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MIPRU 4.1 Application and purpose

Application

MIPRU 4.1.1 R RP

2This chapter applies to a firm with Part IV permission to carry on any of the following activities, unless an exemption in this section applies:

  1. (1)

    insurance mediation activity;

  2. (2)

    home finance mediation activity;1

    1
  3. (3)

    home financing1;

    14114
  4. (4)

    home finance administration1.

    14114
MIPRU 4.1.2 G RP

As this chapter applies only to a firm with Part IV permission, it does not apply to an incoming EEA firm (unless it has a top-up permission). An incoming EEA firm includes a firm which is passporting into the United Kingdom under the Insurance Mediation Directive3.

3
MIPRU 4.1.3 G RP

The definition of insurance mediation activity refers to several activities 'in relation to a contract of insurance' which includes a contract of reinsurance. This chapter, therefore, applies to a reinsurance intermediary in the same way as it applies to any other insurance intermediary.

Application: banks, building societies, insurers and friendly societies

MIPRU 4.1.4 R RP

This chapter does not apply to:

  1. (1)

    a bank; or

  2. (2)

    a building society; or

  3. (3)

    a solo consolidated subsidiary of a bank or a building society ; or

  4. (4)

    an insurer; or

  5. (5)

    a friendly society.

MIPRU 4.1.5 G RP

The capital resources of the firms above are calculated in accordance with the appropriate prudential sourcebook.

Application: firms carrying on designated investment business only

MIPRU 4.1.6 R RP

This chapter does not apply to a firm whose Part IV permission is limited to regulated activities which are designated investment business.

MIPRU 4.1.7 G

A firm which carries on designated investment business, and no other regulated activity, may disregard this chapter. For example, a firm with permission limited to dealing in investments as agent in relation to securities is only carrying on designated investment business and the Interim Prudential sourcebook for investment businesses or the Prudential sourcebook for Banks, Building Societies and Investment Firms, as appropriate, will apply. However, if its permission is varied to enable it to arrange motor insurance as well, this activity is not designated investment business so the firm will be subject to the higher of the requirements in this chapter and those sourcebooks (see MIPRU 4.2.5 R).

Application: credit unions

MIPRU 4.1.8 R

This chapter does not apply to:

  1. (1)

    a 'small credit union', that is one with:

    1. (a)

      assets of £5 million or less; and

    2. (b)

      a total number of members of 5,000 or less (see CRED 8.3.14 R); or

  2. (2)

    a credit union whose Part IV permission includes mortgage lending or mortgage administration (or both) but not insurance mediation activity or mortgage mediation activity.

MIPRU 4.1.9 G
  1. (1)

    For credit unions to which this chapter applies and which are not CTF providers, the capital requirements will be the higher of the requirements in this chapter and in the Credit Unions sourcebook (see MIPRU 4.2.6 R).

  2. (2)

    For credit unions to which this chapter applies and which are CTF providers with permission to carry on designated investment business, the capital requirements will be the highest of the requirements in this chapter, those in the Credit Unions sourcebook and in the Interim Prudential sourcebook for investment businesses (see MIPRU 4.2.6 R).

  3. (3)

    1A credit union cannot carry on home purchase activities or reversion activities because the Credit Unions Act 1979 restricts the circumstances whereby credit unions can hold land.

Application: professional firms

MIPRU 4.1.10 R RP
  1. (1)

    This chapter does not apply to an authorised professional firm:

    1. (a)

      whose main business is the practice of its profession; and

    2. (b)

      whose regulated activities covered by this chapter are incidental to its main business.

  2. (2)

    A firm's main business is the practice of its profession if the proportion of income it derives from professional fees is, during its annual accounting period, at least 50% of the firm's total income (a temporary variation of not more than 5% may be disregarded for this purpose).

  3. (3)

    Professional fees are fees, commissions and other receipts receivable in respect of legal, accountancy, actuarial, conveyancing and surveying services provided to clients but excluding any items receivable in respect of regulated activities.

Application: Lloyd's managing agents

MIPRU 4.1.11 R

This chapter does not apply to a managing agent.

MIPRU 4.1.12 G

The reason for excluding managing agents from the provisions of this chapter is twofold: first, a member will have accepted full responsibility for those activities under the Society'smanaging agent agreement. Secondly, the member is itself subject to capital requirements which are equivalent to those applying to an insurer (to which this chapter is also disapplied).

Application: social housing firms

MIPRU 4.1.13 G RP

There are special provisions for a social housing firm when it is carrying on home financing1or home finance administration1(see MIPRU 4.2.7 R).

1 1 1 1

Purpose

MIPRU 4.1.14 G RP

This chapter amplifies threshold condition 4 (Adequate resources) by providing that a firm must meet, on a continuing basis, a basic solvency requirement and a minimum capital resources requirement. This chapter also amplifies Principle 4 which requires a firm to maintain adequate financial resources by setting out capital requirements for a firm according to the regulated activity or activities it carries on.

MIPRU 4.1.15 G RP

Capital has an important role to play in protecting consumers and complements the roles played by professional indemnity insurance and client money protection (see the client money rules). Capital provides a form of protection for situations not covered by a firm's professional indemnity insurance and it provides the funds for the firm's PII excess, which it has to pay out of its own finances (see MIPRU 3.2.11 R and MIPRU 3.2.12 R for the relationship between the firm's capital and its excess).

MIPRU 4.1.16 G RP

More generally, having adequate capital gives the firm a degree of resilience and some indication to consumers of creditworthiness, substance and the commitment of its owners. It reduces the possibility of a shortfall of funds and provides a cushion against disruption if the firm ceases to trade.

MIPRU 4.1.17 G RP

There is a greater risk to consumers, and a greater adverse impact on market confidence, if a firm holding client money or other client assets fails. For this reason, the capital resources rules in this chapter clearly distinguish between firms holding client assets and those that do not.

Purpose: social housing firms

MIPRU 4.1.18 G RP

Social housing firms undertake small amounts of home finance1business even though their main business consists of activities other than regulated activities. Their home financing1is only done as an adjunct to their primary purpose (usually the provision of housing) and is substantially different in character to that done by commercial lenders. Furthermore, they are subsidiaries of local authorities or registered social landlords which are already subject to separate regulation. The FSA does not consider that it would be proportionate to the risks involved with such business to impose significant capital requirements for these firms. The capital resources requirement for social housing firms therefore simply provides that, where their Part IV permission is limited to home financing1and home finance administration1, their net tangible assets must be greater than zero.

1 1 1 1 1 1
MIPRU 4.1.19 G RP

A registered social landlord is a non-profit organisation which provides and manages homes for rent and sale for people who might not otherwise be able to rent or buy on the open market. It can be a housing association, a housing society or a non-profit making housing company. The Homes and Communities Agency and the Tenant Services Authority were set up by Parliament in 2008 and cooperate in providing financial assistance for social housing.5

5

MIPRU 4.2 Capital resources requirements

General solvency requirement

MIPRU 4.2.1 R RP

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

General capital resource requirement

MIPRU 4.2.2 R RP

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 4.2.3 R RP

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 4.2.4 R RP

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 4.2.5 R RP

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 EUCRR or the Prudential sourcebook for Banks, Building Societies and Investment Firms.

Capital resources requirement: credit unions

MIPRU 4.2.6 R

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 4.2.7 R RP

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

  1. (1)

    home financing;1 or

    11
  2. (2)

    home finance administration1(or both);

    11

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

MIPRU 4.2.8 G RP

If a social housing firm is carrying on home financing1or home finance administration1(and no other regulated activity), its net tangible assets must be greater than zero. However, if it carries on insurance mediation activity or home finance mediation activity1, 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.

1 1 1 1 1

Capital resources requirement: application according to regulated activities

MIPRU 4.2.9 R RP

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 4.2.10 R RP

Table: Application of capital resources requirements

Regulated activities

Provisions

1.

(a) insurance mediation activity; or

(b) home finance mediation activity1(or both); and no other regulated activity.

1

MIPRU 4.2.11 R

2.

(a) home financing1; or

(b) home financing1 and home finance administration1; and no other regulated activity.

1 1 1 1 1 1

MIPRU 4.2.12 R to MIPRU 4.2.17 E

3.

home finance administration;1 and no other regulated activity.

1 1

MIPRU 4.2.18 R to MIPRU 4.2.19 R

4.

insurance mediation activity; and

(a) home financing1; or

(b) home finance administration1 (or both).

1 1 1 1

MIPRU 4.2.20 R

5.

home finance mediation activity;1 and

(a) home financing1, or

(b) home finance administration1(or both).

1 1 1 1 1

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 4.2.11 R RP
  1. (1)

    If a firm carrying on insurance mediation activity or home finance mediation activity1(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
    1. (a)

      £5,000; and

    2. (b)

      2.5% of the annual income from its insurance mediation activity or home finance mediation activity1(or both).

      1
  2. (2)

    If a firm carrying on insurance mediation activity or home finance mediation activity1(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
    1. (a)

      £10,000; and

    2. (b)

      5% of the annual income from its insurance mediation activity or home finance mediation activity1(or both).

Capital resources requirement: 1home financing1 and home finance1administration (but not 1home finance1 administration only)

MIPRU 4.2.12 R RP
  1. (1)

    The capital resources requirement for a firm carrying on home financing, 1or home financing1and home finance administration1 (and no other regulated activity) is the higher of:

    111111
    1. (a)

      £100,000; and

    2. (b)

      1% of:

      1. (i)

        its total assets plus total undrawn commitments and unreleased amounts under the home reversion plan1; less:

      2. (ii)

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

  2. (2)

    Undrawn commitments and unreleased amounts 1means the total of those amounts which a customer1has the right to draw down or to receive 1from the firm but which have not yet been drawn down or received1, excluding those under an agreement:

    1
    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 or provider.1

MIPRU 4.2.13 G RP

When considering what is an undrawn commitment or unreleased amount1, the FSA takes into account an amount which a customer1has the right to draw down or to receive under a home finance transaction1, but which has not yet been drawn down or received1, whether the commitment or obligation1is revocable or irrevocable, conditional or unconditional.

1
MIPRU 4.2.14 R RP

When calculating total assets, the firm may exclude a loan or plan 1which has been transferred to a third party only if it meets the following conditions:

  1. (1)

    the first condition is that the loan or the plan 1has 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 home finance provider1:

    1
    1. (a)

      retains no material economic interest in the loan or the plan1; and

    2. (b)

      has no material exposure to losses arising from it.

MIPRU 4.2.15 E RP
  1. (1)

    When seeking to rely on the second condition, a firm should ensure that the loan or plan1 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 4.2.16 G RP

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 4.2.17 E RP
  1. (1)

    When seeking to rely on the second condition, a firm should not provide material credit enhancement in respect of the loan or plan1 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 or plans1 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 or plan1.

  3. (3)

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

Capital resources requirement: home finance1 administration only

MIPRU 4.2.18 R RP

The capital resources requirement for a firm carrying on home finance administration1only, which has all or part of the home finance transactions1that it administers on its balance sheet, is the amount which is applied to a firm carrying on home financing1or home financing1and home finance administration1(and no other regulated activity) (see MIPRU 4.2.12 R).

1 1 1 1 1 1 1 1 1
MIPRU 4.2.19 R RP

The capital resources requirement for a firm carrying on home finance administration only, which has all the home finance transactions1 that it administers off its balance sheet, is the higher of:

1 1
  1. (1)

    £100,000; and

  2. (2)

    10% of its annual income.

1Capital resources requirement: insurance mediation activity and home financing or home finance administration1

MIPRU 4.2.20 R RP

The capital resources requirement for a firm carrying on insurance mediation activity and home financing1 or home finance administration1 is the sum of the requirements which are applied to the firm by:

1 1 1 1
  1. (1)

    the capital resources rule for a firm carrying on insurance mediation activity or home finance mediation activity1 (and no other regulated activity) (see MIPRU 4.2.11 R); and

    1
  2. (2)
    1. (a)

      the capital resources requirement rule for a firm carrying on home financing1 or home financing1 and home finance administration1 (and no other regulated activity) (see MIPRU 4.2.12 R); or

      111111
    2. (b)

      if, in addition to its insurance mediation activity, the firm carries on home finance administration1 with all the assets that it administers off balance sheet, the capital resources rule for such a firm (see MIPRU 4.2.19 R).

      11

1Capital resources requirement: home finance mediation activity and home financing or home finance administration1

MIPRU 4.2.21 R RP
  1. (1)

    If a firm carrying on home finance mediation activity1 and home financing1 or home finance administration1 does not hold client money or other client assets in relation to itshome finance mediation activity1, the capital requirement isthe amount applied to a firm, according to the activities carried on by the firm, by:

    111111
    1. (a)

      the capital resources requirement rule for a firm carrying on home financing1 or home financing1 and home finance administrator1 (and no other regulated activity) (see MIPRU 4.2.12 R); or

      111111
    2. (b)

      if, in addition to its home finance mediation activity1, the firm carries on home finance administration1 with all the assets that it administers off balance sheet, the capital resources rule for such a firm (see MIPRU 4.2.19 R).

      11
  2. (2)

    If the firm holds client money or other client assets in relation to its home finance mediation activity1, the capital resources requirement is:

    1
    1. (a)

      the amount calculated under (1); plus

    2. (b)

      the amount which is applied to a firm carrying on insurance mediation activity or home finance mediation activity1(and no other regulated activity) that holds client money or other client assets in relation to these activities (see MIPRU 4.2.11R (2)).

      1

Capital resources requirement: other combinations of activities

MIPRU 4.2.22 R RP

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 home financing1or home finance administration1(see MIPRU 4.2.20 R).

1 1 1 1

MIPRU 4.3 Calculation of annual income

Annual income

MIPRU 4.3.1 R RP

This section contains provisions relating to the calculation of annual income for the purposes of:

  1. (1)

    the limits of indemnity for professional indemnity insurance; and

  2. (2)

    the capital resources requirements.

MIPRU 4.3.2 R RP

'Annual income' is the annual income given in the firm's most recent annual financial statement from the relevant regulated activity or activities.

MIPRU 4.3.3 R RP

For a firm which carries on insurance mediation activity or home finance mediation activity1, annual income is the amount of all brokerage, fees, commissions and other related income (for example, administration charges, overriders, profit shares) due to the firm in respect of or in relation to those activities.

1
MIPRU 4.3.4 G RP
  1. (1)

    The purpose of the rule on annual income that applies to insurance intermediaries and mortgage intermediaries is to ensure that the capital resources requirement is calculated on the basis only of brokerage and other amounts earned by a firm which are its own income.

  2. (2)

    Annual income includes commissions and other amounts the firm may have agreed to pay to other persons involved in a transaction, such as sub-agents or other intermediaries.

  3. (3)

    A firm'sannual income does not, however, include any amounts due to another person (for example, the product provider) which the firm has collected on behalf of that other person.

MIPRU 4.3.5 R RP

If a firm is a principal, its annual income includes amounts due to its appointed representative in respect of activities for which the firm has accepted responsibility.

MIPRU 4.3.6 G RP

If a firm is a network, it should include the relevant income due to all of its appointed representatives in its annual income.

Annual income for home finance administration11

MIPRU 4.3.7 R RP

For the purposes of the calculation of the capital resources of a firm carrying on home finance administration1only with all the assets it administers off balance sheet, annual income is the sum of:

1 1
  1. (1)

    revenue (that is, commissions, fees, net interest income, dividends, royalties and rent); and

  2. (2)

    gains;

  3. (3)

    arising in the course of the ordinary activities of the firm, less profit:

    1. (a)

      on the sale or termination of an operation;

    2. (b)

      arising from a fundamental reorganisation or restructuring having a material effect on the nature and focus of the firm's operation; and

    3. (c)

      on the disposal of fixed assets, including investments held in a long-term portfolio.

Annual income: periods of less than 12 months

MIPRU 4.3.8 R RP

If the firm's most recent annual financial statement does not cover a 12 month period, the annual income is taken to be the amount in the statement converted, proportionally, to a 12 month period.

Annual income: no financial statements

MIPRU 4.3.9 R RP

If the firm does not have annual financial statements, the annual income is to be taken from the forecast or other appropriate accounts which the firm has submitted to the FSA.

MIPRU 4.4 Calculation of capital resources

The calculation of a firm's capital resources

MIPRU 4.4.1 R RP
  1. (1)

    A firm must calculate its capital resources only from the items which are eligible to contribute to a firm's capital resources from which it must deduct certain items (see MIPRU 4.4.4 R).

  2. (2)

    If the firm is subject to the Interim Prudential sourcebook for investment businesses, the Prudential sourcebook for Banks, Building Societies and Investment Firms or the Credit Unions sourcebook, the capital resources are the higher of:

    1. (a)

      the amount calculated under (1); and

    2. (b)

      the financial resources calculated under those sourcebooks .

MIPRU 4.4.2 R RP

Table: Items which are eligible to contribute to the capital resources of a firm

Item

Additional explanation

1.

Share capital

This must be fully paid and may include:

(1)

ordinary share capital; or

(2)

preference share capital (excluding preference shares redeemable by shareholders within two years).

2.

Capital other than share capital (for example, the capital of a sole trader, partnership or limited liability partnership)

The capital of a sole trader is the net balance on the firm's capital account and current account. The capital of a partnership is the capital made up of the partners':

(1)

capital account, that is the account:

(a)

into which capital contributed by the partners is paid; and

(b)

from which, under the terms of the partnership agreement, an amount representing capital may be withdrawn by a partner only if:

(i) he ceases to be a partner and an equal amount is transferred to another such account by his former partners or any person replacing him as their partner; or

(ii) the partnership is otherwise dissolved or wound up; and

(2)

current accounts according to the most recent financial statement.

For the purpose of the calculation of capital resources, in respect of a defined benefit occupational pension scheme:

(1)

a firm must derecognise any defined benefit asset;

(2)

a firm may substitute for a defined benefit liability the firm'sdeficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

3.

Reserves (Note 1)

These are, subject to Note 1, the audited accumulated profits retained by the firm (after deduction of tax, dividends and proprietors' or partners' drawings) and other reserves created by appropriations of share premiums and similar realised appropriations. Reserves also include gifts of capital, for example, from a parent undertaking.

For the purposes of calculating capital resources, a firm must make the following adjustments to its reserves, where appropriate:

(1)

a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on debt instruments held, or formerly held,3 in the available-for-sale financial assets category;

(2)

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;

(3)

in respect of a defined benefit occupational pension scheme:

(a)

a firm must derecognise any defined benefit asset;

(b)

a firm may substitute for a defined benefit liability the firm'sdeficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

4.

Interim net profits (Note 1)

If a firm seeks to include interim net profits in the calculation of its capital resources, the profits have, subject to Note 1, to be verified by the firm's external auditor, net of tax, anticipated dividends or proprietors' drawings and other appropriations.

5.

Revaluation reserves

6.

General/ collective provisions (Note 1)

These are provisions that a firm carrying on home financing1or home finance administration1holds against potential losses that have not yet been identified but which experience indicates are present in the firm's portfolio of assets. Such provisions must be freely available to meet these unidentified losses wherever they arise. Subject to Note 1, general/collective provisions must be verified by external auditors and disclosed in the firm's annual report and accounts.

1 1 1 1

7.

Subordinated loans

Subordinated loans must be included in capital on the basis of the provisions in this chapter that apply to subordinated loans.

Note:

1

Reserves must be audited and interim net profits, general and collective provisions must be verified by the firm's external auditor unless the firm is exempt from the provisions of Part VII of the Companies Act 1985 (section 249A (Exemptions from audit)) or, where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies: Conditions for exemption from audit))2 relating to the audit of accounts. 2

MIPRU 4.4.3 G RP

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

MIPRU 4.4.4 R RP

Table: Items which must be deducted from capital resources

1

Investments in own shares

2

Intangible assets (Note 1)

3

Interim net losses (Note 2)

4

Excess of drawings over profits for a sole trader or a partnership (Note 2)

Notes

Notes 1. Intangible assets are the full balance sheet value of goodwill (but not until 14 January 2008 - see transitional provision 1), capitalised development costs, brand names, trademarks and similar rights and licences.

2. The interim net losses in row 3, and the excess of drawings in row 4, are in relation to the period following the date as at which the capital resources are being computed.

Personal assets

MIPRU 4.4.5 R RP

In relation to a sole trader'sfirm or a firm which is a partnership, the sole trader or a partner in the firm may use personal assets to meet the general solvency requirement and the general capital resource requirement, to the extent necessary to make up any shortfall in meeting those requirements, unless:

  1. (1)

    those assets are needed to meet other liabilities arising from:

    1. (a)

      personal activities; or

    2. (b)

      another business activity not regulated by the FSA; or

  2. (2)

    the firm holds client money or other client assets.

MIPRU 4.4.6 G RP

A sole trader or a partner may use any personal assets, including property, to meet the capital requirements of this chapter, but only to the extent necessary to make up a shortfall.

Subordinated loans

MIPRU 4.4.7 R RP

A subordinated debt must not form part of the capital resources of the firm unless it meets the following conditions:

  1. (1)

    (for a firm which carries on insurance mediation activity, home finance mediation activity1 (or both) but not home financing1or home finance administration1) it has an original maturity of:

    1111
    1. (a)

      at least two years; or

    2. (b)

      it is subject to two years' notice of repayment;

  2. (2)

    (for all other firms) it has an original maturity of:

    1. (a)

      at least five years; or

    2. (b)

      it is subject to five years' notice of repayment;

  3. (3)

    the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;

  4. (4)

    the only events of default must be non-payment of any interest or principal under the debt agreement or the winding up of the firm;

  5. (5)

    the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated debt must be limited to petitioning for the winding up of the firm or proving the debt and claiming in the liquidation of the firm;

  6. (6)

    the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with (4);

  7. (7)

    the agreement and the debt are governed by the law of England and Wales, or of Scotland or of Northern Ireland;

  8. (8)

    to the fullest extent permitted under the rules of the relevant jurisdiction, creditors must waive their right to set off amounts they owe the firm against subordinated amounts owed to them by the firm;

  9. (9)

    the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the conditions set out in this rule; and

  10. (10)

    the debt must be unsecured and fully paid up.

MIPRU 4.4.8 R RP
  1. (1)

    This rule applies to a firm which:

    1. (a)

      carries on:

      1. (i)

        insurance mediation activity; or

      2. (ii)

        home finance mediation activity1(or both); and

        1
    1. (b)

      in relation to those activities, holds client money or other client assets;

but is not carrying on home financing1orhome finance administration1.

1 1 1 1
  1. (2)

    In calculating its capital resources, the firm must exclude any amount by which the aggregate amount of its subordinated loans and its redeemable preference shares exceeds the amount calculated as follows:

  2. four times (a - b - c);

    where:

    a

    =

    items 1 to 5 in the Table of items which are eligible to contribute to a firm's capital resources (see MIPRU 4.4.2 R)

    b

    =

    the firm's redeemable preference shares; and

    c

    =

    the amount of its intangible assets (but not goodwill until 14 January 2008 - see transitional provision 1).

MIPRU 4.4.9 G RP

If a firm wishes to see an example of a subordinated loan agreement which would meet the required conditions, it should refer to the Forms page.

1Reversion providers: additional requirement for instalment reversions

MIPRU 4.4.10 R RP
  1. (1)

    1If the reversion provider agrees under the terms of an instalment reversion plan to pay the reversion occupier for the qualifying interest in land over a period of time, then the provider must:

    1. (a)

      take out and maintain adequate insurance from an insurance undertaking authorised in the EEA or a person of equivalent status in:

      1. (i)

        a Zone A country; or

      2. (ii)

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

    2. (b)

      enter into a written agreement with a credit institution;

    to meet these obligations in the event that the reversion provider is unable to do so.

  2. (2)

    This rule does not apply if:

    1. (a)

      the instalment reversion plan is linked to an investment and it is reasonably anticipated that the amounts due to the reversion occupier under the plan will be paid out of the proceeds of the investment to the occupier by a product provider other than the reversion provider; or

    2. (b)

      the reversion provider acquires its interest in the property in steps proportionate to the instalments paid.

MIPRU 4.4.11 G RP

The additional requirement for reversion providers aims to protect the reversion occupier against the insolvency of the reversion provider where the reversion occupier has agreed to receive the price for the part of the qualifying interest in land sold in instalments rather than in a lump sum. The requirement does not arise, for example, in relation to reversions linked to annuities as the reversion occupier has no credit risk on the reversion provider. Also, the requirement does not arise in relation to 'mini-reversions' (or 'staged reversions') as under these plans the reversion occupier continues to own the qualifying interest in land.

Regulated sale and rent back agreements: additional requirement

MIPRU 4.4.12 R RP

4If a SRB agreement provider agrees, under the terms of a regulated sale and rent back agreement, to account to the SRB agreement seller for any monetary sum, whether after a qualifying period, over a period of time, on the occurrence of a contingent event or otherwise, the provider must:

  1. (1)

    take out and maintain adequate insurance from an insurance undertaking authorised in the EEA or a person of equivalent status in:

    1. (a)

      a Zone A country; or

    2. (b)

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

  2. (2)

    enter into a written agreement with a credit institution;

to meet these obligations in the event that the SRB agreement provider is unable to do so.

MIPRU 4.4.13 G RP

4An example of where this additional requirement would apply would be a term of a regulated sale and rent back agreement under which the SRB agreement seller was to receive from the SRB agreement provider a refund of an agreed percentage of the discount on the sale price of the property to which the agreement relates after an agreed qualifying period.