

42

2,000

2,500

46

2,500

3,000

51

3,000

3,500

55

3,500

4,000

59

4,000

4,500

63

4,500

5,000

67

5,000

6,000

73

6,000

7,000

79

7,000

8,000

85

8,000

9,000

90

9,000

10,000

95

10,000

100,000

95y

100,000

n/a

950

Note 1 - For firms with relevant income of more than £10m but up to £100m value y is calculated by relevant income/ £10m.

Note 2 - The calculation of a firm's capital resources is set out in sections 13.1A to 13.12 (see rule 13.1.1 for application of these sections to an exempt CAD firm and a category B firm).

IPRU-INV 13.1.24 G RP

The firm should hold additional capital resources in excess of those minimum amounts set out in the table in 13.1.23R where the required amounts of additional capital resources provide insufficient cover, taking into account the firm's individual circumstances.

Excess Level

IPRU-INV 13.1.25 R RP

The policy must not make provision for payment by the firm of an excess on any claim of more than £5,000, unless the firm holds additional capital resources, in accordance with 13.1.27R.

IPRU-INV 13.1.26 R

The reference to "excess" is to the highest excess level required to be paid under the policy unless that excess relates to a type of business that has not been carried out by the firm in the past. In those circumstances, the reference is to the next highest excess level required by the policy applicable to a type of business that has been carried out by the firm in the past.

Additional Capital Resources - Excess

IPRU-INV 13.1.27 R RP

The amount of additional capital resources that a firm must hold where the policy's excess on any claim is more than £5,000 must be calculated by referring to the firm's relevant income and excess obtained in the following table:

All amounts are shown in £000s (Notes 1 and 2)

Relevant income is

Excess obtained, up to and including

more than

up to

5

10

15

20

25

30

40

50

75

100

150

200+

0

100

0

4

7

9

12

14

18

21

28

34

45

54

100

200

0

7

11

14

17

20

25

29

38

46

59

70

200

300

0

9

14

18

21

24

30

35

45

54

69

82

300

400

0

11

16

21

24

28

34

39

50

60

77

91

400

500

0

13

18

23

27

30

37

43

55

66

83

98

500

600

0

14

20

25

29

33

40

46

59

70

89

105

600

700

0

16

22

27

31

35

42

49

63

74

94

111

700

800

0

17

23

28

33

37

45

52

66

78

99

117

800

900

0

18

24

30

35

39

47

54

69

82

103

122

900

1,000

0

19

26

31

36

41

49

56

72

85

107

126

1,000

1,500

0

23

31

37

43

48

57

66

83

99

124

146

1,500

2,000

0

26

35

42

48

54

64

73

93

109

138

161

2,000

2,500

0

29

38

46

53

59

71

81

102

121

152

179

2,500

3,000

0

32

42

51

58

65

78

89

112

132

166

195

3,000

3,500

0

35

46

55

63

71

84

96

121

142

179

210

3,500

4,000

0

38

50

59

68

76

90

102

129

152

191

223

4,000

4,500

0

41

53

63

72

80

95

108

137

161

202

236

4,500

5,000

0

43

56

67

76

85

100

114

144

169

212

248

5,000

6,000

0

48

62

73

84

93

110

125

157

185

231

271

6,000

7,000

0

52

67

79

90

101

119

135

169

199

249

291

7,000

8,000

0

56

72

85

97

107

127

144

181

212

265

310

8,000

9,000

0

59

76

90

103

114

134

152

191

224

280

328

9,000

10,000

0

63

80

95

108

120

141

160

201

236

294

344

10,000

100,000

0

63y

80y

95y

108y

120y

141y

160y

201y

236y

294y

344y

100,000

n/a

0

630

800

950

1080

1200

1410

1600

2010

2360

2940

3440

Note 1 - For firms with relevant income more of £10m but up to £100m value y is calculated by relevant income/ £10m.

Note 2 - The calculation of a firm's capital resources is set out in sections 13.1A to 13.12 (see rule 13.1.1 for application of these sections to an exempt CAD firm and a category B firm).

Notification Requirements

IPRU-INV 13.1.28 R RP

A firm must notify the FSA immediately if it becomes aware, or has information which reasonably suggests, that any of the following matters in relation to its professional indemnity insurance has occurred, may have occurred or may occur in the foreseeable future:

  1. (1)

    professional indemnity insurance cannot be obtained within 28 days of the inception or renewal date;

  2. (2)

    professional indemnity insurance is cancelled;

  3. (3)

    the amount of aggregate cover is exhausted;

  4. (4)

    the firm commences business lines for which it had not obtained cover;

  5. (5)

    the firm is relying on a policy cover for more than one firm; or

  6. (6)

    the firm is relying on a comparable guarantee provided in accordance with the rules in this chapter.

IPRU-INV 13.1.29 G RP

For the purposes of the provisions relating to professional indemnity insurance, "additional capital resources" means readily realisable own funds. The FCA expects items included in own funds to be regarded as "readily realisable" only if they can be realised, at any given time, within 90 days.

IPRU-INV 13.1A FINANCIAL RESOURCES REQUIREMENTS FOR AN EXEMPT CAD FIRM

Application

IPRU-INV 13.1A.1 R RP

This section applies to a personal investment firm which is an exempt CAD firm.

Initial capital and professional indemnity insurance requirements

IPRU-INV 13.1A.2 R RP

The financial resources requirement for a personal investment firm which is an exempt CAD firm is the higher of:

  1. (1)

    the requirement that is applied by section 13.1A; and

  2. (2)
    1. (a)

      the requirement that is applied by sections 13.2 to 13.8

    2. (b)

      if it is an opted-in exempt CAD firm, the requirement that is applied by sections 13.9 to 13.12 (but reading references to Category B firm as references to the firm).

IPRU-INV 13.1A.3 R RP
  1. (1)

    A firm which is not an IMD insurance intermediary must have:

    1. (a)

      initial capital of EUR 50,000; or

    2. (b)

      professional indemnity insurance at least equal to the requirements of

      13.1.4(2)(b) and 13.1.4(3) to 13.1.6; or

    3. (c)

      a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to (a) or (b).

      [Note: Article 67(3) of MiFID and article 31(1) of the CRD (see also rule

      13.1.4(2)(b))]

  2. (2)

    If a firm chooses to comply with either (b) or (c) above, it must nevertheless have initial capital of at least £10,000.

IPRU-INV 13.1A.4 R RP
  1. (1)

    A firm that is also an IMD insurance intermediary must have professional indemnity insurance at least equal to the limits set out in 13.1.4(2)(b) and in addition has to have:

    1. (a)

      initial capital of EUR 25,000; or

    2. (b)

      professional indemnity insurance at least equal to the

      requirements of 13.1.4(2)(c) and 13.1.4(3) to 13.1.6; or

    3. (c)

      a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to (a) or (b).

[Note: Article 67(3) of MiFID and article 31(2) of the CRD (see also

rule

13.1.12 )]

  1. (2)

    If a firm chooses to comply with either (b) or (c) above, it must nevertheless have initial capital of at least £20,000.

IPRU-INV 13.1A.5 G RP

A trade-off between initial capital and professional indemnity insurance is appropriate such that EUR 1 of initial capital is the equivalent of professional indemnity insurance cover of EUR 20 for a single claim against the firm and EUR 30 in aggregate.

Initial capital

IPRU-INV 13.1A.6 R RP

A firm'sinitial capital consists of the sum of the following items:

  1. (1)

    ordinary share capital which is fully paid;

  2. (2)

    perpetual non-cumulative preference share capital which is fully paid;

  3. (3)

    share premium account;

  4. (4)

    reserves excluding revaluation reserves;

  5. (5)

    audited retained earnings;

  6. (6)

    externally verified interim net profits;

  7. (7)

    partners' capital;

  8. (8)

    eligible LLP members' capital (in accordance with the provisions of IPRU-INV Annex A); and

  9. (9)

    sole trader capital.

Perpetual non-cumulative preference share capital

IPRU-INV 13.1A.7 R RP

A firm may include preference share capital in initial capital only where any coupon on it is not cumulative, and the firm is under no obligation to pay a coupon in any circumstances.

Audited retained earnings

IPRU-INV 13.1A.8 R RP

When calculating initial capital, a firm may include its audited retained earnings only after making the following adjustments:

  1. (1)

    a firm must not recognise the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost;

  2. (2)

    in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;

  3. (3)

    a firm must not include any unrealised gains from investment property (these should be reported as part of revaluation reserves);

  4. (4)

    where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but excluding from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

Externally verified interim net profits or current account

IPRU-INV 13.1A.9 G RP

A firm may include interim net profits or current account when calculating initial capital to the extent that they have been verified by the firm's external auditor and are net of any foreseeable tax, dividend and other appropriations.

IPRU-INV 13.1A.10 R RP

When calculating initial capital, a firm may include its partners' capital only after making the following adjustments:

  1. (1)

    a firm must not recognise the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost;

  2. (2)

    in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;

  3. (3)

    where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but excluding from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

Defined benefit pension scheme: defined benefit liability

IPRU-INV 13.1A.11 R RP

For the calculation of initial capital, a firm may substitute for a defined benefit liability the firm'sdeficit reduction amount. The election must be applied consistently in respect of any one financial year.

IPRU-INV 13.1A.12 R RP

A firm should keep a record of and be ready to explain to its supervisory contacts in the FSA the reasons for any difference between the deficit reduction amount and any commitment the firm has made in any public document to provide funding in respect of a defined benefit occupational pension scheme.

Ongoing capital requirements

IPRU-INV 13.1A.13 R RP

A firm must, at all times, maintain a combination of professional indemnity insurance and own funds, at least equal to the requirements in this chapter for professional indemnity insurance and initial capital.

IPRU-INV 13.1A.14 R RP

A firm'sinitial capital:

minus the sum of the items set out against B

plus the sum of the items set out against C

minus material holdings in credit and financial institutions and material insurance holdings

equals own funds.

IPRU-INV 13.1A.15 R RP

This table forms part of rule 13.1A.14

(1)

Investments in own shares at book value

B

(2)

Intangible assets

(3)

Material current year losses

(4)

Excess of current year drawings over current year profits

(1)

Revaluation reserves

C

(2)

Perpetual cumulative preference share capital and debt capital

(3)

Long-term subordinated loans (in accordance with IPRU-INV 13.5.5AR)

(4)

Fixed term preference share capital (if not redeemable by shareholders within 5 years)

Perpetual cumulative preference share capital

IPRU-INV 13.1A.16 R RP

Perpetual cumulative preference share capital may not be included in the calculation of own funds unless it meets the following requirements:

  1. (1)

    it may not be reimbursed on the holder's initiative or without the prior agreement of the

    FSA

    ;

  2. (2)

    the instrument must provide for the firm to have the option of deferring the dividend payment on the share capital;

  3. (3)

    the shareholder's claims on the firm must be wholly subordinated to those of all non-subordinated creditors;

  4. (4)

    the terms of the instrument must provided for the loss-absorption capacity of the share capital and unpaid dividends, whilst enabling the firm to continue its business; and

  5. (5)

    it must be fully paid-up.

Own funds - Restrictions

IPRU-INV 13.1A.17 R RP
  1. (1)

    In calculating own funds:

    1. (i)

      the total amount of revaluation reserves, perpetual cumulative preference share capital, long-term subordinated loans and fixed term preference share capital must not exceed 100% of initial capital minus the sum of the items set out against B; and

    2. (ii)

      the total amount of fixed term preference share capital and long-term subordinated loans must not exceed 50% of initial capital minus the sum of the items set out against B.

IPRU-INV 13.2 FINANCIAL RESOURCES TESTS

IPRU-INV 13.2.1 R

An exempt CAD firm must meet:

  1. (1)

    [deleted]

  2. (2)

    Financial Resources Test 1A (the Adjusted Net current assets Test) calculated in accordance with section 13.4; and

  3. (3)

    Financial Resources Test 2 (the Expenditure-based Test) calculated in accordance with section 13.5.

IPRU-INV 13.2.2 G

[deleted]

IPRU-INV 13.2.3 G

Table 13A is a summary of the financial resources test for exempt CAD firm.

Table 13.A

This table forms part of guidance 13.2.3

SUMMARY OF FINANCIAL RESOURCES FOR EXEMPT CAD FIRMS

Type of firm

Financial Resources Test 1A

Financial Resources Test 2

Rules/section references

Adjusted net current assets Test

Expenditure-based Test

Exempt CAD firm

Adjusted net current assets of £1

Financial resources equal to the highest of

13.1A.14

13.4

4/52 of Relevant Annual Expenditure

13.5.1D and

13.5.2 to

13.5.4

or

13/52 of Relevant Annual Expenditure without special adjustments

or

£400 per adviser

Exempt CAD firm which is a network

Adjusted net current assets of £1

Financial resources equal to the higher of

13.1A.14

13.4

13/52 of Relevant Annual Expenditure

13.5.1B and

13.5.2 to

or

13.5.4

£400 per adviser

IPRU-INV 13.3 FINANCIAL RESOURCES TEST 1 - OWN FUNDS

IPRU-INV 13.3.1 R

[deleted]

IPRU-INV 13.3.1A G

[deleted]

IPRU-INV 13.3.2 R

[deleted]

IPRU-INV 13.3.2A R

[deleted]

IPRU-INV 13.3.2B G

[deleted]

Table 13.3.2(2)

[deleted]

Alternative to Financial Resources Test 1

IPRU-INV 13.3.3 R

[deleted]

IPRU-INV 13.3.3A R

[deleted]

IPRU-INV 13.3.3B R

[deleted]

IPRU-INV 13.4 FINANCIAL RESOURCES TEST 1A - ADJUSTED NET CURRENT ASSETS

IPRU-INV 13.4.1 R

An exempt CAD firm must adjust its net current assets as follows:

  1. (1)

    exclude assets which cannot be realised or recovered within twelve months;

  2. (2)

    exclude amounts receivable from connected persons to the extent that they are not properly secured, except amounts that are deposits referred to at item (11) in Part I of table 13.5.4(1) or at item (11) in Part I of table 13.5.4(2);

  3. (3)

    value investments at current market value, using the bid price for a net long position in an investment and the offer price for a net short position in an investment;

  4. (4)

    where applicable, deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

IPRU-INV 13.4.2 R

An exempt CAD firm must at all times have adjusted net current assets of at least £1.

IPRU-INV 13.5 FINANCIAL RESOURCES TEST 2 - EXPENDITURE-BASED REQUIREMENT

Requirement

IPRU-INV 13.5.1 R

[deleted]

IPRU-INV 13.5.1A R

[deleted]

IPRU-INV 13.5.1B R

An exempt CAD firm which is a network must have financial resources calculated in accordance with whichever of (1), or (2) produces the higher amount:

  1. (1)

    13/52 of its relevant annual expenditure, calculated in accordance with rule 13.5.2; or

  2. (2)

    an amount equal to £400 multiplied by the number of its advisers.

IPRU-INV 13.5.1C R

[deleted]

IPRU-INV 13.5.1D R
  1. (1)

    [deleted]

  2. (2)

    An exempt CAD firm which is not permitted to carry on the activity of managing investments or to delegate such activity to an investment firm must have financial resources calculated in accordance with whichever of (3), (4) or (5) produces the highest amount.

  3. (3)

    Financial resources which taking into account all the special adjustments amount to 4/52 of its relevant annual expenditure calculated in accordance with rules 13.5.2; or

  4. (4)

    financial resources which disregarding all the special adjustments amount to 13/52 of its relevant annual expenditure, calculated in accordance with rules 13.5.2; or

  5. (5)

    financial resources taking into account all the special adjustments of an amount equal to £400 multiplied by the number of its advisers.

Calculation of Relevant Annual Expenditure

IPRU-INV 13.5.2 R
  1. (1)

    An exempt CAD firm must calculate its relevant annual expenditure by reference to the amount described as total expenditure in its most recently prepared set of annual financial statements. If those statements were for a period other than 12 months, the amounts in the firm's profit and loss account must be adjusted proportionately.

  2. (2)

    Where an exempt CAD firm has just begun trading or has not been authorised long enough to submit such statements, the firm must calculate its relevant annual expenditure on the basis of forecast or other appropriate accounts submitted to the FCA.

  3. (3)

    An exempt CAD firm may, subject to rule 13.5.3, deduct from its total expenditure the items set out in table 13.5.2.

Table 13.5.2

This table forms part of rule 13.5.2

DEDUCTIONS FROM EXPENDITURE

(a)

Staff bonuses (except to the extent that they are guaranteed);

(b)

employees' and directors'shares in profits (except to the extent that the amount is guaranteed);

(c)

other appropriations of profits;

(d)

shared commissions paid which are directly related to commissions received;

(e)

interest charges in respect of borrowing made to finance the acquisition of its readily realisable investments;

(f)

interest paid to clients on client money;

(g)

interest paid to counterparties;

(h)

fees, brokerage and other charges paid to recognised clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;

(i)

foreign exchange losses;

(j)

a firm must not deduct any exceptional expenditure.

IPRU-INV 13.5.2A G
  1. (1)

    Salaries of directors or partners are not eligible for deduction, except to the extent that they can be demonstrated to be non-fixed costs of the firm.

  2. (2)

    The deduction in item (c) is intended to cover forms of remuneration, other than those set out in (b), that are not fixed or guaranteed.

Adjustments to Calculation of Relevant Annual Expenditure

IPRU-INV 13.5.3 R

A firm must ensure that the expenditure base properly reflects the ongoing annual operating costs of the firm by having proper regard to its circumstances when deciding whether to include or exclude any item of expenditure or to make any other adjustment to the calculation of relevant annual expenditure.

IPRU-INV 13.5.3A G

In rule 13.5.3 the FCA would expect a firm to take proper account of the effect of, for example, the ongoing annual operating costs of the firm being met by another party, or of a significant change in the structure of the firm's business during the year.

Calculation of Financial Resources to Meet Tests 1, 1A OR 2

IPRU-INV 13.5.4 R

An exempt CAD firm must be able to calculate its financial resources at any time on the basis of the balance sheet it could draw up at that time. For this purpose:

  1. (1)

    [deleted]

  2. (2)

    An exempt CAD firm must, adjust the assets in the balance sheet as specified in table 13.5.4(2) and include the liabilities after making the adjustments specified in table 13.5.4(2).

  3. (3)

    the assets and liabilities in the balance sheet are also subject to the following adjustments:

    1. (a)

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

    2. (b)

      in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined business asset:

    3. (c)

      a firm may substitute for a defined benefit liability the firm'sdeficit reduction amount. The election must be applied consistently in respect of any one financial year;

    4. (d)

      where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

IPRU-INV 13.5.4A R

[deleted]

TABLE 13.5.4(1) PART I [DELETED]

TABLE 13.5.4(1) PART II [DELETED]

Table 13.5.4(2) Part I

This table forms part of rule 13.5.4

EXEMPT CAD FIRM

ASSETS

CALCULATION

TYPE OF ADJUSTMENT

(1) Land and Buildings

Exclude in full. (A loan secured by a charge on land and buildings may be deducted from liabilities in accordance with item (14) of Part II of this table.

An Illiquid

Adjustment

(2) Investments

Exclude in full the value of shares in connected companies.

Include any net long position in any fixed or current asset investment

(a) valued at its current bid price (or, in the case of a with profits life policy, at its surrender value), and

(b) discounted by the applicable percentage specified in table 13.5.4A.

An Illiquid

Adjustment

A Position Risk

Adjustment

(3) Investments subject to Repurchase, Reverse Repurchase, Stock Borrowing or Stock Lending transactions

Include investments for which the firm has entered as principal into a repurchase, reverse repurchase, stock borrowing or stock lending transaction, after making (I) a deduction in accordance with item (2), and (II) a deduction calculated by

(a) computing the firm's exposure (the difference between the market value of the securities and the loan or collateral (including accrued interest) where that difference is not in the firm's favour, after adjusting for any excess collateral), and

(b) multiplying that exposure by the applicable percentage in table 13.5.4C.

A Position Risk

Adjustment

A Counterparty

Risk Adjustment

(4) Debtors relating to Unsettled Securities Transactions - Cash against Documents

Include debtors where the firm has entered into a transaction in securities or units in collective investment schemes as agent on a cash against documents basis and the transaction remains unsettled, after deducting an amount calculated by

(a) computing the difference between the agreed settlement price for those investments and their current market value where that difference is not in the firm's favour, and

(b) multiplying that difference by the applicable percentage specified in table 13.5.4B.

A Counterparty

Risk Adjustment

(5) Debtors relating to Unsettled Securities Transactions - Free Deliveries

Where the firm has delivered securities or units in collective investment schemes before receiving payment for them, or paid for such investments before receiving certificates of good title for them, and not more than 3 days have passed since delivery, include debtors after deducting an amount calculated by

(a) (i) (where the firm has delivered them) computing the full amount due to a firm under the contract;

(ii) (where the firm has paid for them) computing their current market value; and

(b) multiplying the amount or value at (a) by the applicable percentage specified in table 13.5.4C.

Exclude debtors if more than 3 days have passed since delivery.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(6) Regulated collective investment schemes

Include an amount owing in respect of a transaction in units in a regulated collective investment scheme only

(a) if the amount has been due and unpaid for less than 90 days after the settlement date of the transaction to which it relates, and

(b) after discounting that amount by the applicable percentage specified in table 13.5.4C.

Exclude amounts that have been due and unpaid for more than 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(7) Debts of group or connected companies

Include an amount due from group or connected companies (which does not relate to trade debts)

(a) where the firm has no reason to doubt that it will be repaid in full on demand, and

(b) after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude an amount that the firm has reason to doubt will be repaid in full on demand.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(8) Debtors

Include amounts due from debtors (including group or connected companies) which have been due and unpaid for less than 90 days, after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude amounts that have been due and unpaid for more than 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(9) Prepayments

Include the amount of prepayments which relate to goods or services to be received or performed within 90 days, after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude the amount of prepayments relating to more than 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(10) Accrued income

Include accrued income, including any such income not yet due and receivable in respect of fees earned in the performance of investment management services that is receivable within 90 days, after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude accrued income receivable after 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(11) Deposits

Include amounts in respect of

(a) cash and balances on current accounts and on deposit accounts with an approved bank or National Savings Bank which can be withdrawn within 90 days;

(b) money on deposit with a UK local authority which can be withdrawn within 90 days;

(c) money deposited and evidenced by a certificate of tax deposit

Exclude amounts which can only be withdrawn after 90 days.

An Illiquid

Adjustment

(12) Other amounts due from Government bodies or local authorities

Include other amounts due from UK Government bodies or local authorities if they are agreed and due within 90 days, after discounting the amounts by the applicable percentage specified in table 13.5.4C.

Exclude amounts that are not due to be paid within 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(13) All other assets

Exclude in full.

If not otherwise excluded in full in this table, this category should include any holding in eligible capital instruments of an insurance undertaking, insurance holding company, or reinsurance undertaking that is a subsidiary or participation.

Eligible capital instruments include ordinary share capital,1 preference shares, perpetual securities and long-term subordinated loans, that are eligible for insurance undertakings under GENPRU 2 or, as the case may be, INSPRU 7, or is an item of basic own funds as defined in the PRA Rulebook: Glossary1.

An Illiquid

Adjustment

Where applicable - Large exposures

Deduct an amount calculated in accordance with rule 13.6.2.

A Large exposure Adjustment

Table 13.5.4(2) Part II

This table forms part of rule 13.5.4

EXEMPT CAD FIRM

LIABILITY

CALCULATION

TYPE OF ADJUSTMENT

(14) Secured Liabilities

Include in full, except the amount of the liabilities secured by a charge on land and buildings which may be reduced by the smallest of the following amounts:

An Illiquid Adjustment

(a) the aggregate amount of the firm's secured liabilities which are due more than one year after the balance sheet date;

(b) (if the land and buildings have been valued by an independent professional valuer within the past 18 months) 85% of the amount certified by the valuer as their market value; and

(c) 85% of the net book value of land and buildings.

(15) Subordinated loans

Include in full except any long term or short term subordinated loan in the standard form prescribed by the FCA which may be treated as capital up to the limits specified in SUP 16.

(16) Commission on indemnity terms from the sale of life policies or pension contracts

Include as a liability a provision for repayment, in the event that premiums cease within the indemnity period, which must equal or exceed 2.5% of the commissions the firm has received on indemnity terms during the previous twelve months. This provision must be reasonable having regard to the firm's circumstances and, in particular, its previous lapse ratio.

An Illiquid Adjustment

(17) Investments (Short Positions)

Include a net short position

A Position Risk Adjustment

(a) valued at its offer price, and

(b) increased by the applicable percentage specified in table 13.5.4A.

(18) Deficiency in subsidiary

Include as a liability the amount by which the liabilities of any subsidiary (excluding its capital and reserves) exceed its tangible assets. This requirement applies only to the extent that the firm has not already made such a provision elsewhere in its financial statements.

An Illiquid Adjustment

(19) Liability for tax

Include as a liability a provision for taxation on the whole of the profits of its business up to its balance sheet date.

An Illiquid Adjustment

(20) Creditors relating to Unsettled Securities Transactions Cash against Documents

Include creditors where a firm has entered into a transaction in securities or units in collective investment schemes as agent on a cash against documents basis, and the transaction remains unsettled, after adding an amount calculated by

A Counterparty Risk Adjustment

(a) computing the difference between the agreed settlement price for those investments and their current market value, and

(b) multiplying that exposure by the applicable percentage specified in table 13.5.4B.

(21) Creditors relating to Unsettled Securities Transactions Free D eliveries

Include an amount for creditors where (acting as agent) the firm has delivered certificates of title for securities or units in collective investment schemes before receiving payment for them, or where the firm has bought such investments before receiving certificates of good title for them, after adding an amount calculated by

A Counterparty Risk Adjustment

(a) (i) (where the firm has paid for them but not received certificates of good title for them) computing their current market value;

(ii) (where the firm has delivered the certificates without receiving payment for them) computing the full amount due to a firm under the contract for sale; and

(b) multiplying that exposure by the applicable percentage specified in table 13.5.4C.

(22) Over the counter derivatives

Include as a liability an amount for its positions in such derivatives calculated by

A Counterparty Risk Adjustment

(a) computing the credit equivalent of those positions in accordance with table 13.5.4D, and

(b) increasing that credit equivalent by the applicable percentage specified in table 13.5.4C,

(in addition to making an adjustment in accordance with item (17) of this table and (in respect of bought OTC equity options and covered warrants) in accordance with item (25)).

(23) Contingent Liabilities

A firm must include a provision for any contingent liabilities which exist at its balance sheet date that must be made.

An Illiquid Adjustment

(24) Preference Shares

Include as a liability any amounts in excess of the amounts which may be treated as financial resources specified in table 13.3.2(2) and SUP 16.

(25) Net open foreign currency position

Include as a liability an amount in respect of its foreign exchange risk calculated in accordance with table 13.5.4E.

A Foreign Exchange Risk Adjustment

(26) All other liabilities

Include in full.

Table 13.5.4A

This table forms part of rule 13.5.4

POSITION RISK

The percentages in the table are applied to the market value (unless otherwise stated) of gross positions, i.e. both longs and shorts in each category; netting and offsetting are prohibited. The long or short position in a particular investment is the net of any long or short positions held in that same investment.

INVESTMENT

DISCOUNT

A. Debt

Maturity

Central Government

0-2 years

2-5 years

>5 years

2%

5%

13%

Qualifying debt security:

- fixed rate

8%

8%

15%

- floating rate

10%

10%

15%

Non-qualifying debt security:

- fixed rate

10%

20%

30%

- floating rate

30%

30%

30%

B. Equities

- exchange traded

25%

- other

100%

C. Derivatives

- exchange traded futures

4 x initial margin requirement

- OTC futures

Apply the appropriate percentage shown in A and B to the market value of the underlying position

- Purchased options

Apply the appropriate percentage shown in A and B to the market value of the underlying position but the result may be limited to the market value of the option

- Contracts for differences

20% of the market value of the contract

D. Other Investments

- Units in regulated collective investment schemes

25%

- units in higher volatility funds or property funds

50%

- with profit life policies

20% of surrender value

- other

100%

Table 13.5.4B

This table forms part of rule 13.5.4

UNSETTLED SECURITIES TRANSACTIONS

Number of business days after due settlement date

Percentage

0 - 4

0

5 - 15

8

16 - 30

50

31 - 45

75

46 or more

100

Table 13.5.4C

This table forms part of rule 13.5.4

COUNTERPARTY RISK

Type of Counterparty

Deduction

A counterparty which is, or the contract of which is, explicitly guaranteed by:

NIL

- the government or central bank of the United Kingdom or another Zone A country; or

- the European Economic Area; or

- any other government or central bank, provided the exposure is denominated in that country's national currency.

A counterparty which is, or the contract of which is, explicitly guaranteed by:

1.6%

- a local authority or regional government in the United Kingdom or another Zone A country; or

- a credit institution authorised in the United Kingdom or another Zone A country; or

- a recognised clearing house or recognised investment exchange; or

- an investment firm or a comparable undertaking regulated by a recognised third country.

Any other counterparty

8%

Table 13.5.4D

This table forms part of rule 13.5.4

OVER THE COUNTER DERIVATIVES

a . By attaching current market values to contracts (marking to market), obtain the current replacement cost of all contracts with positive values.

b. To obtain a figure for potential futurecreditexposure (except in the case of single currency "floating/floating interest rate swaps" in which only the current replacement costs will be calculated), multiply the notional principal amounts or values underlying the firm's aggregate positions by the following percentages:

Residual Maturity

Interest Rate Contracts

Foreign Exchange Contracts

One year or less

Nil

1%

More than 1 year

More than 1 year

5%

c. The credit equivalent is the sum of current replacement cost and potential future credit exposure.

Table 13.5.4E

This table forms part of rule 13.5.4

FOREIGN EXCHANGE RISK

(a) A firm must deduct a foreign exchange risk requirement for all the following items which are denominated in a foreign currency:

(i) all assets and liabilities, including accrued interest, denominated in the currency (all investments at market or realisable value);

(ii) any currency future, at the nominal value of the contract;

(iii) any forward contract for the purchase or sale of the currency, at the contract value, including any future exchange of principal associated with currency swaps;

(iv) any foreign currency options at the net delta (or delta-based) equivalent of the total book of such options;

(v) any non-currency option, at market value;

(vi) any irrevocable guarantee;

(vii) any other off-balance sheet commitment to purchase or sell an asset denominated in that currency.

(b) The requirement must be calculated as follows:

(i) using the spot rate, convert the net long position and net short position in each foreign currency into the currency in which its annual financial statements are reported;

(ii) total the net open long positions and the net open short positions;

(iii) the higher of (i) and (ii) above is the firm'snet open foreign currency position;

(iv) multiply the firm'snet open foreign currency position by 10%.

(c) A firm may not include any future income or expense not yet accrued but fully hedged (subject to deduction of an appropriate risk requirement).

Subordinated Loans

IPRU-INV 13.5.5 R

An exempt CAD firm may treat a subordinated loan as a financial resource, as specified in table 13.1A.15R and subject to rule 13.5.5C, if the long term subordinated loan is eligible for such treatment in accordance with rule 13.5.5A.

IPRU-INV 13.5.5A R

A long term subordinated loan is eligible for such treatment if:

  1. (1)

    it is fully paid up;

  2. (2)

    it has an original maturity of at least five years, or where it has no fixed term, it is subject to five years' notice of repayment;

  3. (3)

    repayment, prepayment or termination is only permitted under the loan agreement:

    1. (a)

      on maturity, or on expiration of the period of notice, if after such payment or termination a firm meets 120% of its financial resource requirement; or

    2. (b)

      on winding up after the claims of all other creditors and all outstanding debts have been settled;

  4. (4)

    the amount used in the calculation of its financial resources is reduced on a straight line basis over the last five years of its term;

  5. (5)

    it is in the standard form prescribed by the appropriate regulator for long term subordinated loans.

IPRU-INV 13.5.5B R

[deleted]

IPRU-INV 13.5.5C R

The total amount of long term subordinated loans that an exempt CADfirm may include in the calculation of its financial resources is restricted as stipulated in 13.1A.17R and in SUP 16.

IPRU-INV 13.6 Large exposures [deleted]

IPRU-INV 13.6.1 R

[deleted]

Requirements [deleted]

IPRU-INV 13.6.2 R

[deleted]

IPRU-INV 13.6.2A R

[deleted]

IPRU-INV 13.6.2B R

[deleted]

IPRU-INV 13.6.2C R

[deleted]

IPRU-INV 13.6.2D R

[deleted]

Table 13.6.2(1) [deleted]

Calculation of financial resources to meet tests 1, 1A OR 2 [deleted]

Table 13.6.2(2) [deleted]

IPRU-INV 13.7 Consolidated Supervision of Group Companies

Application

IPRU-INV 13.7.1 R

[deleted]

IPRU-INV 13.7.1A G

[deleted]

Requirements

IPRU-INV 13.7.2 R

[deleted]

IPRU-INV 13.7.2A R

[deleted]

IPRU-INV 13.7.2B R

An exempt CAD firm must, where it is exposed to undue risk in consequence of its membership of a group, provide against, reduce or eliminate that risk.

IPRU-INV 13.8 Trading Book [deleted]

IPRU-INV 13.8.2 G

[deleted]

IPRU-INV 13.8.2 R

[deleted]

IPRU-INV 13.8.3 G

[deleted]

IPRU-INV 13.9 FINANCIAL TESTS FOR CATEGORY B FIRMS

IPRU-INV 13.9.1 R

A Category B firm must meet:

  1. (1)

    financial Resources Test 1 (the Own funds Test) calculated in accordance with section 13.10;

  2. (2)

    Financial Resources Test 1A (the Adjusted Net current assets Test) calculated in accordance with section 13.11, unless the firm is a low resource firm which is not permitted to carry on the activity of managing investments in respect of portfolios containing only life policies; and

  3. (3)

    Financial Resources Test 2 (the Expenditure-based Test) calculated in accordance with section 13.12 unless the firm is a low resource firm.

IPRU-INV 13.9.1A G

Table 13B is a summary of the financial resources test for a Category B firm.

Table 13B This table forms part of rule 13.9.1

SUMMARY OF FINANCIAL RESOURCES FOR CATEGORY B FIRMS

Type of firm

Financial Resources Test 1 Own funds Test

Financial Resources Test 1A

Adjusted Net current assets Test

Financial Resources Test 2

Expenditure-based Test

Rule/section References

Category B1 (including any Network in this category)

£10,000

Adjusted net current assets of £1

Liquid capital equal to the highest of 13/52 of relevant annual expenditure or £400 per adviser or £10.000

13.10

13.11

13.12.1C

13.12.2 to

13.12.5A

0

Category B2 which is permitted to carry on the activity of investment management in respect of portfolios containing only life policies or to delegate such activity to an investment firm

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the higher of 13/52 of relevant annual expenditure or £400 per adviser

13.10

13.11

13.12.1D

13.12.2 to

13.12.5A

Category B2 with 26+ advisers

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the higher of 8/52 of relevant annual expenditure or £400 per adviser

13.10

13.11

13.12.1E

13.12.2 to

13.12.5A

Category B2 with 1-25 advisers

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the higher of 4/52 of relevant annual expenditure or £400 per adviser

13.10

13.11

13.12.1F

13.12.2 to

13.12.5A

Category B3 which is permitted to carry on the activity of managing investments in respect of portfolios containing only life policies or to delegate such activity to an investment firm

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the higher of 8/52 of relevant annual expenditure or £400 per adviser

13.10

13.11

13.12.1E

13.12.2 to

13.12.5A

Category B3 with 26+ advisers

£10,000

N/A

N/A

13.10

Network in Category B2 or B3

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the higher of 13/52 of relevant annual expenditure or £400 per adviser

13.10

13.11

13.12.1D

13.12.2 to

13.12.5A

All Category B firms that do not hold client money or assets, but are permitted to establish, operate or wind up a personal pension scheme.

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the highest of 6/52 of relevant annual expenditure, £400 per adviser, £10,000 and any other expenditure-based requirement set out in 13.12.1 applicable to the firm.

13.10

13.11

13.12.1

13.12.2 to

13.12.5A

All Category B firms that hold client money or assets and are permitted to establish, operate or wind up a personal pension scheme.

£10,000

Adjusted net current assets of £1

Adjusted capital equal to the highest of 13/52 of relevant annual expenditure, £400 per adviser, and £10,000

13.10

13.11

13.12.1G

13.12.2 to

13.12.5A

IPRU-INV 13.10 FINANCIAL RESOURCES TEST 1- OWN FUNDS REQUIREMENT

Requirement

IPRU-INV 13.10.1 R

A Category B firm'sown funds must at all times be at least £10,000.

Calculation

IPRU-INV 13.10.2 R

A Category B firm'sown funds must be calculated in accordance with table 13.10(2).

Table 13.10(2).

This table forms part of rule 13.10.2

OWN FUNDS

Companies

Sole Traders: Partnerships

Paid-up share capital (excluding preference shares redeemable by shareholders within 2 years)

Eligible LLP members' capital

Share premium account

Retained profits (see 13.10.2AR) and

interim net profits (Note 1)

Revaluation reserves

Short-term subordinated loans

Debt capital

Balances on proprietor's or partners'

- capital accounts

- current accounts

(see 13.10.2AR)

Revaluation reserves

Short-term subordinated loans

less

- Intangible assets

- Material current year losses

- Excess LLP members' drawings

less

- Intangible assets

- Material current year losses

- Excess of current year

- drawings over current year profits

Note 1 Retained profits must be audited and interim net profits 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 294A (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 13.10.2A R

For the purpose of calculating a Category B firm'sown funds, the following adjustments apply to retained profits or, (for non-corporate entities), current accounts figures.

  1. (1)

    a Category B 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;

  2. (2)

    a Category B firm must derecognise any defined benefit asset;

  3. (3)

    a Category B firm may substitute for a defined benefit liability its deficit reduction amount. The election must be applied consistently in respect of any one financial year.

  4. (4)

    a Category B firm must deduct any unrealized gains on investment property and include these within revaluation reserves.

  5. (5)

    where applicable, a Category B firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

IPRU-INV 13.10.2B G

A firm should keep a record of and be ready to explain to its supervisory contacts in the FSA the reasons for any difference between the deficit reduction amount and any commitment the firm has made in any public document to provide funding in respect of a defined benefit occupational pension scheme.

Where a Category B firm is a sole trader or a partnership:

  1. (1)

    it can use (to the extent necessary to make up any shortfall in the required resources) any of its personal assets (not being needed to meet liabilities arising from its personal activities and any business activities not regulated by the FSA);

  2. (2)

    the firm's total financial resources, from whatever source, must at all times be sufficient to cover its total liabilities.

IPRU-INV 13.10.3 R
  1. (1)

    Where a Category B3 firm with 1-25 advisers has a facility under the PASS Loan Agreement Scheme it may make an adjustment in its own funds calculation in accordance with (2).

  2. (2)

    a firm in (1) can regard as additional to its own funds the lower of either:

    1. (a)

      the amount of the loan facility agreed (less any loan repayments already made and less the amount of the facility withdrawn or lapsed); or

    2. (b)

      the amount of the firm's provision for redress (net of any professional indemnity insurance recoverable) at the time of its application for the loan facility.

IPRU-INV 13.11 FINANCIAL RESOURCES TEST 1A - ADJUSTED NET CURRENT ASSETS

Application

IPRU-INV 13.11.1 R

This section does not apply to a low resourcefirm.

Requirement

IPRU-INV 13.11.2 R

A Category B firm must adjust its net current assets as follows:

  1. (1)

    exclude assets which cannot be realised or recovered within twelve months;

  2. (2)

    exclude amounts receivable from connected persons to the extent that they are not properly secured, except amounts that are deposits referred to in item (11) of table 13.12.3(1) or item (11) in table 13.12.3(2);

  3. (3)

    value investments at current market value, using the bid price for a net long position in an investment and the offer price for a net short position in an investment;

  4. (4)

    where applicable, deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

IPRU-INV 13.11.3 R

A Category B firm must at all times have adjusted net current assets of at least £1.

IPRU-INV 13.12 FINANCIAL RESOURCES TEST 2 - EXPENDITURE-BASED REQUIREMENT

Application

IPRU-INV 13.12.1A R

This section does not apply to a low resource firm.

Requirement

IPRU-INV 13.12.1B R

A Category B firm must have at all times financial resources calculated in accordance with rules 13.12.2 to 13.12.5 which equal or exceed the amount specified in rules 13.12.1C to F as applicable.

IPRU-INV 13.12.1C R

A Category B1 firm, including a Network must have financial resources calculated in accordance with whichever of (1), (2) or (3) produces the higher amount.

  1. (1)

    13/52 of its relevant annual expenditure, calculated in accordance with 13.12.2 to 13.12.2D; or

  2. (2)

    an amount equal to £400 multiplied by the number of its advisers; or

  3. (3)

    £10,000;

IPRU-INV 13.12.1D R
  1. (1)

    A Category B2 firm which is permitted to carry on the activity of investment management in respect of portfolios containing only life policies or to delegate such activity to an investment firm must have financial resources calculated in accordance with whichever of (3) or (4) produces the higher amount.

  2. (2)

    A Network in Category B2 or B3 must have financial resources calculated in accordance with whichever of (3) or (4) produces the higher amount.

  3. (3)

    13/52 of its relevant annual expenditure, calculated in accordance with 13.12.2 to 13.12.2D; or

  4. (4)

    an amount equal to £400 multiplied by the number of its advisers.

IPRU-INV 13.12.1E R
  1. (1)

    A Category B2 firm with more than 25 advisers which is not a Network and is not permitted to carry on the activity of managing investments in respect of portfolios containing only life policies or to delegate such activity to an investment firm must have financial resources calculated in accordance with whichever of (3) or (4) produces the higher amount.

  2. (2)

    A Category B3 firm which is permitted to carry on the activity of investment management in respect of portfolios containing only life policies or to delegate such activity to an investment firm must have financial resources calculated in accordance with whichever of (3) or (4) produces the higher amount.

  3. (3)

    8/52 of its relevant annual expenditure, calculated in accordance with 13.12.2 to 13.12.2D; or

  4. (4)

    an amount equal to £400 multiplied by the number of its advisers.

IPRU-INV 13.12.1F R
  1. (1)

    A Category B2 firm with fewer than 26 advisers which is not a Network and is not permitted to carry on the activity of managing investments in respect of portfolios containing only life policies or to delegate such activity of investment management to an investment firm must have financial resources calculated in accordance with whichever of (3) or (4) produces the higher amount.

  2. (2)

    A Category B3 firm which is not permitted to carry on the activity of investment management in respect of portfolios containing only life policies or to delegate such activity to an investment firm must have financial resources calculated in accordance with whichever of (3) or (4) produces the higher amount.

  3. (3)

    4/52 of its relevant annual expenditure, calculated in accordance with 13.12.2 to 13.12.2D; or

  4. (4)

    an amount equal to £400 multiplied by the number of its advisers.

IPRU-INV 13.12.1G R

A category B firm whose permission includes establishing, operating or winding up a personal pension scheme must have financial resources calculated in accordance with (1) or (2)

  1. (1)

    For a firm which holds client money or assets, the highest of:

    1. (a)

      13/52 of its relevant annual expenditure, calculated in accordance with 13.12.2 to 13.12.2D;

    2. (b)

      an amount equal to £400 multiplied by the number of its advisers; and

    3. (c)

      £10,000.

  2. (2)

    For a firm which does not hold client money or assets, the highest of:

    1. (a)

      6/52 of its relevant annual expenditure, calculated in accordance with 13.12.2 to 13.12.2D;

    2. (b)

      an amount equal to £400 multiplied by the number of its advisers;

    3. (c)

      £10,000; and

    4. (d)

      any other expenditure-based requirement set out in 13.12.1 applicable to the firm.

Calculation of Relevant Annual Expenditure

IPRU-INV 13.12.2 R

A Category B firm must calculate its relevant annual expenditure by reference to the amount described as total expenditure in its most recently prepared set of annual financial statements. If those statements were for a period other than 12 months, the amounts in its profit and loss account must be adjusted proportionately.

IPRU-INV 13.12.2A R

Where a Category B firm has just begun trading or have not been authorised long enough to submit such statements the firm must calculate its relevant annual expenditure on the basis of forecast or other appropriate accounts submitted to the FCA.

IPRU-INV 13.12.2B R

A Category B firm may deduct from its relevant annual expenditure items (a) to (f) set out in table 13.12.2, unless the firm is a Category B1 firm, in which case it may not deduct item (e).

Table 13.12.2

This table forms part of rule 13.12.2

DEDUCTIONS FROM EXPENDITURE

(a)

staff bonuses;

(b)

employees' and directors'shares in profits;

(c)

interest charges in respect of borrowing made to finance the acquisition of its readily realisable investments;

(d)

shared commissions paid which are directly related to commissions received;

(e)

emoluments of directors, partners or a sole trader;

(f)

a firm must not deduct any exceptional expenditure.

Adjustments to Calculation of Relevant Annual Expenditure

IPRU-INV 13.12.2C R

A firm must ensure that the expenditure base properly reflects the ongoing annual operating costs of the firm by having proper regard to its circumstances when deciding whether to include or exclude any item of expenditure or to make any other adjustment to the calculation of relevant annual expenditure.

IPRU-INV 13.12.2D G

In rule 13.12.2C the FSA would expect a firm to take proper account of the effect of, for example, the ongoing annual operating costs of the firm being met by another party, or of a significant change in the structure of the firm's business during the year.

Calculation of Financial Resources to meet Tests 1, 1A OR 2

IPRU-INV 13.12.3 R
  1. (1)

    This rule does not apply to a low resource firm;

  2. (2)

    A Category B firm must be able to calculate its financial resources at any time on the basis of the balance sheet the firm could draw up at that time. For this purpose:

    1. (a)

      a Category B1 firm must adjust the assets in the balance sheet as specified in Part I of table 13.12.3(1) and include the liabilities after making the adjustments specified in Part II of table 13.12.3(1);

    2. (b)

      a Category B2 or B3 firm to which 13.12 applies must adjust the assets in the balance sheet as specified in Part I of table 13.12.3(2) and include the liabilities after making the adjustments specified in Part II of table 13.12.3(2).

  3. (3)

    the assets and liabilities in the balance sheet are also subject to the following adjustments:

    1. (a)

      a Category B 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;

    2. (b)

      in respect of a defined benefit occupational pension scheme, a Category B firm must derecognise any defined benefit asset;

    3. (c)

      a Category B firm may substitute for a defined benefit liability the firm'sdeficit reduction amount. The election must be applied consistently in respect of any one financial year;

    4. (d)

      where applicable, a Category B firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

Table 13.12.3(1) Part I

This table forms part of rule 13.12.3

FIRMS CATEGORY B1

Calculation of Assets

ASSETS

ADJUSTMENTS

(1) Land and Buildings

Exclude in full. (A loan secured by a charge on land and buildings may be deducted from liabilities in accordance with item (14) of Part II of this table.)

(2) Investments

Include any net long position in any fixed or current asset investment (including shares in any connected company)

(a) valued at its current bid price (or, in the case of a with-profits life policy, at its surrender value), and

(b) discounted by the applicable percentage specified in table 13.12.3A.

A firm which acts as a market-maker in second-hand life policies must comply with the relevant requirements in respect of secondhand life policies held by the firm and include such a policy.

(a) valued at its surrender value at the date on which the firm acquired it, or its latest available surrender value if different.

(b) where a life office whose policy is held by the firm has altered adversely the basis on which it calculates surrender values, the firm must revise its valuation of the second-hand policy as soon as practicable after becoming aware of the alteration.

(3) Investments subject to Repurchase, Reverse Repurchase, Stock Borrowing or Stock Lending transactions

Include investments for which the firm has entered as principal into a repurchase, reverse repurchase, stock borrowing or stock lending transaction on its own behalf, after making (I) a deduction in accordance with item (2), and (II) a deduction calculated by computing its exposure (the difference between the market value of the securities and the loan or collateral (including accrued interest) where that difference is not in the firm's favour, after adjusting for any excess collateral).

(4) Debtors relating to Unsettled Securities Transactions Cash against Documents

Include debtors where the firm has entered into a transaction on its own behalf in securities or units in collective investment schemes on a cash against documents basis, and the transaction remains unsettled, after deducting an amount calculated by

(a) computing the difference between the agreed settlement price for those investments and their current bid price where that difference is not in the firm's favour, and

(b) multiplying that difference by the applicable percentage specified in table 13.12.3B.

(5) Debtors relating to Unsettled Securities Transactions Free Deliveries

(a) Include the full amount due to the firm from debtors if a firm has delivered securities or units in collective investment schemes before receiving payment for them, or paid for such investments before receiving certificates of good title for them, so long as not more than three days have passed since delivery

(b) If more than three days have passed since delivery, exclude in full.

(6) Regulated collective investment schemes

Include an amount owing in respect of a transaction in units in a regulated collective investment scheme only if the amount has been due and unpaid for 30 days or less after the settlement date of the transaction to which it relates.

(7) Loans secured on investments

If the firm holds client title documents as security for

(a) the repayment of money it has lent; or

(b) money due to the firm in connection with the purchase for or sale to another person of those investments, which the firm has for genuine commercial reasons agreed to postpone, the firm may include as an asset the lower of the following:

(i) the total amount due;

(ii) the market value of the investments multiplied by the appropriate rates set out in table 13.12.3A.

(8) Trade debtors

Include amounts owing only in respect of

(a) (i) commission;

(ii) investment management fees;

(iii) other fees earned in connection with the firm'sinvestment business, which are due from other authorised or EEA firms, recognised investment exchanges or recognised clearing houses and have been due and unpaid for 30 days or less;

(b) (i) investment management fees; or

(ii) pensions administration which have been due from its customers and unpaid for 30 days or less.

(c) All other trade debtors must be deducted in full.

(9) Prepayments

Include prepayments which relate to goods or services to be received or performed within 90 days.

(10) Accrued income

(a) Accrued income relating to investment management fees not yet due and payable may be included if the fees relate to services provided within the previous six months.

(b) Other accrued income may be included if it relates to interest on marketable debt instruments or on deposits included in item (11).

(11) Deposits

The following may be included:

(a) cash and balances on current accounts and on deposit accounts with an approved bank or National Savings Bank which can be withdrawn within 90 days;

(b) money on deposit with a UK local authority which can be withdrawn within 90 days;

(c) money deposited and evidenced by a certificate of tax deposit.

(12) Other Debts

(a) Amounts owing in respect of

(i) interest on investments;

(ii) repayments of marketable debt instruments at maturity or call;

(iii) dividends declared by authorised or not EEA firms or by companies in respect of shares listed on a recognised or designated investment exchange;

which have been due and unpaid for 30 days or less may be included.

(b) Other amounts due from UK government bodies may be included if they are agreed and due within 30 days.

(13) All other a ssets

Exclude in full.

Table 13.12.3(1) Part II

This table forms part of

rule 13.12.3

FIRMS IN CATEGORY B1

Calculation of Liabilities

LIABILITIES

ADJUSTMENTS

(14) Secured Liabilities

Include in full, except the amount of the liabilities secured by a charge on land and buildings which may be reduced by the smallest of the following amounts:

(a) the aggregate amount of the firm's secured liabilities which are due more than one year after the balance sheet date;

(b) (if the land and buildings have been valued by an independent professional valuer within the past 18 months) 85% of the amount certified by the valuer as their market value;

(c) 85% of the net book value of the land and buildings.

(15) Subordinated loans

Include in full, except any short-term subordinated loan in the standard form prescribed by the

FSA

which may be treated as capital up to the limits specified in rules 13.12.5 and 13.12.5A.

(16) Commission on indemnity terms from the sale of life policies or pension contracts

Include as a liability a provision for repayment, in the event that premiums cease within the indemnity period, which must equal or exceed 2.5% of the commissions the firm has received on indemnity terms during the previous twelve months. This provision must be reasonable having regard to its circumstances and, in particular, its previous lapse ratio.

(17) Short Positions

Include a net short position

(a) valued at its offer price and

(b) increased using the applicable percentage rate in table 13.12.3A.

(18) Deficiency in subsidiary

Include as a liability the amount by which the liabilities of any subsidiary (excluding its capital and reserves) exceed its tangible assets. This requirement applies only to the extent that the firm has not already made such a provision elsewhere in its financial statements.

(19) Liability for tax

Include as a liability a provision for taxation on the whole of the profits of the firm's business up to its balance sheet date.

(20) Creditors relating to Unsettled Securities Transactions - Cash against Documents

Include creditors where the firm has entered into a transaction on its own behalf in Securities or units in collective investment schemes on a cash against documents basis, and the transaction remains unsettled, after adding an amount calculated by

(a) computing the difference between the agreed settlement price for those investments and their current market value where that difference is not in the firm's favour, and

(b) multiplying that difference by the applicable percentage specified in table 13.12.3B.

(21) Creditors relating to Unsettled Securities Transactions - Free Deliveries

Include an amount for creditors where (acting on the firm's own behalf) the firm has delivered certificates of title for securities or units in collective investment schemes before receiving payment for them, or where a firm has bought such investments before receiving certificates of good title for them, as follows:

(a) (if the firm has paid for them and not more than 3 days have passed since the payment was made) include in full:

(b) (if more than 3 days have passed since the payment was made) include the full value of the securities at their current offer price.

(22) Over the counter derivatives

If the firm holds positions in derivatives on its own behalf must

(a) make the adjustment in item (17) of this table, and

(b) deduct the credit equivalent of those positions computed in accordance with table 13.12.3C. In addition, bought OTCoptions and covered warrants will be subject to table 13.12.3D.

(23) Contingent Liabilities

A firm must include a provision for any contingent liabilities which exist at its balance sheet date that must be made.

(24) Redeemable Preference Shares

Include as a liability any redeemable preference shares which fall due within two years. If shares are not redeemable by the shareholder within 2 years, they must be treated in accordance with rules 13.12.5 and 13.12.5A.

(25) Foreign currency risk

If the firm holds positions on its own behalf in foreign currencies or has assets or liabilities denominated in foreign currencies, the firm must calculate a provision to cover the risk in accordance with table 13.12.3D and include the amount as a liability

(26) All other liabilities

Include in full.

Table 13.12.3(2) Part I

This table forms part of rule 13.12.3

FIRMS IN CATEGORIES B2 AND B3

(except low resource firms)

Calculation of Assets

ASSETS

ADJUSTMENTS

(1) Land and Buildings

Include land and buildings which are not subject to any charge only if they have been valued either

(a) at 60% of their net book value, or

(b) ( if valued by an independent professional valuer within the past three years) at 60% of the amount certified by the valuer to be the market value.

(2) Motor vehicles

(a) Include motor vehicles acquired less than 12 months ago valued at 50% of their cost

(b) Include motor vehicles acquired within the past 24 months (but more than 12 months ago) valued at 25% of their cost

(c) Exclude in full any other motor vehicles.

(3) Investments

Include any net long position in any fixed or current asset investment (including shares in any connected company)

(a) valued at its current bid price (or, in the case of a with-profits life policy, at its surrender value), and

(b) discounted by the applicable percentage specified in table 13.12.3A.

(4) Debtors relating to Unsettled Securities Transactions Cash against Documents

Include debtors where the firm has entered into a transaction on its own behalf in securities or units in collective investment schemes on a cash against documents basis, and the transaction remains unsettled, after deducting an amount calculated by

(a) computing the difference between the agreed settlement price for those investments and their current bid price where that difference is not in the firm's favour, and

(b) multiplying that difference by the applicable percentage specified in table 13.12.3B.

(5) Debtors relating to Unsettled Securities Transactions Free Deliveries

(a) Where the firm has delivered securities or units in collective investment schemes before receiving payment for them or paid for such investments before receiving certificates of good title for them include the full amount due to a firm from debtors so long as not more than 3 days have passed since delivery.

(b) Exclude in full if more than 3 days have passed since delivery.

(6) Regulated collective investment schemes

Include an amount owing in respect of a transaction in units in a regulated collective investment scheme only if the amount has been due and unpaid for 30 days or less after the settlement date of the transaction to which it relates.

(7) Debts of group or connected companies

Include amounts due from group or connected companies (which do not relate to trade debts) where a firm has no reason to doubt that repayment will be made in full on demand.

(8) Trade debtors

Include amounts due from trade debtors (including group or connected companies) which have been due and unpaid for less than 90 days.

(9) Prepayments

Include prepayments which relate to goods or services to be received or performed within 90 days.

(10) Accrued income

(a) Include accrued income not yet due and payable in respect of fees earned in the performance of investment management services that is receivable within six months.

(b) Include any other accrued income receivable within 90 days.

(11) Deposits

The following may be included:

(a) cash and balances on current accounts and on deposit accounts with an approved bank or National Savings Bank which can be withdrawn within 90 days;

(b) money on deposit with a UK local authority which can be withdrawn within 90 days;

(c) money deposited and evidenced by a certificate of tax deposit.

(12) Other amounts due from Government bodies or local authorities

Include other amounts due from UK Government bodies or local authorities if they are agreed and due within 90 days.

(13) All other assets

Exclude in full.

Table 13.12.3(2) Part II

This table forms part of rule 13.12.3

FIRMS IN CATEGORY B1

(except low resource firms)

Calculation of Liabilities

LIABILITIES

ADJUSTMENTS

(14) Secured Liabilities

Include in full, except the amount of the liabilities secured by a charge on land and buildings which may be reduced as follows:

(a) If the liabilities secured exceed 85% of the value of the land and buildings, then the excess is treated as a liability;

(b) If the land and buildings have been valued by an independent professional valuer within the past three years, the value of the land and buildings is the amount certified by the valuer as their market value; otherwise it is their net book value.

(If 60% of the value of the land and buildings which are subject to a charge exceeds the liabilities secured, then the amount of that excess may be treated as an asset.)

(15) Subordinated loans

Include in full, except any short-term subordinated loan in the standard form prescribed by the FCA which may be treated as capital up to the limits specified in rules 13.12.5 and 13.12.5A.

(16) Commission on indemnity terms from the sale of life policies or pension contracts

Include as a liability a provision for repayment, in the event that premiums cease within the indemnity period, which must equal or exceed 2.5% of the commissions the firm has received on indemnity terms during the previous twelve months. This provision must be reasonable having regard to its circumstances and, in particular, its previous lapse ratio.

(17) Short Positions

Include a net short position

(a) valued at its offer price, and

(b) increased using the applicable percentage rate in table 13.12.3A.

(18) Deficiency in subsidiary

Include as a liability the amount by which the liabilities of any subsidiary (excluding its capital and reserves) exceed its tangible assets. This requirement applies only to the extent that the firm has not already made such a provision elsewhere in its financial statements.

(19) Liability for tax

Include as a liability a provision for taxation on the whole of the profits of its business up to its balance sheet date.

(20) Creditors r elating to Unsettled Securities Transactions - Cash against Documents

Include creditors where the firm has entered into a transaction on its own behalf in securities or units in collective investment schemes on a cash against documents basis, and the transaction remains unsettled, after adding an amount calculated by

(a) computing the difference between the agreed settlement price for those investments and their current market value where that difference is not in the firm's favour, and

(b) multiplying that difference by the applicable percentage specified in table 13.12.3B.

(21) Creditors r elating to Unsettled Securities Transactions - Free Deliveries

Include an amount for creditors where (acting on its behalf) the firm has delivered certificates of title for securities or units in collective investment schemes before receiving payment for them, or where a firm has bought such investments before receiving certificates of good title for them, as follows:

(a) (if the firm has paid for them and not more than 3 days have passed since the payment was made) include in full:

(b) ( if more than 3 days have passed since the payment was made) include the full value of the securities at the current offer price.

(22) Over the counter derivatives

Include as a liability an amount for any positions the firm holds on its own behalf in such derivatives calculated by computing the credit equivalent of those positions in accordance with table 13.12.3C. In addition, bought OTC derivatives and covered warrants will be subject to table 13.12.3D.

(23) Contingent Liabilities

A firm must include a provision for any contingent liabilities which exist at its balance sheet date that must be made.

(24) Long term li abilities

Include as a liability any amount which falls due more than 3 years from the balance sheet date and is due to connected persons, in accordance with rules 13.12.5 and 13.12.5A.

(25) Redeemable Preference Shares

Include as a liability any redeemable preference shares which fall due within two years. If shares are not redeemable by the shareholder within two years, they must be treated in accordance with rules 13.12.5 and 13.12.5A.

(26) Net open foreign currency position

A firm must calculate its foreign exchange risk requirement in accordance with table 13.12.3D and include the amount as a liability.

(27) All other liabilities

Include in full.

Table 13.12.3A

This table forms part of rule 13.12.3

DISCOUNTS FOR INVESTMENTS

The percentages in the table are applied to the market value (unless otherwise stated) or gross positions, i.e. both longs and shorts in each category; netting and offsetting are prohibited. The long or short position in a particular investment is the net of any long or short positions held in that same investment.

Investment

Discount

A. Debt

UK Government or local authority stocks:

- with less than one year to final redemption

2%

- with more than one year but less than five years to final redemption

5%

- with five years or more to final redemption

10%

Debt security:

- debt instruments issued or accepted by an approved bank with less than 90 days to final redemption

2%

- other debt instruments which are marketable investments with less than one year to final redemption

5%

- other debt instruments which are marketable investments with less than five years to final redemption

10%

- other debt instruments which are marketable investments

15%

- floating rate notes which are marketable investments:

- with no more than 20 years to final redemption

5%

- with more than 20 years to final redemption

10%

B. Equities

- other investments listed on a recognised or designated investment exchange

25%

- shares traded on a recognised or designated investment exchange

35%

- other shares for which there is a market maker in the UK

35%

C. Derivatives

- exchange tradedfutures

4 x initial margin requirement

- OTCfutures

Apply the appropriate percentage shown in A and B to the market value of the underlying position

- Purchased options

Apply the appropriate percentage shown in A and B to the market value of the underlying position but the result may be limited to the market value of the option

- Contracts for differences

20% of the market value of the contract

D. Other Investments

- Unit linked bonds and units in authorised unit trust schemes (other than higher volatility funds and property funds) or regulated collective investment schemes

25%

- units in higher volatility funds and property funds

50%

- with profit life policies (only applicable to firms other than traded life policymarket makers)

20% of the surrender value of the policy

- shares in subsidiary companies and shares which are not readily realisable securities in connected companies

100%

- traded endowment policies:

where a traded life policy is held for resale by a firm which is a traded life policymarket maker:

(a) for 3 months or less

0% of the surrender value of the policy

(b) for more than 3 months

10% of the surrender value of the policy

when a traded life policy is held by a firm which is a traded life policymarket maker for investment

10% of the surrender value of the policy

- other

100%

Table 13.12.3B

This table forms part of rule 13.12.3

UNSETTLED SECURITIES TRANSACTIONS

Number of business days

A

B

after due settlement date

%

%

0 - 15

0

0

16 - 30

25

0

31 - 45

50

25

46 - 60

75

50

61 or more

100

75

over 90

100

100

Note 1: Column A applies to a transaction in a debt or debt-related instrument (unless the debt instrument is settled through the appropriate UK settlement system), and

Note 2: Column B applies in all other cases (and, in particular, applies to equity and equity-related instruments).

Table 13.12.3C

This table forms part of rule 13.12.3

OVER THE COUNTER DERIVATIVES

a . By attaching current market values to contracts (marking to market), obtain the current replacement cost of all contracts with positive values.

b. To obtain a figure for potential future credit exposure (except in the case of single currency "floating/floating interest rate swaps" in which only the current replacement costs will be calculated), the notional principal amounts or values underlying the firm's aggregate positions are multiplied by the following percentages:

Residual Maturity

Interest Rate Contracts

Foreign Exchange Contracts

One year or less

Nil

1%

More than 1 year

0.5%

5%

c. The credit equivalent is the sum of current replacement cost and potential future credit exposure.

Table 13.12.3D

This table forms part of rule 13.12.3

FOREIGN EXCHANGE RISK

(a) A firm must deduct a foreign exchange risk requirement for all the following items which are denominated in a foreign currency:

(i)

all assets and liabilities, including accrued interest, denominated in the currency (all investments at market or realisable value);

(ii)

any currency future, at the nominal value of the contract;

(iii)

any forward contract for the purchase or sale of the currency, at the contract value, including any future exchange of principal associated with currency swaps;

(iv)

any foreign currency options at the net delta (or deltabased) equivalent of the total book of such options;

(v)

any non-currency option, at market value;

(vi)

any irrevocable guarantee;

(vii)

any other off-balance sheet commitment to purchase or sell an asset denominated in that currency.

(b) The requirement must be calculated as follows:

(i)

using the spot rate, convert the net long position and net short position in each foreign currency into the currency in which the firm'sannual financial statements are reported;

(ii)

total the net open long positions and the net open short positions;

(iii)

the higher of (i) and (ii) above is its net open foreign currency position;

(iv)

multiply its net open foreign currency position by 10%;

(c) A firm may not include any future income or expense not yet accrued but fully hedged (subject to deduction of an appropriate risk requirement).

Short Term Subordinated Loans

IPRU-INV 13.12.4 R

A Category B firm may treat subordinated loan as a financial resource, as specified in rules 13.12.5 to 5A, if the short term subordinated loan is eligible for such treatment in accordance with rule 13.12.4A;

IPRU-INV 13.12.4A R

A short term subordinated loan is eligible for such treatment if:

  1. (1)

    it has an original maturity of at least two years or, if it has no fixed term, it is subject to two years' notice of repayment;

  2. (2)

    payment of interest is not permitted under the loan agreement unless after such payment a firm meet 120% of its financial resource requirement;

  3. (3)

    repayment, prepayment or termination is only permitted under the loan agreement

    1. (a)

      on maturity, or on expiration of the period of notice, if after such payment or termination a firm meets 120% of its financial resources requirement; or

    2. (b)

      on winding up after the claims of all other creditors and all outstanding debts have been settled;

  4. (4)

    it is in the standard form for short term subordinated loans prescribed by the FSA.

Restrictions

IPRU-INV 13.12.5 R R

A Category B firm must calculate:

  1. (1)

    the aggregate amount of its short term subordinated loans, its preference shares which are not redeemable within two years, and for a Category B firm other than a Category B1 firm its long term liabilities which are not secured on its assets, if they do not fall due more than three years from the balance sheet date, and are not due to connected persons;

  2. (2)

    the amount of the firm's total capital and reserves excluding preference share capital, less the amount of its intangible assets, multiplied by 400%.

IPRU-INV 13.12.5A R

A Category B firm must treat as a liability in the calculation or its financial resources any amount by which the sum of 13.12.5(1) exceeds the product of 13.12.5(2).