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MIPRU 4.2 Capital resources requirements

General solvency requirement

MIPRU 4.2.1RRP

A firm must at all times ensure that it is able to meet its liabilities as they fall due.

General capital resource requirement

MIPRU 4.2.2RRP

A firm must at all times maintain capital resources equal to or in excess of its relevant capital resources requirement.

Capital resources: relevant accounting principles

MIPRU 4.2.3RRP

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

Capital resources: client assets

MIPRU 4.2.4RRP

In this chapter, "client assets" includes a document only if it has value, or is capable of having value, in itself (such as a bearer instrument)

Capital resources requirement: firms carrying on regulated activities including designated investment business

MIPRU 4.2.5RRP

The capital resources requirement for a firm (other than a credit union) carrying on regulated activities, including designated investment business, is the higher of:

  1. (1)

    the requirement which is applied by this chapter according to the activity or activities of the firm (treating the relevant rules as applying to the firm by disregarding its designated investment business); and

  2. (2)

    the financial resource requirement which is applied by the Interim Prudential sourcebook for investment businesses, the Prudential sourcebook for Investment Firms and the EU CRR or the Prudential sourcebook for Banks, Building Societies and Investment Firms.

Capital resources requirement: credit unions

MIPRU 4.2.6R

The capital resources requirement for a credit union to which this chapter applies is the highest of:

  1. (1)

    the requirement which is applied to firms carrying on mediation activities only (see MIPRU 4.2.11 R) treating that rule as applying to the credit union by disregarding activities which are not insurance mediation activity or mortgage mediation activity;

  2. (2)

    the amount which is applied by the Credit Unions sourcebook; and

  3. (3)

    if the credit union is a CTF provider that has a permission to carry on designated investment business, the amount which is applied by Chapter 8 of the Interim Prudential sourcebook for investment businesses.

Capital resources requirement: social housing firms

MIPRU 4.2.7RRP

The capital resources requirement for a social housing firm whose Part IV permission is limited to carrying on the regulated activities of:

  1. (1)

    mortgage lender; or

  2. (2)

    mortgage administration (or both);

is that the firm's net tangible assets must be greater than zero.

MIPRU 4.2.8GRP

If a social housing firm is carrying on mortgage lending or mortgage administration (and no other regulated activity), its net tangible assets must be greater than zero. However, if it carries on insurance mediation activity or mortgage mediation activity, there is no special provision and the capital resources requirement for firms carrying on designated investment business or mediation activities only applies to it as appropriate.

Capital resources requirement: application according to regulated activities

MIPRU 4.2.9RRP

Unless any of the rules on capital resources for firms carrying on designated investment business, for credit unions or for social housing firms apply, the capital resources requirement for a firm varies according to the regulated activity or activities it carries on.

MIPRU 4.2.10RRP

Table: Application of capital resources requirements

Regulated activities

Provisions

1.

(a) insurance mediation activity; or

(b) mortgage mediation activity (or both); and no other regulated activity.

MIPRU 4.2.11 R

2.

(a) mortgage lending; or

(b) mortgage lending and mortgage administration; and no other regulated activity.

MIPRU 4.2.12 R to MIPRU 4.2.17 E

3.

mortgage administration; and no other regulated activity.

MIPRU 4.2.18 R to MIPRU 4.2.19 R

4.

insurance mediation activity; and

(a) mortgage lending; or

(b) mortgage administration (or both).

MIPRU 4.2.20 R

5.

mortgage mediation activity; and

(a) mortgage lending, or

(b) mortgage administration(or both).

MIPRU 4.2.21 R

6.

Any combination of regulated activities not within rows 1 to 5.

MIPRU 4.2.22 R

Capital resources requirement: mediation activity only

MIPRU 4.2.11RRP
  1. (1)

    If a firm carrying on insurance mediation activity or mortgage mediation activity (and no other regulated activity) does not hold client money or other client assets in relation to these activities, its capital resources requirement is the higher of:

    1. (a)

      £5,000; and

    2. (b)

      2.5% of the annual income from its insurance mediation activity or mortgage mediation activity (or both).

  2. (2)

    If a firm carrying on insurance mediation activity or mortgage mediation activity (and no other regulated activity) holds client money or other client assets in relation to these activities, its capital resources requirement is the higher of:

    1. (a)

      £10,000; and

    2. (b)

      5% of the annual income from its insurance mediation activity or mortgage mediation activity (or both).

Capital resources requirement: mortgage lending and administration (but not mortgage administration only)

MIPRU 4.2.12RRP
  1. (1)

    The capital resources requirement for a firm carrying on mortgage lending or mortgage lending and mortgage administration (and no other regulated activity) is the higher of:

    1. (a)

      £100,000; and

    2. (b)

      1% of:

      1. (i)

        its total assets plus total undrawn commitments; less:

      2. (ii)

        excluded loans plus intangible assets (see Note 1 in the table in MIPRU 4.4.4 R).

  2. (2)

    Undrawn commitments means the total of those amounts which a borrowerhas the right to draw down from the firm but which have not yet been drawn down, excluding those under an agreement:

    1. (a)

      which has an original maturity of up to one year; or

    2. (b)

      which can be unconditionally cancelled at any time by the lender

MIPRU 4.2.13GRP

When considering what is an undrawn commitment , the FSA takes into account an amount which a borrowerhas the right to draw down , but which has not yet been drawn down, whether the commitment is revocable or irrevocable, conditional or unconditional.

MIPRU 4.2.14RRP

When calculating total assets, the firm may exclude a loan which has been transferred to a third party only if it meets the following conditions:

  1. (1)

    the first condition is that the loan has been transferred in a legally effective manner by:

    1. (a)

      novation; or

    2. (b)

      legal or equitable assignment; or

    3. (c)

      sub-participation; or

    4. (d)

      declaration of trust; and

  2. (2)

    the second condition is that the lender:

    1. (a)

      retains no material economic interest in the loan; and

    2. (b)

      has no material exposure to losses arising from it.

MIPRU 4.2.15ERP
  1. (1)

    When seeking to rely on the second condition, a firm should ensure that the loan qualifies for the 'linked presentation' accounting treatment under Financial Reporting Standard 5 (Reporting the substance of transactions) issued in April 1994, and amended in December 1994 and September 1998 (if applicable to the firm).

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with the second condition.

MIPRU 4.2.16GRP

The requirement that the loan qualifies for the 'linked presentation' accounting treatment under FRS 5 is aimed at those firms which report according to FRS 5. Other firms which report under other standards, including International Accounting Standards, need not adopt FRS 5 in order to meet the second condition.

MIPRU 4.2.17ERP
  1. (1)

    When seeking to rely on the second condition, a firm should not provide material credit enhancement in respect of the loan unless it deducts the amount of the credit enhancement from its capital resources before meeting its capital resources requirement.

  2. (2)

    Credit enhancement includes:

    1. (a)

      any holding of subordinated loans or notes in a transferee that is a special purpose vehicle; or

    2. (b)

      over collateralisation by transferring loans to a larger aggregate value than the securities to be issued; or

    3. (c)

      any other arrangement with the transferee to cover a part of any subsequent losses arising from the transferred loan.

  3. (3)

    Contravention of (1) may be relied upon as tending to establish contravention the second condition.

Capital resources requirement: mortgage administration only

MIPRU 4.2.18RRP

The capital resources requirement for a firm carrying on mortgage administration only, which has all or part of the regulated mortgage contracts that it administers on its balance sheet, is the amount which is applied to a firm carrying on mortgage lending or mortgage lending and mortgage administration (and no other regulated activity) (see MIPRU 4.2.12 R).

MIPRU 4.2.19RRP

The capital resources requirement for a firm carrying on mortgage administration only, which has all the regulated mortgage contracts that it administers off its balance sheet, is the higher of:

  1. (1)

    £100,000; and

  2. (2)

    10% of its annual income.

Capital resources requirement: insurance mediation activity and mortgage lending or mortgage administration

MIPRU 4.2.20RRP

The capital resources requirement for a firm carrying on insurance mediation activity and mortgage lending or mortgage administration is the sum of the requirements which are applied to the firm by:

  1. (1)

    the capital resources rule for a firm carrying on insurance mediation activity or mortgage mediation activity (and no other regulated activity) (see MIPRU 4.2.11 R); and

  2. (2)
    1. (a)

      the capital resources requirement rule for a firm carrying on mortgage lending or mortgage lending and mortgage administration (and no other regulated activity) (see MIPRU 4.2.12 R); or

    2. (b)

      if, in addition to its insurance mediation activity, the firm carries on mortgage administration with all the assets that it administers off balance sheet, the capital resources rule for such a firm (see MIPRU 4.2.19 R).

Capital resources requirement: mortgage mediation activity and mortgage lending or mortgage administration

MIPRU 4.2.21RRP
  1. (1)

    If a firm carrying on mortgage mediation activity and mortgage lending or mortgage administration does not hold client money or other client assets in relation to its mortgage mediation activity, the capital requirement isthe amount applied to a firm, according to the activities carried on by the firm, by:

    1. (a)

      the capital resources requirement rule for a firm carrying on mortgage lending or mortgage lending and mortgage administration (and no other regulated activity) (see MIPRU 4.2.12 R); or

    2. (b)

      if, in addition to its mortgage mediation activity, the firm carries on mortgage administration with all the assets that it administers off balance sheet, the capital resources rule for such a firm (see MIPRU 4.2.19 R).

  2. (2)

    If the firm holds client money or other client assets in relation to its mortgage mediation activity, the capital resources requirement is:

    1. (a)

      the amount calculated under (1); plus

    2. (b)

      the amount which is applied to a firm carrying on insurance mediation activity or mortgage mediation activity (and no other regulated activity) that holds client money or other client assets in relation to these activities (see MIPRU 4.2.11R (2)).

Capital resources requirement: other combinations of activities

MIPRU 4.2.22RRP

The capital resources requirement for a firm carrying any other combination of regulated activities is the amount which is applied to a firm carrying on insurance mediation activity and mortgage lending or mortgage administration (see MIPRU 4.2.20 R).