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IPRU-INV 5.1 Application

IPRU-INV 5.1.1 R
  1. (1)
    1. (a)

      1This chapter applies to an investment management firm, other than:

      1. (i)

        an incoming EEA firm unless it has a top-up permission for acting as trustee or depositary of a UCITS; or

      2. (ii)

        a MiFID investment firm (unless it is an exempt CAD firm for the purpose of calculating its own funds and if it carries on any regulated activity other than MiFID business).

    2. (aa)

      This chapter applies, as set out in IPRU-INV 5.1.2R, to:

      1. (i)

        exempt CAD firms;

      2. (ii)

        OPS firms;

      3. (iii)

        non-OPS Life Offices and non-OPS Local Authorities; and

      4. (iv)

        individuals admitted to membership collectively.

IPRU-INV 5.1.2 R

Exempt CAD firms

OPS firms (see Note 1 below)

Non-OPS Life Offices and Non-OPS Local Authorities

Individuals admitted to membership collectively

Financial resources rules

IPRU-INV 5.2.1R to 5.7.3R

No (see Note 3 below)

No

No

Yes

Individuals whose sole investment business is giving investment advice to institutional or corporate investors

Firms subject to "lead regulator arrangements"

All other firms

Financial resources rules

IPRU-INV 5.2.1R to 5.7.3R

No

No

Yes

(see Note 2 below)

Accounting records rules

IPRU-INV 5.3.1R (1) to 5.3.1R(6)

No

Yes

Yes

Note 1. Firms are referred to the specific compliance reports for OPS firms required by Chapter 16 of the Supervision Manual.

Note 2. A firm subject to "lead regulator arrangements" whereby a body other than the FCA is responsible for its financial regulation shall comply with the corresponding financial resources rules and financial returns rules of that body, and a breach of such rules shall be treated as a breach of the rules of the FCA.

Note 3. The financial and non-financial resources rules for an exempt CAD firm are set out in IPRU-INV chapter 9. However, IPRU-INV 5.2.1R to 5.7.3R apply to an exempt CAD firm for the purpose of calculating its own funds (see IPRU-INV 9.2.9R(2)(a)) (although the Category A items of Tier 1 capital as set out in IPRU-INV 5.8.1R are replaced by all the items in IPRU-INV 9.3.1R) and if it carries on any regulated activity other than MiFID business (see IPRU-INV 9.2.3R).

Interpretation

PRU-INV 5.1.4 G

The definitions in the glossary at IPRU-INV 5 Appendix 12 apply to terms shown in bold type in this chapter (other than headings and titles). Where the term is italicised, the FCA HandbookGlossary definition applies.

IPRU-INV 5.2 General requirement

Adequacy of financial resources

IPRU-INV 5.2.1 R

1A firm must at all times have available the amount and type of financial resources required by the rules in this chapter.

Basic requirement

IPRU-INV 5.2.2 R

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

Financial resources

IPRU-INV 5.2.3 R

A firm'sfinancial resources means:

  1. (a)

    its own funds, if the firm is subject to an own funds requirement under IPRU-INV 5.4.2R or IPRU-INV 5.4.4R; or

  2. (b)

    its liquid capital, if the firm is subject to a liquid capital requirement under IPRU-INV 5.4.1R.

IPRU-INV 5.3 Financial resources

Own funds

IPRU-INV 5.3.1 R

1A firm must calculate its own funds in accordance with IPRU-INV 5.8, unless the firm has a Part 4A permission for acting as trustee or depositary of a UCITS.

IPRU-INV 5.3.2 R

For a firm that has a Part 4A permission for acting as trustee or depositary of a UCITS, own funds has the meaning in article 4(1)(118) of the EU CRR.

Liquid capital

IPRU-INV 5.3.3 R
  1. (a)

    A firm must calculate its liquid capital in accordance with IPRU-INV 5.8.

  2. (b)

    In addition to the above, a firm whose permitted business includes establishing, operating or winding up a personal pension scheme must comply with:

    1. (i)

      the requirements in relation to the realisability of liquid capital found in Note 2 of IPRU-INV 5.9.1R; and

    2. (ii)

      the limitation in respect of Item 14 of IPRU-INV 5.8.2R, not to include net trading book profits in the firm’sliquid capital calculation.

IPRU-INV 5.4 Financial resources requirement

Determination of requirement

IPRU-INV 5.4.1 R

1The financial resources requirement for a firm is a liquid capital requirement, determined in accordance with IPRU-INV 5.4.10R:

  1. (i)

    unless the firm falls within any of the exceptions in IPRU-INV 5.4.2R; or

  2. (ii)

    the firm is an incoming EEA firm with a top-up permission of acting as trustee or depositary of a UCITS.

Exceptions from the liquid capital requirement

IPRU-INV 5.4.2 R

The financial resources requirement is an own funds requirement determined in accordance with IPRU-INV 5.4.3R for a firm if its permitted business does not include establishing, operating or winding up a personal pension scheme and which:

  1. (i)

    is an exempt CAD firm which is also a residual CIS operator or a small authorised UK AIFM and that scheme or AIF only invests in venture capital investments for non-retail clients; or

  2. (ii)

    is not an exempt CAD firm if:

    1. (a)

      the firm's permitted business does not include the holding of customers' monies or assets and it neither executes transactions (or otherwise arranges deals) in investments nor has such transactions executed for itself or its customers; or

    2. (b)

      the firm's permitted business includes the activities as in (a) above, but only in respect of venture capital investments for non-retail clients; or

    3. (c)

      the firm is a trustee of an authorised unit trust scheme whose permitted business consists only of trustee activities and does not include any other activity constituting specified trustee business or the firm is a depositary of an ICVC or ACS or a depositary appointed in line with FUND 3.11.12R (Eligible depositaries for UK AIFs) or a UK depositary of a non-EEA AIF whose permitted business consists only of depositary activities.

    4. (d)

      the firm's permitted business limits it to acting a residual CIS operator or a small authorised UK AIFM where the main purpose of the collective investment scheme or AIF (as applicable) is to invest in permitted immovables whether in the UK or abroad.

Own funds requirement

IPRU-INV 5.4.3 R

The own funds requirement for a firm subject to IPRU-INV 5.4.2R is the higher of:

  1. (i)

    £4 million for a firm which is a depositary of an authorised fund, if the authorised fund is an AIF;

  2. (ia)

    €125,000 for a firm which is a depositary appointed in line with FUND 3.11.12R (Eligible depositaries for UK AIFs) or a UK depositary of a non-EEA AIF;

  3. (ib)

    for a firm which is a depositary of a UCITS scheme, the higher of:

    1. (A)

      the requirement calculated depending on the selected approach in accordance with articles 315 or 317 of the EU CRR; and

    2. (B)

      £4million; and

  4. (ii)

    £5,000 for any other firm.

IPRU-INV 5.4.4 R

The financial resources requirement for an incoming EEA firm with a top-up permission for acting as trustee or depositary of a UCITS is the own funds requirement in IPRU-INV 5.4.3R(ib).

IPRU-INV 5.4.5 G

In accordance with IPRU-INV 5.4.3R(ib)(A) and IPRU-INV 5.4.4R, a firm which is a depositary of a UCITS scheme has a choice between:

  1. (a)

    the basic indicator approach in article 315 of the EU CRR; and

  2. (b)

    the standardised approach in article 317 of the EU CRR.

IPRU-INV 5.4.6 G

If a firm that is the depositary of a UCITS scheme is seeking to determine its own funds requirement on the basis of the standardised approach in article 317 EU CRR, it should notify the FCA in advance.

IPRU-INV 5.4.7 G

The effect of IPRU-INV 5.4.4R is to apply the financial resources requirement to an incoming EEA firm with a top-up permission for acting as trustee or depositary of a UCITS in relation to its activity in the UK of acting as trustee or depositary of a UCITS.

IPRU-INV 5.4.8 R

A firm which is the depositary of a UCITS scheme must comply with the rules in IFPRU 2 as if it were an IFPRU investment firm that is not a significant IFPRU investment firm.

IPRU-INV 5.4.9 G

A firm to which IPRU-INV 5.4.8R applies is, in particular, reminded of the rules in IFPRU 2 that determine whether a firm must apply the ICAAP rules on an individual basis or comply with them on a consolidated basis or sub-consolidated basis (see IFPRU 2.2.45R to IFPRU 2.2.49R).

Liquid capital requirement

IPRU-INV 5.4.10 R

The liquid capital requirement for a firm subject to IPRU-INV 5.4.1R is:

  1. (i)

    for a firm whose permitted business includes establishing, operating or winding up a personal pension scheme, the higher of (A) £20,000, and (B) the calculation from IPRU-INV 5.9.1R;

  2. (ii)

    for any other firm, the higher of (A) £5,000 and (B), its total capital requirement calculated in accordance with IPRU-INV 5.4.12R.

IPRU-INV 5.4.11 G
  1. (1)

    This guidance applies to a firm whose permitted business includes establishing, operating or winding up a personal pension scheme for the purpose of IPRU-INV 5.9.1R.

  2. (2)

    A firm should:

    1. (a)

      value each asset in accordance with generally accepted standards used in the relevant sector for the asset, taking into account its individual characteristics and using all the information reasonably available;

    2. (b)

      on a consistent basis across all clients who hold the same type of assets, apply the following:

      1. (i)

        a prudent valuation approach; and

      2. (ii)

        a reasonable valuation methodology;

    3. (c)

      when determining whether an asset is capable of being readily realised within 30 days, consider whether:

      1. (i)

        the transaction can be concluded within that time limit in the ordinary course of business. For example, if the transaction can be concluded within 30 days but, in practice, takes longer due to factors such as delays in receiving information or permissions from third parties, then the asset can be categorised as a Standard Asset;

      2. (ii)

        a Standard Asset can be realised for a value close to the most recent valuation if no material change to the underlying economic conditions has occurred.

Total capital requirement

IPRU-INV 5.4.12 R

A firm's total capital requirement is the sum of its:

  1. (a)

    position risk requirement calculated in accordance with IPRU-INV 5.11;

  2. (b)

    position risk requirement calculated in accordance with IPRU-INV 5.11;

  3. (c)

    counterparty risk requirement calculated in accordance with IPRU-INV 5.12 to 5.15;

  4. (d)

    foreign exchange requirement calculated in accordance with IPRU-INV 5.16; and

  5. (e)

    other assets requirement calculated in accordance with IPRU-INV 5.17.

IPRU-INV 5.4.13 G

A firm which discloses clients' money or assets on its balance sheet need not calculate the requirements under IPRU-INV 5.11 to 5.17 on such items where these do not represent assets or liabilities of the firm itself.

IPRU-INV 5.5 Annual expenditure

Determination

IPRU-INV 5.5.1 R

1 Annual expenditure is:

  1. (a)

    the sum of the amounts described as total expenditure in the four quarterly financial returns up to (and including) that prepared at the firm's most recent accounting reference date, less the following items (if they are included within such expenditure):

    1. (i)

      staff bonuses, except to the extent that they are guaranteed;

    2. (ii)

      employees' and directors' shares in profits, except to the extent that they are guaranteed;

    3. (iii)

      other appropriations of profits;

    4. (iv)

      shared commission and fees payable which are directly related to commission and fees receivable which are included within total revenue;

    5. (v)

      interest charges in respect of borrowings made to finance the acquisition of the firm'sreadily realisable investments;

    6. (vi)

      interest paid to customers on client money;

    7. (vii)

      interest paid to counterparties;

    8. (viii)

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

    9. (ix)

      foreign exchange losses; or

  2. (b)

    where the previous accounting period does not include twelve months' trading, an amount calculated in accordance with paragraph (a) above prorated to an equivalent annual amount; or

  3. (c)

    where a firm has not prepared four quarterly financial returns since the commencement of its permitted business, an amount based on forecast expenditure included in its budget for the first twelve months' trading, as submitted with its application for membership.

IPRU-INV 5.5.2 G

A firm'sfinancial resources requirement will be recalculated annually when its fourth quarterly financial return is prepared. The firm must maintain financial resources sufficient to meet its new financial resources requirement from the date on which the fourth quarterly financial return is prepared and no later than 80 business days after the firm’saccounting reference date. The expenditure based requirement applicable at the accounting reference date will be based on the four quarterly financial returns prepared up to and on that date.

IPRU-INV 5.6 Qualifying subordinated loans

Characteristics of long term qualifying subordinated loans

IPRU-INV 5.6.1 R

1A long term qualifying subordinated loan (IPRU-INV 5.8.1R Item 11) must have the following characteristics:

  1. (a)

    the loan is repayable only on maturity or on the expiration of a period of notice in accordance with paragraph (c) below or on the winding up of the firm;

  2. (b)

    in the event of the winding up of the firm, the loan ranks after the claims of all other creditors and is not to be repaid until all other debts outstanding at the time have been settled;

  3. (c)

    either

    1. (i)

      the minimum original maturity of the loan is 5 years; or

    2. (ii)

      the loan does not have a minimum or fixed maturity but requires 5 years notice of repayment; and

  4. (d)

    the loan is fully paid-up.

Amount allowable in the calculation of own funds

IPRU-INV 5.6.2 R

A firm may only take into account the paid-up amount of a long term qualifying subordinated loan in the calculation of its own funds. This amount must be amortised on a straight-line basis over the five years prior to the date of repayment.

Requirements applicable to short-term qualifying subordinated loans

IPRU-INV 5.6.3 R

A short term qualifying subordinated loan (IPRU-INV 5.8.1R item 15) must have the characteristics set out in IPRU-INV 5.6.1R save that the minimum period set out in IPRU-INV 5.6.1R(c) shall be two years.

IPRU-INV 5.6.4 R

A firm must not make any payment of principal or interest which would result in a breach of IPRU-INV 5.2.2R.

Form of qualifying subordinated loan agreement

IPRU-INV 5.6.5 R

A qualifying subordinated loan must be in the form prescribed by the FCA for the purposes of this rule.

IPRU-INV 5.6.6 G

Firms wishing to initiate a subordinated loan agreement other than in the prescribed form are advised to contact the FCA.

Conditions applicable to qualifying subordinated loans

IPRU-INV 5.6.7 R

A firm wishing to include a qualifying subordinated loan in its calculation of liquid capital must:

  1. (a)

    provide the FCA with a copy of the agreement not less than 10 business days before the loan is to be made; and

  2. (b)

    certify to the FCA that the loan agreement complies with the FCA'sprescribed subordinated loan agreement.

Requirements on a firm in relation to qualifying subordinated loans

IPRU-INV 5.6.8 R

A firm including a qualifying subordinated loan in its calculation of liquid capital must not:

  1. (a)

    secure all or any part of the loan;

  2. (b)

    redeem, purchase or otherwise acquire any of the liabilities of the borrower in respect of the loan;

  3. (c)

    amend or concur in amending the terms of the loan agreement;

  4. (d)

    repay all or any part of the loan otherwise than in accordance with the terms of the loan agreement; or

  5. (e)

    take or omit to take any action whereby the subordination of the loan or any part thereof might be terminated, impaired or adversely affected.

IPRU-INV 5.7 Qualifying property and qualifying undertakings

Qualifying property and qualifying amount defined

IPRU-INV 5.7.1 R

1 Qualifying property is any freehold or leasehold (or the equivalent tenure in Scotland or other territories) land and buildings purchased or secured by way of a mortgage (or other form of secured long-term arrangement) where the security for the liability is the property (and does not include any other allowable assets). The qualifying amount is the lowest of:

  1. (a)

    85 per cent of the current market value of the property (if known);

  2. (b)

    85 per cent of the net book value of the property;

  3. (c)

    the amount of the liability outstanding under mortgage or other secured long term arrangement, excluding any part of the liability repayable within one year.

IPRU-INV 5.7.2 G

IPRU-INV 5.7.1R can be illustrated as follows:

Current market value

£200,000

Net book value

£100,000

Mortgage

£70,000, including £5,000 payable within one year

Qualifying amount is the lowest of:

(a) 85% x £200,000 =

£170,000

(b) 85% x £100,000 =

£85,000

(c) £70,000 - £5,000 =

£65,000

i.e. £65,000

Qualifying undertakings

IPRU-INV 5.7.3 R

A qualifying undertaking is an arrangement between a firm and an approved bank which:

  1. (a)

    is in the form prescribed by the FCA for the purposes of this rule; and

  2. (b)

    complies with the appropriate limitations set out in IPRU-INV 5.8.2R(7).

IPRU-INV 5.8 Calculation of own funds and liquid capital

IPRU-INV 5.8.1 R

1A firm must calculate its own funds and liquid capital as shown below, subject to the detailed requirements set out in IPRU-INV 5.8.2R.

Financial resources

Category

IPRU-INV 5.8.2R paragraph

Tier 1

(1)

Paid-up share capital (excluding preference shares)

A

(1A)

Eligible LLP members' capital

(2)

Share premium account

(3)

Reserves

2A

(4)

Non-cumulative preference shares

Less:

(5)

Investments in own shares

B

(6)

Intangible assets

(7)

Material current year losses

4

(8)

Material holdings in credit and financial institutions and, for exempt CAD firms only, material insurance holdings.

5 and 5A

(8A)

Excess LLP members' drawings

Tier 1 capital = (A-B)

C

Plus: TIER 2

1

(9)

Revaluation reserves

D

(10)

Fixed term cumulative preference share capital

1(a)

(11)

Long-term Qualifying Subordinated Loans

1(a); 6

(12)

Other cumulative preference share capital and debt capital but, for exempt CAD firms, only perpetual cumulative preference share capital and qualifying capital instruments

6A

(13)

Qualifying arrangements

7

"Own Funds" = (C+D)

E

Plus: TIER 3

(14)

Net trading book profits

F

1(b)(i); 8

(15)

Short-term Qualifying Subordinated Loans and excess Tier 2 capital

1(b)(ii); 1(c); 9

(16)

Illiquid assets

G

10

(17)

Qualifying Property

11

"Liquid Capital" = (E+F+G)

IPRU-INV 5.8.2 R

1 Deductions and Ratios (Items 10, 11 and 15)

(a)

Notwithstanding IPRU-INV 5.8.1R and 5.8.2R for an exempt CAD firm, in calculating own funds, all of Item 8 must be deducted after the total of Tier 1 and Tier 2 capital and the following restrictions apply:

(i)

the total of fixed term cumulative preference shares (item 10) and long-term qualifying subordinated loans (item 11) that may be included in Tier 2 capital is limited to 50 per cent of Tier 1 capital;

(ii)

Tier 2 capital must not exceed 100 per cent of Tier 1 capital.

(b)

A firm which is not an exempt CAD firm and which is subject to a liquid capital requirement under IPRU-INV 5.4.1R may take into account qualifying subordinated loans in the calculation of liquid capital up to a maximum of 400% of its Tier 1 capital.

2 Non corporate entities

(a)

In the case of partnerships or sole traders, the following terms should be substituted, as appropriate, for items 1 to 4 in Tier 1 capital:

(i)

partners' capital accounts (excluding loan capital);

(ii)

partners' current accounts (excluding unaudited profits and loan capital);

(iii)

proprietors' account (or other term used to signify the sole trader's capital but excluding unaudited profits).

(b)

Loans other than qualifying subordinated loans shown within partners' or proprietors' accounts must be classified as Tier 2 capital under item 12.

(c)

For the calculation of own funds, partners' current accounts figures are subject to the following adjustments in respect of a defined benefit occupational pension scheme:

(i)

a firm must derecognise any defined benefit asset;

(ii)

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.

Note 1

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.

2A Reserves

For the calculation of own funds the following adjustments apply to the audited reserves figure:

(a)

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;

(b)

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

(c)

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.

Note 2

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.

(d)

a firm must not include any unrealised gains from investment property.

Note 3

Unrealised gains from investment property should be reported as part of revaluation reserves.

(e)

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.

Note 4

Reserves must be audited unless the firm is exempt from the provisions of Part VII of the Companies Act 1985 (section 249A (Exemptions from audit)), or where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit)) relating to the audit of accounts.

3 Intangible assets (Item 6)

Intangible assets comprise:

(a)

formation expenses to the extent that these are treated as an asset in the firm's accounts;

(b)

goodwill, to the extent that it is treated as an asset in the firm's accounts; and

(c)

other assets treated as intangibles in the firm's accounts.

Intangible assets do not include a deferred acquisition cost asset.

4 Material current year losses (Item 7)

Losses in current year operating figures must be deducted when calculating Tier 1 capital if such losses are material. For this purpose profits and losses must be calculated quarterly or monthly, as appropriate. If this calculation reveals a net loss it shall only be deemed to be material for the purposes of this Table if it exceeds 10 per cent of the firm's Tier 1 capital.

5 Material holdings in credit and financial institutions (Item 8)

Material holdings comprise:

(a)

where the firm holds more than 10 per cent of the equity share capital of the institution, the value of that holding and the amount of any subordinated loans to the institution and the value of holdings in qualifying capital items or qualifying capital instruments issued by the institution;

(b)

in the case of holdings other than those mentioned in (a) above, the value of holdings of equity share capital in, and the amount of subordinated loans made to, such institutions and the value of holdings in qualifying capital items or qualifying capital instruments issued by such institutions to the extent that the total of such holdings and subordinated loans exceeds 10 per cent of the firm'sown funds calculated before the deduction of item 8.

5A Material insurance holdings (Item 8)

(a)

A material insurance holding means the holdings of an exempt CAD firm of items of the type set out in (b) in any:

(i)

insurance undertaking; or

(ii)

insurance holding company;

that fulfils one of the following conditions:

(iii)

it is a subsidiary undertaking of that firm; or

(iv)

that firm holds a participation in it.

(b)

An item falls into this provision for the purpose of (a) if it is:

(i)

an ownership share; or

(ii)

subordinated debt or another item of capital that forms part of the tier two capital resources that falls into GENPRU 2 or, as the case may be, INSPRU 7, or is an item of “basic own funds” defined in the PRA Rulebook: Glossary.

6 Long term qualifying subordinated loans (Item 11)

Loans having the characteristics prescribed by IPRU-INV 5.6.1R may be included in item 11, subject to the limits set out in paragraph (1) above.

6A Perpetual cumulative preference share capital

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

(a)

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

(b)

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

(c)

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

(d)

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

(e)

it must be fully paid-up.

7 Qualifying arrangements (Item 13)

(a)

An exempt CAD firm may only include a qualifying undertaking or other arrangement in item 13 if it is a qualifying capital instrument or a qualifying capital item.

(b)

A firm which is not an exempt CAD firm may only include qualifying undertakings in its calculation of liquid capital if:

(i)

it maintains liquid capital equivalent to 6/52 of its annual expenditure in a form other than qualifying undertakings; and

(ii)

the total amount of all qualifying undertakings plus qualifying subordinated loans does not exceed the limits set out in paragraph (1)(b) above.

8 Net trading book profits (Item 14)

For firms which are not exempt CAD firms unaudited profits can be included at item 14.

This Item must not be included in the liquid capital calculation of a firm whose permitted business includes establishing, operating or winding up a personal pension scheme.

Note 5

Non-trading book interim profits may only be included in Tier 1 of the calculation if they have been independently verified by the firm’s external auditors, unless the firm is exempt from the provisions of Part VII of the Companies Act 1985 (section 249A (Exemptions from audit)), or where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit)) relating to the audit of accounts.

For this purpose, the external auditor should normally undertake at least the following:

(a)

satisfy himself that the figures forming the basis of the interim profits have been properly extracted from the underlying accounting records;

(b)

review the accounting policies used in calculating the interim profits so as to obtain comfort that they are consistent with those normally adopted by the firm in drawing up its annual financial statements;

(c)

perform analytical review procedures on the results to date, including comparisons of actual performance to date with budget and with the results of prior periods;

(d)

discuss with management the overall performance and financial position of the firm;

(e)

obtain adequate comfort that the implications of current and prospective litigation, all known claims and commitments, changes in business activities and provisions for bad and doubtful debts have been properly taken into account in arriving at the interim profits; and

(f)

follow up problem areas of which the auditors are already aware in the course of auditing the firm’s financial statements.

A firm wishing to include interim profits in Tier 1 capital in a financial return should submit to the FCA with the financial return a verification report signed by its external auditor which states whether the interim results are fairly stated, unless the firm is exempt from the provisions of Part VII of the Companies Act 198 (section 249A (Exemptions from audit)), or where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit)) relating to the audit of accounts.

Profits on the sale of capital items or arising from other activities which are not directly related to the investment business of the firm may also be included within the calculation of liquid capital, but (unless the firm is exempt as above) only if they can be separately verified by the firm’s auditors. In such a case, such profits can form part of the firm’s Tier 1 capital as profits.

9 Short term qualifying subordinated loans (Item 15)

Loans having the characteristics prescribed by IPRU-INV 5.6.3R may be included in item 15 subject to the limits set out in paragraph (1) above. Tier 2 capital which exceeds the ratios prescribed by paragraph (1)(a) and (b) may be included in item 15 subject to paragraph (1) above.

10 Illiquid assets (Item 16)

Illiquid assets comprise:

(a)

tangible fixed assets.

Note 6

In respect of tangible fixed assets purchased under finance leases the amount to be deducted as an illiquid asset shall be limited to the excess of the asset over the amount of the related liability shown on the balance sheet.

(b)

holdings in, including subordinated loans to, credit or financial institutions which may be included in the own funds of such institutions unless they have been deducted under item 8;

(c)

any investment in undertakings other than credit institutions and other financial institutions where such investments are not readily realisable;

(d)

any deficiency in net assets of a subsidiary;

(e)

deposits not available for repayment within 90 days or less (except for payments in connection with margined futures or options contracts);

Note 7

Where cash is placed on deposit with a maturity of more than 90 days but is repayable on demand subject to the payment of a penalty, then this is not required to be deducted as an illiquid asset but a deduction is required for the amount of the penalty.

(f)

loans, other debtors and accruals not falling due to be repaid within 90 days or which are more than one month overdue by reference to the contractual payment date;

(g)

physical stocks (except where subject to the position risk requirement as set out in IPRU-INV 5.11; and

(h)

prepayments to the extent that the period of prepayment exceeds six weeks in the case of a firm subject to the 6/52 expenditure based requirement or thirteen weeks in the case of a firm subject to the 13/52 expenditure based requirement.

(i)

if not otherwise covered, any holding in eligible capital instruments of an insurance undertaking, insurance holding company, or reinsurance undertaking that is a subsidiary or participation. Eligible capital instruments include ordinary share capital, cumulative preference shares, perpetual securities and long-term subordinated loans that are eligible for insurance undertakings under INSPRU 1.

Illiquid assets do not include a defined benefit asset or a deferred acquisition cost asset.

11 Qualifying property (Item 17)

This item comprises the qualifying amount calculated in accordance with IPRU-INV 5.7.1R.

IPRU-INV 5.9 Liquid Capital Requirement for firms whose permitted business includes establishing, operating or winding up a personal pension scheme

IPRU-INV 5.9.1 R

1 Liquid Capital Requirement = Initial Capital Requirement + Capital Surcharge

Calculation of Initial Capital Requirement

ICR = (√AUA) x K1

Where

ICR

means Initial Capital Requirement

AUA

means Assets Under Administration calculated as the sum of the most recent annual valuations over the preceding 12 months of the personal pension schemes administered by the firm, and adjusted to include any revaluation of assets that may occur between the date of the most recent annual valuation and the date when the firm must calculate its AUA.

A firm must calculate its AUA quarterly in line with the dates when it has to submit its regulatory capital reporting form in accordance with SUP 16.12 (Integrated Regulatory Reporting).

Where it is not possible to value an asset (for example because there is no readily available market price), the most recent market valuation should be used.

Where it would be reasonable to assume that the value of the asset has changed by more than 15% since the most recent market valuation, a firm should instead use a reasonable estimate. This is without prejudice to any requirement on a firm to provide a personal pension scheme member with accurate and timely valuations of their portfolios.

K1

is set subject to the firm’s AUA as specified in the below table:

AUA

K1 constant to be applied

<£100m

10

£100-£200m

15

>£200m

20

When K1 changes due to an increase in AUA, in accordance with the thresholds in this table, the firm must apply the new K1 value within six months following the date on which its AUA exceeded the threshold of its previous K1 value.

Calculation of Capital Surcharge

CS =(√P) x K2 x ICR

Where

CS

means Capital Surcharge

P

means the fraction of personal pension schemes administered by the firm which contain one or more asset types which do not appear in the list of Standard Assets below, at the most recent quarter end. For example, if a quarter of personal pensions contained non-Standard Assets, this would be inputted in to the formula as 0.25.

K2

is set at 2.5.

ICR

means the Initial Capital Requirement calculated as above.

Standard Assets

The List of Standard Assets is as follows (subject to Note 1):

Cash

Cash funds

Deposits

Exchange traded commodities

Government & local authority bonds and other fixed interest stocks

Investment notes (structured products)

Shares in Investment trusts

Managed pension funds

National Savings and Investment products

Permanent interest bearing shares (PIBs)

Physical gold bullion

Real estate investment trusts (REITs)

Securities admitted to trading on a regulated venue

UK commercial property

Units in Regulated collective investment schemes

NOTE 1:

A Standard Asset must be capable of being accurately and fairly valued on an ongoing basis and readily realised within 30 days, whenever required.

NOTE 2:

In addition to complying with the provisions of IPRU-INV 5.8, in accordance with IPRU-INV 5.3.2R, a firm must hold its liquid capital in financial resources as follows:

ICR

realisable within 12 months; and

CS

realisable within 30 days

IPRU-INV 5.10 Expenditure based requirement

IPRU-INV 5.10.1 R

1A firm'sexpenditure based requirement is a fraction of its annual expenditure determined in accordance with IPRU-INV 5.10.2 R.

IPRU-INV 5.10.2 R
  1. 1: The fraction is 6/52 where:

    1. (a) the firm is an authorised unit trust manager; or

    2. (aa) the firm is an authorised contractual scheme manager; or

    3. (b) the firm acts only as an authorised corporate director of an ICVC; or

    4. (c) the firm is an investment manager (including the operator of an unregulated collective investment scheme in relation to which the firm carries on the activity of an investment manager), unless paragraph 2 applies.

  2. 2: The fraction is 13/52 where the firm is an investment manager as in paragraph 1(c) above, or is a custodian, and the firm either:

    1. (a) itself holds customers' monies or assets; or

    2. (b) procures the appointment as custodian of its customers' monies or assets of an associate of the firm which is not an approved bank.

    [Note: Paragraph 1(a) above includes a firm which acts as an authorised unit trust manager and, in addition, is both or either:

    1. (a) an authorised corporate director of an ICVC; or

    2. (b) an authorised contractual scheme manager]

IPRU-INV 5.11 Position risk requirement

IPRU-INV 5.11.1 R

1A firm'sposition risk requirement is determined by calculating on a daily mark to market basis, the sum of the weighted value of each position held by the firm. The weighted value for each position must be calculated by multiplying its current market value by the appropriate factor set out in IPRU-INV 5.11.2R.

[Note: this requirement does not attach to items deducted in full as illiquid assets]

IPRU-INV 5.11.2 R

Instrument

Requirement

A Debt

Maturity

0-2 years

2-5 years

>5 years

Central Government

2%

5%

13%

Qualifying debt securities

· fixed rate

8%

8%

15%

· floating rate

10%

10%

15%

Non-qualifying debt securities

· fixed rate

10%

20%

30%

· floating rate

30%

30%

30%

B Equities

· Traded on a recognised or designated investment exchange.

25%

· other

100%

C Stock position in physical commodities

· Physical positions associated with firm'sinvestment business

30% of realisable value

D Derivatives

· Exchange traded futures and written options

4 x initial margin requirement.

· otc futures and written options

Apply the appropriate percentage shown in Sections A, B, & C above to the market value of the underlying position.

· Purchased options

Apply the appropriate percentage shown in Sections A, B & C above 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.

E Other investments

· units in regulated collective investment schemes

25% of realisable value.

· with profit life policies

20% of surrender value.

· other

100% of the value of investment or underlying instrument.

IPRU-INV 5.12 Counterparty risk requirement (CRR)

IPRU-INV 5.12.1 R

11

Receivables

In the case of receivables due to the firm in the form of fees, commission, interest, dividends and margin in exchange-traded futures or options contracts, which are directly related to items included in the trading book, the CRR is calculated as follows:

CRR = A x RF, where

A = the amount of the sum due; and

RF = the appropriate risk factor derived from IPRU-INV 5.14.1R.

Note 1

This requirement attaches only to balances arising from proprietary activity falling within the definition of the trading book.

Note 2

This requirement does not attach to items deducted in full as illiquid assets.

2

Delivery of cash against documents

Where a firm enters into a trading book transaction and the transaction is to be settled by delivery of cash against documents, the firm's CRR in respect of that transaction is calculated as follows:

CRR = (SP - MV) x RF, where

SP = agreed settlement price;

MV = current market value;

RF = the appropriate risk factor derived from IPRU-INV 5.13.1R.

The CRR should only be calculated where the difference between SP and MV would involve a loss if borne by the firm.

3

Free deliveries

Where a firm enters into a trading book transaction and the firm pays for the securities before it receives documents of title or delivers documents of title before receiving payment, the CRR in respect of that transaction is calculated as follows:

CRR =

V x RF,

where

V

(i)

the full amount due to the firm (i.e. the contract value) where the firm has delivered securities to a counterparty and has not received payment; or

(ii)

the market value of the securities, where the firm has made payment to a counterparty for securities and has not received documents of title; and

RF =

the appropriate risk factor derived from IPRU-INV 5.14.1R.

4

Settlement outstanding 30 days or more

In the case of trading book transactions entered into by a firm where the firm pays for the securities before it receives documents of title or delivers documents of title before receiving payment and settlement has not been effected within 30 days of falling due, CRR = V.

5

Repos/Stock Lending and Reverse Repos/Stock Borrowing

Where a firm enters into a transaction based on securities included in the trading book under the terms of a repurchase agreement or a securities lending agreement the firm's CRR in respect of that transaction is calculated as follows:

CRR = V x RF, where

RF = the appropriate risk factor derived from IPRU-INV 5.14.1R; and

for repos/stock lending:

V = the excess of the market value of the securities over the value of the collateral provided under the agreement, if the net figure is positive; or

for reverse repos/stock borrowing:

V = the excess of the amount paid or the collateral given for the securities received under the agreement, if the net figure is positive.

6

otc derivatives

In the case of a transaction entered into by a firm as principal in an otc derivative the CRR is calculated as follows:

CRR = A x RF, where

A = the appropriate credit equivalent amount derived from IPRU-INV 5.15.1R; and

RF = the appropriate risk factor derived from IPRU-INV 5.14.1R.

This calculation shall not apply to contracts for interest rate and foreign exchange which are traded on a recognised investment exchange or designated investment exchange where they are subject to a daily margin requirement and foreign exchange contracts with an original maturity of 14 calendar days or less.

A firm may net off contracts with the same counterparty in the same otc derivative contract for settlement on the same date in the same currency provided that the firm is legally entitled under the terms of the contracts with such a counterparty to net such contracts by novation.

IPRU-INV 5.13 Counterparty risk factor: cash settlements

IPRU-INV 5.13.1 R

1Number of working days after due settlement date

Risk Factor

0-4

0%

5-15

8%

16-30

50%

31-45

75%

46 or more

100%

IPRU-INV 5.14 Counterparty risk requirement

IPRU-INV 5.14.1 R

1Type of counterparty

Risk Weighting

Solvency Ratio

Risk Factor

(1)

A counterparty which is, or the contract of which is, explicitly guaranteed by a category a body.

NIL

8%

NIL

(2)

A counterparty which is, or the contract of which is, explicitly guaranteed by a category b body.

20%

8%

1.6%

(3)

Any other counterparty

100%

8%

8%

IPRU-INV 5.15 OTC derivatives: calculation of credit equivalent amount

IPRU-INV 5.15.1 R

1A

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, 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%

C

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

Note

Except in the case of single-currency "floating/floating interest rate" swaps in which only the current replacement cost will be calculated, bought OTC equity options and covered warrants shall be subject to the treatment accorded to exchange rate contracts.

IPRU-INV 5.16 Foreign exchange requirement

IPRU-INV 5.16.1 R
  1. 1(1) A firm'sforeign exchange requirement is determined by calculating the excess of its foreign exchange position (FEP) above 2 per cent of its own funds and multiplying this excess by 8 per cent.

  2. (2) The FEP is the greater of:

    1. (a) the total in the reporting currency of the net short positions in each currency other than the reporting currency; and

    2. (b) the total in the reporting currency of the net long positions in each currency other than the reporting currency;

    where the conversion to the reporting currency is performed using spot rates.

Note For this purpose, long and short positions in the same currency can be netted to produce the net position.

  1. (3) In calculating the FEP, a firm must include relevant foreign exchange items.

EXCHANGE POSITION FOR HEDGING PURPOSES

Any positions which the firm has taken in order to hedge against the adverse effect of exchange rates on an item already deducted in the calculation of liquid capital may not be excluded from the calculation of net open currency positions.

IPRU-INV 5.17 Other assets requirement

IPRU-INV 5.17.1 R

1The requirement to be met in respect of the assets set out in IPRU-INV 5.17.2R, other than those to which position risk requirements and counterparty risk requirements apply or which have been deducted in full as illiquid assets, and in respect of off-balance sheet items set out in IPRU-INV 5.17.2R, must be calculated as follows:

A

= AV x RF where

A

= the amount of the requirement;

AV

= the current asset value; and

RF

= the appropriate risk factor derived from IPRU-INV 5.17.2R.

IPRU-INV 5.17.2 R

Assets and Off-Balance Sheet Items

Risk Factor

Assets

Cash at bank and in hand and equivalent items

NIL

Assets secured by acceptable collateral including deposits and certificates of deposit with lending institutions

NIL

Amount due from trustees of authorised unit trusts or depositaries of authorised contractual schemes

NIL

Note 1

This only applies to firms who are authorised unit trust managers in relation to authorised unit trusts or authorised contractual scheme managers in relation to authorised contractual schemes they manage.

Amount due from depositaries of ICVCs

NIL

Note 2

This only applies to firms who are authorised corporate directors in relation to ICVCs they operate

Other receivables due from or explicitly guaranteed by or deposits with category a bodies

NIL

Other receivables due from or explicitly guaranteed by or deposits with category b bodies

1.6%

Pre-payments and accrued income (see paragraph 10 of IPRU-INV 5.8.2R)

8%

Defined benefit asset

NIL

Deferred acquisition cost asset

NIL

All other assets

8%

OFF-BALANCE SHEET ITEMS

Full Risk Items e.g.

Charges granted against assets

8% x counterparty weight (see IPRU-INV 5.14.1R)

Guarantees given

Medium Risk Items e.g.

Undrawn credit facilities granted by the firm with an original maturity of more than one year

4% x counterparty weight (see IPRU-INV 5.14.1R)

Low Risk Items e.g.

Undrawn credit facilities granted by the firm with an original maturity of one year or less

NIL

Note

(1)

In determining the appropriate other assets requirement (OAR) for guarantees given in a group context, a firm should follow the calculation below:

(a)

Categorise the guarantee agreements into:

(i)

those with the character of credit substitutes; or

(ii)

those not having the character of credit substitutes; or

(iii)

agreements to provide guarantees.

(b)

Calculate the weighted value.

(i)

For guarantees falling under (1)(a)(i), the weighted value will be 100% of the estimated current year liability under the guarantee.

(ii)

For guarantees falling under (1)(a)(ii) the weighted value will be 50% of the estimated current year liability under the guarantee.

(iii)

For guarantees falling under (1)(a)(iii), the weighted value will be nil.

(c)

The OAR is calculated as:

Weighted value x 8% x counterparty weighting (IPRU-INV 5.14.1R)

(2)

For the purpose of this requirement, in assessing whether the guarantee has the characteristics of a credit substitute the following factors should be considered:

(a)

do the agreements allow for periodic or ad-hoc calling of funds;

(b)

have the guarantees been drawn upon on a regular basis;

(c)

do firms in the group rely on such guarantees to meet their working capital or regulatory capital requirements?

(3)

Where a firm is part of a group including other FCA regulated entities which together have entered into cross-group guarantee arrangements which give rise to an OAR, the estimate of the potential liability under the guarantee may be apportioned between the regulated entities for the purpose of calculating each firm's OAR.

IPRU-INV 5.18 Consolidated supervision

IPRU-INV 5.18.1 G

1Under the Financial Conglomerates and Other Financial Groups Instrument 2004, IPRU-INV 14 shall (with respect to a particular firm, group or financial conglomerate) apply from the first day of its financial year beginning in 2005.