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

Application

IPRU-INV 13.1.1 R 30/06/2016

This chapter applies to a firm which is a personal investment firm as set out in the table below1.

1 Type of personal investment firm	Application of this Chapter
A personal investment firm which is an exempt CAD firm	13.1, 13.1A, 13.13 and 13.14
A personal investment firm which is a category B firm whose permission includes establishing, operating or winding up a personal pension scheme	13.1 and 13.9 to 13.12
A personal investment firm which is a category B firm whose permission does not include establishing, operating or winding up a personal pension scheme	13.1 and 13.13 to 13.15

(2)
[deleted]1
(3)
[deleted]1

Purpose

IPRU-INV 13.1.2 G 30/06/2016

This chapter amplifies threshold condition 2D1 (Appropriate1 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 30/12/2015

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 CAPITAL RESOURCES AND SOLVENCY REQUIREMENTS

IPRU-INV 13.1.4 R 30/06/2016

A firm must at all times:

(1)
have and maintain capital resources at least equal to its relevant capital resources requirement1; and
(2)
be able to meet its liabilities as they fall due.

CAPITAL RESOURCES: GENERAL ACCOUNTING PRINCIPLES

IPRU-INV 13.1.4A R 30/06/2016

(1)
1Unless a rule provides otherwise, a firm must:
1. (a)
  recognise an asset or liability; and
2. (b)
  measure the amount of that asset or liability,
by using the accounting principles it applies in preparing the firm's reporting form in (2).
(2)
The accounting principles are referred to in:
1. (a)
  the Notes for completion of the Retail Mediation Activities Return (RMAR) (under the heading “Accounting Principles”) in SUP 16 Annex 18BG for a category B firm; and
2. (b)
  the Guidance notes for data items in FSA032 (under the heading “Defined terms”) in SUP 16 Annex 25AG for an exempt CAD firm.

Requirement to Hold Professional Indemnity Insurance

IPRU-INV 13.1.5 R 30/12/2015

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)
an insurance undertaking which is authorised to transact professional indemnity insurance in the EEA; or
(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 30/12/2015

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 30/12/2015

(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)
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)
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 30/12/2015

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's permitted 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 30/12/2015

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)
the firm; or
(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 30/12/2015

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)
EUR 1,120,200 for a single claim against the firm; and
(2)
EUR 1,680,300 in the aggregate.

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

IPRU-INV 13.1.11 R 30/12/2015

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)
EUR 1,000,000 for a single claim against the firm; and
(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 30/12/2015

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)
EUR 500,000 for a single claim against the firm; and
(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 30/12/2015

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

(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)
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 30/12/2015

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 30/12/2015

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 30/12/2015

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 30/12/2015

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 30/06/2016

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

(1)
The relevant income for calculating the limits of indemnity is that of all the firms named in the policy combined;
(2)
each firm named in the policy must have the benefit of the minimum limits of indemnity as required in this section; and
(3)
each firm named in the policy must notify the FCA 1 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 30/12/2015

In addition to the specific requirements in

13.1.9R to 13.1.13R

, the policy must make provision for the following:

(1)
for a firm with relevant income of more than £6,000,000, the aggregate limit identified in the table below:

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

(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
(3)
cover in respect of Ombudsman awards made against the firm.

Limitations

IPRU-INV 13.1.20 R 30/12/2015

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 30/12/2015

The policy must not:

(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)
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 30/06/2016

(1)
The FCA 1 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's insurer and claimed for under another policy.
(2)
The FCA 1 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 30/06/2016

The amount of additional capital resources that a firm must hold as a result of an exclusion under IPRU-INV 13.1.21R1 must1 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 13.151 (see IPRU-INV 13.1.1R1 for application of these sections to an exempt CAD firm or1 a category B firm 1).

IPRU-INV 13.1.24 G 30/12/2015

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 30/12/2015

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 30/12/2015

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 30/06/2016

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 13.151 (see IPRU-INV 13.1.1R1 for application of these sections to an exempt CAD firm or1 a category B firm).

Notification Requirements

IPRU-INV 13.1.28 R 30/06/2016

A firm must notify the FCA 1 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)
professional indemnity insurance cannot be obtained within 28 days of the inception or renewal date;
(2)
professional indemnity insurance is cancelled;
(3)
the amount of aggregate cover is exhausted;
(4)
the firm commences business lines for which it had not obtained cover;
(5)
the firm is relying on a policy cover for more than one firm; or
(6)
the firm is relying on a comparable guarantee provided in accordance with the rules in this chapter.

IPRU-INV 13.1.29 G 30/06/2016

(1)
1For the purposes of the provisions relating to professional indemnity insurance, “additional capital resources” means readily realisable own funds or capital resources under IPRU-INV 13.15.3R, depending on the type of firm1.
(2)
1The FCA 1 expects items included in own funds or capital resources under IPRU-INV 13.15.3R, depending on the type of firm,1 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 30/12/2015

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

Requirement to hold initial capital and professional indemnity insurance

IPRU-INV 13.1A.2 R 30/06/2016

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

(1)
the requirement that is applied by section 13.1A; and
(2)
2the requirement that is applied by sections 13.13 to 13.142.

IPRU-INV 13.1A.3 R 30/06/2016

(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 13.1.11R1and 13.1.15R1 to 13.1.27R1; 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 13.1.11R1)]
(2)
A2 firm applying2 (b) or (c) above, must have initial capital of at least £20,0002.

IPRU-INV 13.1A.4 R 30/06/2016

(1)
A firm that is also an IMD insurance intermediary must have professional indemnity insurance at least equal to the limits set out in 13.1.10R1 and in addition must2 have:
1. (a)
  initial capital of EUR 25,000; or
2. (b)
  professional indemnity insurance at least equal to the requirements1 of 13.1.12R1and 13.1.15R1 to 13.1.27R1; or
  2
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 13.1.12R1)]

(2)
A2 firm applying2 (b) or (c) above2 must2 have initial capital of at least £20,000.

IPRU-INV 13.1A.5 G 30/12/2015

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 30/12/2015

A firm's initial capital consists of the sum of the following items:

(1)
ordinary share capital which is fully paid;
(2)
perpetual non-cumulative preference share capital which is fully paid;
(3)
share premium account;
(4)
reserves excluding revaluation reserves;
(5)
audited retained earnings;
(6)
externally verified interim net profits;
(7)
partners' capital;
(8)
eligible LLP members' capital (in accordance with the provisions of IPRU-INV Annex A); and
(9)
sole trader capital.

Perpetual non-cumulative preference share capital

IPRU-INV 13.1A.7 R 30/12/2015

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 30/12/2015

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

(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)
in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;
(3)
a firm must not include any unrealised gains from investment property (these should be reported as part of revaluation reserves);
(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 30/12/2015

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 30/12/2015

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

(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)
in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;
(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 30/12/2015

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

IPRU-INV 13.1A.12 G 30/06/2016

2A firm should keep a record of and be ready to explain to its supervisory contacts in the FCA 2 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 30/12/2015

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 30/12/2015

A firm's initial 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 30/06/2016

This table forms part of rule 13.1A.14 IPRU-INV 13.1A.14R2.

(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 13.1A.18R2)
(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 30/06/2016

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

(1)
it may not be reimbursed on the holder's initiative or without the prior agreement of the FCA 2
;
(2)
the instrument must provide for the firm to have the option of deferring the dividend payment on the share capital;
(3)
the shareholder's claims on the firm must be wholly subordinated to those of all non-subordinated creditors;
(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)
it must be fully paid-up.

Own funds - Restrictions

IPRU-INV 13.1A.17 R 30/12/2015

(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.

Subordinated Loans – Exempt CAD firm

IPRU-INV 13.1A.18 R 30/06/2016

2 IPRU-INV 13.1A.19R to IPRU-INV 13.1A.20R apply to an exempt CAD firm.

IPRU-INV 13.1A.19 R 30/06/2016

2A firm may include a long-term subordinated loan as own funds (see item C(3) table 13.1A.15R) if all the conditions in IPRU-INV 13.1A.20R are satisfied.

IPRU-INV 13.1A.20 R 30/06/2016

2The conditions referred to in IPRU-INV 13.1A.19R are:

(1)
the subordinated loan must be fully paid up;
(2)
the subordinated loan must have an original maturity of at least five years or, where there is no fixed term, the subordinated loan must be subject to not less than five years' notice of repayment3;
(3)
the agreement governing the subordinated loan must only permit repayment3, prepayment or termination on:
1. (a)
  maturity, or on expiration of the period of notice, if a firm has at least 120% of its financial resources requirement after that payment or termination; or
2. (b)
  winding up after the claims of all other creditors and all outstanding debts have been settled;
(4)
the amount of the subordinated loan used in the calculation of a firm’s own funds must be reduced on a straight-line basis over the last five years of the term of the subordinated loan;
(5)
the subordinated loan is in the standard form prescribed by the FCA for long-term subordinated loans (see form 13.1 Form of subordinated loan agreement for personal investment firms).

IPRU-INV 13.3 FINANCIAL RESOURCES TEST 1 - OWN FUNDS

IPRU-INV 13.3.1 R 30/12/2015

[deleted]

IPRU-INV 13.3.1A G 30/12/2015

[deleted]

IPRU-INV 13.3.2 R 30/12/2015

[deleted]

IPRU-INV 13.3.2A R 30/12/2015

[deleted]

IPRU-INV 13.3.2B G 30/12/2015

[deleted]

Table 13.3.2(2)

[deleted]

Alternative to Financial Resources Test 1

IPRU-INV 13.3.3 R 30/12/2015

[deleted]

IPRU-INV 13.3.3A R 30/12/2015

[deleted]

IPRU-INV 13.3.3B R 30/12/2015

[deleted]

IPRU-INV 13.6 Large exposures [deleted]

IPRU-INV 13.6.1 R 30/12/2015

[deleted]

Requirements [deleted]

IPRU-INV 13.6.2 R 30/12/2015

[deleted]

IPRU-INV 13.6.2A R 30/12/2015

[deleted]

IPRU-INV 13.6.2B R 30/12/2015

[deleted]

IPRU-INV 13.6.2C R 30/12/2015

[deleted]

IPRU-INV 13.6.2D R 30/12/2015

[deleted]

Table 13.6.2(1) [deleted]

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

30/12/2015

Table 13.6.2(2) [deleted]

IPRU-INV 13.8 Trading Book [deleted]

IPRU-INV 13.8.2 G 30/12/2015

[deleted]

IPRU-INV 13.8.2 R 30/12/2015

[deleted]

IPRU-INV 13.8.3 G 30/12/2015

[deleted]

IPRU-INV 13.9 FINANCIAL RESOURCES TESTS FOR CATEGORY B FIRMS WHOSE PERMISSION INCLUDES ESTABLISHING, OPERATING OR WINDING UP A PERSONAL PENSION SCHEME

Application

IPRU-INV 13.9.-1 R 30/06/2016

1This section applies to a personal investment firm which is a category B firm whose permission includes establishing, operating or winding up a personal pension scheme.

Requirement

IPRU-INV 13.9.1 R 30/06/2016

A firm 1 must meet:

(1)
financial Resources Test 1 (the Own funds Test) calculated in accordance with section 13.10;
(2)
financial1 Resources Test 1A (the Adjusted Net current assets Test) calculated in accordance with section 13.111; and
(3)
financial1 Resources Test 2 (the Expenditure-based Test) calculated in accordance with section 13.121.

IPRU-INV 13.9.1A G 30/06/2016

Table 13B is a summary of the financial resources tests1 for a firm 1

Table 13B.1 This table forms part of IPRU-INV 13.9.1R1.

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
1	1	1	1	1
1	1	1	1	1
1	1	1	1	1
1	1	1	1	1
1	1	1	1	1
1	1	1	1	1
1	1	1	1	1
All category B firms1 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	13.10 13.11 13.12.1G1 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

Application

IPRU-INV 13.10.-1 R 30/06/2016

1This section applies to a personal investment firm which is a category B firm whose permission includes establishing, operating or winding up a personal pension scheme.

Requirement

IPRU-INV 13.10.1 R 30/06/2016

A firm's 1 own funds must at all times be at least £10,000.

Calculation

IPRU-INV 13.10.2 R 30/06/2016

A firm's 1 own funds must be calculated in accordance with table 13.10(2).

Table 13.10(2).

This table forms part of IPRU-INV 13.10.2R1.

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 1 - Excess LLP members' drawings	less - Intangible assets - Material current year losses 1 - 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 1 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 30/06/2016

For the purpose of calculating a firm's 1 own funds, the following adjustments apply to retained profits or, (for non-corporate entities), current accounts figures.

(1)
a firm's 1 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)
a firm's 1 must derecognise any defined benefit asset;
(3)
a firm's 1 may substitute for a defined benefit liability its deficit reduction amount. The election must be applied consistently in respect of any one financial year;1
(4)
a firm's 1 must deduct any unrealised1 gains on investment property and include these within revaluation reserves.
(5)
where applicable, a firm's 1 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 30/06/2016

A firm should keep a record of and be ready to explain to its supervisory contacts in the FCA 1 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 firm 1 is a sole trader or a partnership:

(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 FCA 1);
(2)
the firm's total financial resources, from whatever source, should1 at all times be sufficient to cover its total liabilities.

IPRU-INV 13.10.3 R 30/06/2016

[deleted]1

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

Application

IPRU-INV 13.11.1 R 30/06/2016

This section applies to a personal investment firm which is a Category B firm whose permission includes establishing, operating or winding up a personal pension scheme 1.

Requirement

IPRU-INV 13.11.2 R 30/06/2016

A firm 1 must adjust its net current assets as follows:

(1)
exclude assets which cannot be realised or recovered within twelve months;
(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)
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)
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 30/06/2016

A firm 1 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 30/06/2016

This section applies to a personal investment firm which is a category B firm whose permission includes establishing, operating or winding up a personal pension scheme 1.

Requirement

IPRU-INV 13.12.1B R 30/06/2016

A firm 1 must have at all times financial resources calculated in accordance with IPRU-INV 13.12.2R to IPRU-INV 13.12.5R1 which equal or exceed the amount specified in IPRU-INV 13.12.1GR1.

IPRU-INV 13.12.1C R 30/06/2016

[deleted]1

IPRU-INV 13.12.1D R 30/06/2016

[deleted]1

IPRU-INV 13.12.1E R 30/06/2016

[deleted]1

IPRU-INV 13.12.1F R 30/06/2016

[deleted]1

IPRU-INV 13.12.1G R 30/06/2016

(1)
A1 firm which holds client money or assets must have financial resources calculated as1 the highest of:
1. (a)
  13/52 of its relevant annual expenditure, calculated in accordance with IPRU-INV 13.12.2R to IPRU-INV 13.12.2DR;
2. (b)
  an amount equal to £400 multiplied by the number of its advisers 1; and
3. (c)
  £10,000.
(2)
A1 firm which does not hold client money or assets must have financial resources calculated as1 the highest of:
1. (a)
  6/52 of its relevant annual expenditure, calculated in accordance with IPRU-INV 13.12.2R to IPRU-INV 13.12.2D1;
2. (b)
  an amount equal to £400 multiplied by the number of its advisers; and
3. (c)
  £10,000

Calculation of Relevant Annual Expenditure

IPRU-INV 13.12.2 R 30/06/2016

A firm 1 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 30/06/2016

Where a firm 1 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 30/06/2016

A firm 1 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 1, in which case it may not deduct item (e).

Table 13.12.2

This table forms part of IPRU-INV 13.12.2R1.

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 30/12/2015

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 30/06/2016

In rule 13.12.2C the FCA 1 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 30/06/2016

(1)
[deleted]1
(2)
A firm 1 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 1 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)
The1assets and liabilities in the balance sheet are also subject to the following adjustments:
1. (a)
  a firm 1 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 firm 1 must derecognise any defined benefit asset;
3. (c)
  a firm 1 may substitute for a defined benefit liability the firm's deficit reduction amount. The election must be applied consistently in respect of any one financial year;
4. (d)
  where applicable, a firm 1 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 IPRU-INV 13.12.3R1.

CATEGORY B1 FIRMS 1
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 investment exchange or designated investment exchange 1;
	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 IPRU-INV 13.12.3R1.

CATEGORY B2 AND B3 FIRMS 1
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 FCA 1 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 OTC options 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 IPRU-INV 13.12.3R1

CATEGORY B2 AND B3 FIRMS 1

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 IPRU-INV 13.12.3R1

CATEGORY B1 FIRMS 1
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 IPRU-INV 13.12.3R1.

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 investment exchange or designated investment exchange 1	25%
- shares traded on a recognised investment exchange or designated investment exchange 1	35%
- other shares for which there is a market maker in the UK	35%
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
- 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 policy market 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 policy market 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 policy market 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's 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 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 30/12/2015

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 30/06/2016

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

(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)
payment of interest is not permitted under the loan agreement unless after such payment a firm meet 120% of its financial resource requirement;
(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)
it is in the standard form for short term subordinated loans prescribed by the FCA 1.

Restrictions

IPRU-INV 13.12.5 R R 30/06/2016

A firm 1 must calculate:

(1)
the aggregate amount of its short term subordinated loans, its preference shares which are not redeemable within two years, and for a firm 1 other than a category B1 firm 1 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)
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 30/06/2016

In the calculation of financial resources, a firm 1 must treat 1any amount by which the sum of IPRU-INV 13.12.5R(1)1 exceeds the product of IPRU-INV 13.12.5(2) as a liability1.

IPRU-INV 13.13 CAPITAL RESOURCES REQUIREMENT FOR AN EXEMPT CAD FIRM AND A CATEGORY B FIRM WHOSE PERMISSION DOES NOT INCLUDE ESTABLISHING, OPERATING OR WINDING UP A PERSONAL PENSION SCHEME

Application

IPRU-INV 13.13.1 R 30/06/2016

1This section applies to a personal investment firm which is either:

(1)
an exempt CAD firm; or
(2)
a category B firm whose permission does not include establishing, operating or winding up a personal pension scheme.

Requirement

IPRU-INV 13.13.2 R 30/06/2016

(1)
A firm to which MIPRU does not apply must calculate its capital resources requirement as in (2).
(2)
The firm must calculate its capital resources requirement as the higher of:
1. (a)
  £20,000; and
2. (b)
  the amount equivalent to the applicable percentage of its annual income specified in table 13.13.2(2)(b), depending on the type of firm.

Table 13.13.2(2)(b)

This table forms part of IPRU-INV 13.13.2R.

(A)	(B) Type of firm	(C) Applicable percentage of annual income
(1)	Exempt CAD firm	5%
(2)	Category B1 firm	10%
(3)	Category B2 firm	10%
(4)	Category B3 firm 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%
(5)	Category B3 firm not in (4)	5%

IPRU-INV 13.13.3 R 30/06/2016

(1)
A firm to which MIPRU also applies must calculate its capital resources requirement as in (2).
(2)
The firm must calculate its capital resources requirement as the higher of:
1. (a)
  £20,000; and
2. (b)
  the sum of:
  1. (i)
    the amount that would have applied to it under IPRU-INV 13.13.2R(2)(b) if it were a firm of the type in column (B) of table 13.13.2(2)(b); and
  2. (ii)
    the capital resources requirement in MIPRU 4.2. (Capital resources requirements), after excluding the fixed amounts specified in table 13.13.3(2)(b)(ii).

Table 13.13.3(2)(b)(ii)

This table forms part of IPRU-INV 13.13.3R.

Activity	Provision	Fixed amount
Insurance mediation activity or home finance mediation activity	MIPRU 4.2.11R(1)(a) (firm not holding client money or assets)	£5,000
	MIPRU 4.2.11R(2)(a) (firm holding client money or assets)	£10,000
Home financing and home finance administration (not connected to regulated mortgage contracts)	MIPRU 4.2.12R(1)(a)	£100,000
Home finance administration (with all assets off balance sheet)	MIPRU 4.2.19R(1)	£100,000
Home financing and home finance administration (connected to regulated mortgage contracts)	MIPRU 4.2.23R(1)	£100,000

IPRU-INV 13.13.4 G 30/06/2016

(1)
IPRU-INV 13.13.4G(2) illustrates how a firm that is subject to this section and MIPRU calculates its capital resources requirement under IPRU-INV 13.13.3R.
(2)
Example: A category B3 firm with annual income of £300,000 under this section and £100,000 from its home finance mediation activity (without holding client money) should calculate capital resources requirement as specified in table 13.13.4G(2).

Table 13.13.4G(2)

This table forms part of IPRU-INV 13.13.4G.

Requirement	Calculation	Amount
The capital resources requirement is the higher of:
(1) £20,000; and	£20,000	£20,000
(2) The sum of:
(a) the amount that would have applied to it under IPRU-INV 13.13.2R(2)(b) if it were a firm of the type in column (B) of table 13.13.2(2)(b); and	As this is a category B3 firm, the applicable calculation is 5% of £300,000.	£15,000
(b) the capital resources requirement in MIPRU 4.2. (Capital resources requirements), after excluding the fixed amounts specified in table 13.13.3(2)(b)(ii).	For a firm carrying on home finance mediation activity without holding client money, MIPRU 4.2.11R(1) specifies a requirement of 2.5% of £100,000 (excluding the amount of £5,000 in MIPRU 4.2.11R(1)(a)).	£2,500
	Total of part (2) of the capital resources requirement, which is £15,000 plus £2,500.	£17,500
	The capital resources requirement is the higher of part (1), which is £20,000, and part (2), which is £17,500.	£20,000

IPRU-INV 13.14 CALCULATION OF ANNUAL INCOME FOR AN EXEMPT CAD FIRM AND A CATEGORY B FIRM WHOSE PERMISSION DOES NOT INCLUDE ESTABLISHING, OPERATING OR WINDING UP A PERSONAL PENSION SCHEME

Application

IPRU-INV 13.14.1 R 30/06/2016

1This section applies to a personal investment firm which is either:

(1)
an exempt CAD firm;
(2)
a category B firm whose permission does not include establishing, operating or winding up a personal pension scheme.

Annual income

IPRU-INV 13.14.2 R 30/06/2016

This section applies to a firm when it calculates annual income for its capital resources requirement.

IPRU-INV 13.14.3 R 30/06/2016

(1)
“Annual income” is the annual income from the firm’s designated investment business as given in its reporting form in (3) drawn up at its most recent accounting reference date.
(2)
In (1), the most recent accounting reference date is the last one for which the firm reported annual income.
(3)
The relevant reporting form under SUP 16.12 is:
1. (a)
  the Retail Mediation Activities Return (RMAR) (Section B: Profit and Loss Account) for a category B firm; and
2. (b)
  FSA030 (Income Statement) for an exempt CAD firm.
(4)
If the firm’s most recent reporting form does not cover a 12-month period, the annual income is derived by converting the amount reported, proportionally, to a 12-month period.
(5)
If the firm does not yet have a reporting form under (1), the annual income is taken from the forecast or other appropriate accounts which the firm has submitted to the FCA.

IPRU-INV 13.14.4 R 30/06/2016

Annual income must include the following amounts due to the firm in respect of its designated investment business:

(1)
brokerage;
(2)
fees;
(3)
commissions; and
(4)
other related income (for example, administration charges2 or profit shares).

IPRU-INV 13.14.5 G 30/06/2016

A firm should include in its annual income those amounts it may have agreed to pay to other persons involved in a transaction, such as other intermediaries or self-employed advisers.

IPRU-INV 13.14.6 G 30/06/2016

A firm should not include in its annual income those amounts due to it that are used in the calculation of its capital resources requirement under MIPRU 4.2.11R (Capital resources requirement: mediation activity only) or MIPRU 4.2.19R (Capital resources requirement: insurance mediation activity and home financing, or home finance administration).

IPRU-INV 13.14.7 G 30/06/2016

For the purpose of IPRU-INV 13.4.3R, a firm should ensure that the amount of annual income adequately reflects the level of its designated investment business when deciding whether to add any income not included under any of the reporting forms in IPRU-INV 13.14.3R(3). In doing so, the firm should have regard to its circumstances, for example, where such income is being accounted for by a third party.

IPRU-INV 13.14.8 R 30/06/2016

If a firm is a principal, its annual income includes amounts due to its appointed representative for activities related to designated investment business for which the firm has accepted responsibility.

IPRU-INV 13.14.9 G 30/06/2016

If a firm is a network, its annual income should include the relevant income due to all of its appointed representatives for designated investment business.

IPRU-INV 13.15 CALCULATION OF CAPITAL RESOURCES TO MEET THE CAPITAL RESOURCES REQUIREMENT FOR A CATEGORY B FIRM WHOSE PERMISSION DOES NOT INCLUDE ESTABLISHING, OPERATING OR WINDING UP A PERSONAL PENSION SCHEME

Application

IPRU-INV 13.15.1 R 30/06/2016

1This section applies to a personal investment firm which is a category B firm whose permission does not include establishing, operating or winding up a personal pension scheme.

IPRU-INV 13.15.2 G 30/06/2016

The calculation of own funds by an exempt CAD firm is in IPRU-INV 13.1A.14R.

IPRU-INV 13.15.3 R 30/06/2016

A firm must calculate its capital resources in accordance with table 13.15.3(1).

Table 13.15.3(1)

This table forms part of IPRU-INV 13.15.3R.

Capital resources
Companies	Sole traders: Partnerships
Paid-up share capital (excluding preference shares2 redeemable by shareholders2 within two years) Eligible LLP members’ capital Share premium account Retained profits (see IPRU-INV 13.15.4R) and interim net profits (Note 1) Revaluation reserves Subordinated loans (see IPRU-INV 13.15.7R) Debt capital	Balances on proprietor’s or partners’ - capital accounts2 - current accounts2 (see IPRU-INV 13.15.4R) Revaluation reserves Subordinated loans (see IPRU-INV 13.15.7R)
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 profits2
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 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit)) relating to the audit of accounts.

Capital resources

Companies

Sole traders: Partnerships

Paid-up share capital (excluding preference shares2 redeemable by shareholders2 within two years)

Eligible LLP members’ capital

Share premium account

Retained profits (see IPRU-INV 13.15.4R) and interim net profits (Note 1)

Revaluation reserves

Subordinated loans (see IPRU-INV 13.15.7R)

Debt capital

Balances on proprietor’s or partners’

- capital accounts2

- current accounts2

(see IPRU-INV 13.15.4R)

Revaluation reserves

Subordinated loans (see IPRU-INV 13.15.7R)

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 profits2

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 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit)) relating to the audit of accounts.

IPRU-INV 13.15.4 R 30/06/2016

When calculating a firm’s capital resources, the following adjustments apply to retained profits or (for sole traders or partnerships) current accounts figures:

(1)
a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on cash flow hedges of financial instruments measured at cost or amortised cost;
(2)
a firm must de-recognise any defined benefit asset;
(3)
a firm may substitute for a defined benefit liability its deficit reduction amount and that election must be applied consistently in respect of any one financial year;
(4)
a firm must deduct any unrealised gains on investment property and include these within revaluation reserves; and
(5)
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 13.15.5 G 30/06/2016

A firm should keep a record of, and be ready to explain to its supervisory contacts in the FCA, 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.

Personal assets

IPRU-INV 13.15.6 G 30/06/2016

Where a firm is a sole trader or a partnership:

(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 FCA);
(2)
the firm's total financial resources, from whatever source, must at all times be sufficient to cover its total liabilities.

Subordinated loans – Category B firm

IPRU-INV 13.15.7 R 30/06/2016

A category B firm may include a short-term subordinated loan as capital resources (see table in IPRU-INV 13.15.3R), if all the conditions in IPRU-INV 13.15.8R are satisfied.

IPRU-INV 13.15.8 R 30/06/2016

The conditions referred to in IPRU-INV 13.15.7R are:

(1)
the subordinated loan must have an original maturity of at least two years or, if it has no fixed term, it is subject to not less than two years' notice of repayment;
(2)
the agreement governing the subordinated loan must not permit payment of interest unless a firm has at least 120% of its capital resources requirement after that payment2;
(3)
the agreement governing the subordinated loan must only permit repayment, prepayment or termination on:
1. (a)
  maturity, or on expiration of the period of notice, if a firm has at least 120% of its capital resources requirement after that payment2 or termination; or
2. (b)
  winding up after the claims of all other creditors and all outstanding debts have been settled;
(4)
the agreement governing the subordinated loan is in the standard form for short term subordinated loans prescribed by the FCA (see form 13.1 Form of subordinated loan agreement for personal investment firms); and
(5)
the restrictions in IPRU-INV 13.15.9R and IPRU-INV 13.15.10R are complied with.

Restrictions

IPRU-INV 13.15.9 R 30/06/2016

A Category B firm must calculate:

(1)
the aggregate amount of its short-term subordinated loans and its preference shares which are not redeemable within two years;
(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 13.15.10 R 30/06/2016

A category B firm must treat as a liability in the calculation or its capital resources any amount by which the sum of IPRU-INV 13.15.9R(1) exceeds the product of IPRU-INV 13.15.9R(2).

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