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

Application

IPRU-INV 13.1.1 R RP

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 firm1

    13.1 and 13.13 to 13.151

    1

    1

  1. (2)

    [deleted]1

  2. (3)

    [deleted]1

Purpose

IPRU-INV 13.1.2 G RP

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 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 capital resources and solvency requirements

IPRU-INV 13.1.4 R RP

A firm must at all times:

  1. (1)

    have and maintain capital resources at least equal to its relevant capital resources requirement1; and

  2. (2)

    be able to meet its liabilities as they fall due.

Capital resources: general accounting principles

IPRU-INV 13.1.4A R RP
  1. (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. (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 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 IPRU-INV 13.1A.3R2)]

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 IPRU-INV 13.1A.4R2)]

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 FCA1 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 FCA1 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 FCA1 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 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 firm1).

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 13.151 (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 RP

A firm must notify the FCA1 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
  1. (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. (2)

    1The FCA1 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 Capital resources and professional indemnity insurance 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.

Requirement to hold initial capital and professional indemnity insurance

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)

    2the requirement that is applied by sections 13.13 to 13.142.

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 IPRU-INV 13.1.11R4 and IPRU-INV 13.1.15R4 to IPRU-INV 13.1.27R4; or

      1
    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 IPRU-INV 13.1.11R4)]

      1
  2. (2)

    A2firm applying2 (b) or (c) above, must have initial capital of at least £20,0002.

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 IPRU-INV 13.1.10R4 and in addition must2 have:

    1
    1. (a)

      initial capital of EUR 25,000; or

    2. (b)

      professional indemnity insurance at least equal to the requirements1 of IPRU-INV 13.1.12R4 and IPRU-INV 13.1.15R4 to IPRU-INV 13.1.27R4; or

      211
    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 IPRU-INV 13.1.12R4)]

1
  1. (2)

    A2firm applying2 (b) or (c) above2 must2 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 G RP

2A firm should keep a record of and be ready to explain to its supervisory contacts in the FCA2 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 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 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 FCA2

    ;

  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.

Subordinated Loans – Exempt CAD firm

IPRU-INV 13.1A.18 R RP
IPRU-INV 13.1A.19 R RP

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 RP

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

  1. (1)

    the subordinated loan must be fully paid up;

  2. (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. (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. (4)

    the amount of the subordinated loan used in the calculation of a firm’sown funds must be reduced on a straight-line basis over the last five years of the term of the subordinated loan;

  5. (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

[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 13.6 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 13.8 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 13.13 CAPITAL RESOURCES REQUIREMENT FOR AN EXEMPT CAD FIRM AND A CATEGORY B FIRM

Application

IPRU-INV 13.13.1 R RP

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

  1. (1)

    an exempt CAD firm; or

  2. (2)

    a category B firm1.

Requirement

IPRU-INV 13.13.2 R RP
  1. (1)

    A firm to which MIPRU does not apply must calculate its capital resources requirement as in (2).

  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 RP
  1. (1)

    A firm to which MIPRU also applies must calculate its capital resources requirement as in (2).

  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 RP
  1. (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. (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 13.13.5 R RP

1A firm whose permission includes establishing, operating or winding up a personal pension scheme must calculate its capital resources requirement as the sum of:

  1. (1)

    the capital resources requirement that is applied under IPRU-INV 13.13.2R(2) or IPRU-INV 13.13.3R(2); and

  2. (2)

    the financial resources requirement calculated in accordance with IPRU-INV 5 (Investment Management Firms).

IPRU-INV 13.14 CALCULATION OF ANNUAL INCOME FOR AN EXEMPT CAD FIRM AND A CATEGORY B FIRM

Application

IPRU-INV 13.14.1 R RP

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

  1. (1)

    an exempt CAD firm;

  2. (2)

    a category B firm1.

Annual income

IPRU-INV 13.14.2 R RP

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

IPRU-INV 13.14.3 R RP
  1. (1)

    Annual income” is the annual income from the firm’sdesignated investment business as given in its reporting form in (3) drawn up at its most recent accounting reference date.

  2. (2)

    In (1), the most recent accounting reference date is the last one for which the firm reported annual income.

  3. (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. (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. (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 RP

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

  1. (1)

    brokerage;

  2. (2)

    fees;

  3. (3)

    commissions; and

  4. (4)

    other related income (for example, administration charges2 or profit shares).

IPRU-INV 13.14.5 G RP

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 RP

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 RP

For the purpose of IPRU-INV 13.14.3R, 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 13.4.3R(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 RP

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 RP

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 OWN FUNDS TO MEET THE CAPITAL RESOURCES REQUIREMENT FOR A CATEGORY B FIRM

Application

IPRU-INV 13.15.1 R RP

1This section applies to a personal investment firm which is a category B firm1.

IPRU-INV 13.15.2 G RP

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

IPRU-INV 13.15.3 R RP

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.

IPRU-INV 13.15.4 R RP

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

  1. (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. (2)

    a firm must de-recognise any defined benefit asset;

  3. (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. (4)

    a firm must deduct any unrealised gains on investment property and include these within revaluation reserves; and

  5. (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 RP

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 RP

Where a 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 FCA);

  2. (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 RP

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 RP

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

  1. (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. (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. (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. (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. (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 RP

A Category B firm must calculate:

  1. (1)

    the aggregate amount of its short-term subordinated loans and its preference shares which are not redeemable within two years;

  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 13.15.10 R RP

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).