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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 4A permission to carry on any of the following activities, unless an exemption in this section applies:

  1. (1)

    insurance distribution activity11;

  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 4A 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 IDD11.

3 3
MIPRU 4.1.3 G RP

The definition of insurance distribution activity11 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 4A 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: 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: 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

Application: MCD firms

MIPRU 4.1.13A R RP
MIPRU 4.1.13B R RP

9For a firm that carries on a combination of home finance mediation activity, home financing and home finance administration, this chapter will only apply to the extent its activities relate to specified investments other than second charge regulated mortgage contracts.

Purpose

MIPRU 4.1.14 G RP

This chapter: 8

8
  1. (1)

    sets out that a firm must meet, on a continuing basis, a basic solvency requirement and a minimum capital resources requirement (see COND 2.4 (Appropriate resources)); and

    8
  2. (2)

    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 regulated 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 FCA 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 4A 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

4

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.

MIPRU 4.2.1A G

2Specific liquidity requirements for a firm carrying on any home financing or home finance administration connected to regulated mortgage contracts are set out in MIPRU 4.2D.

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 and to which IPRU(INV) does not apply5, 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 resources5 requirement which is applied by5 the Prudential sourcebook for Investment Firms and the EUCRR3 or the General Prudential sourcebook and the 3Prudential sourcebook for Banks, Building Societies and Investment Firms.

MIPRU 4.2.5A G RP

5The capital resources requirement for a firm (other than a credit union) carrying on regulated activities, including designated investment business, which is also subject to the Interim Prudential sourcebook for investment businesses is the amount calculated in IPRU(INV) 13.13.3R.

Capital resources requirement: social housing firms

MIPRU 4.2.7 R RP

The capital resources requirement for a social housing firm whose Part 4A 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 distribution activity6 or home finance mediation activity1, there is no special provision and the capital resources requirement for firms carrying on designated investment business, insurance distribution activity or home finance mediation activity6 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 4.2.10A G RP

2 MIPRU 4.2.12 R to MIPRU 4.2.23 R have the effect that a firm carrying on any home financing or home finance administration which is connected to regulated mortgage contracts will be subject to different capital requirements to a firm that carries on those activities without connection to regulated mortgage contracts. To identify which of the rules in MIPRU 4.2.12 R to MIPRU 4.2.23 R is applicable, a firm should consider which regulated activities it performs as part of its home financing and home finance administration activities and determine whether any of those regulated activities (no matter what proportion) are connected to regulated mortgage contracts.

Capital resources requirement: insurance distribution activity or home finance mediation activity only

MIPRU 4.2.11 R RP
  1. (1)

    If a firm carrying on insurance distribution activity6 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 distribution activity6 or home finance mediation activity1(or both).

      1
  2. (2)

    If a firm carrying on insurance distribution activity6 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 distribution activity6 or home finance mediation activity1(or both).

1 1Capital resources requirement: home financing and home finance administration not connected to regulated mortgage contracts2

MIPRU 4.2.12 R RP
  1. (1)

    The capital resources requirement for a firm carrying on only2home financing, 1which is not connected to regulated mortgage contracts, 2or home financing1and home finance administration1 which is not connected to regulated mortgage contracts2 (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 appropriate regulator 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:2

1 1 1 2 1 1 1 1 1 1 2
  1. (1)

    in the case of a firm carrying on only home finance administration which is not connected to regulated mortgage contracts, the amount which is applied to a firm under MIPRU 4.2.12 R; or2

  2. (2)

    in the case of a firm carrying on any home finance administration which is connected to regulated mortgage contracts, the amount which is applied to a firm under MIPRU 4.2.23 R.2

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.

1 1Capital resources requirement: insurance distribution activity and home financing or home finance administration

MIPRU 4.2.20 R RP

The capital resources requirement for a firm carrying on insurance distribution activity6 and home financing1 or home finance administration1 is the sum of :

1 1 1 1 2
  1. (1)

    the capital resources requirement2 for a firm carrying on insurance distribution activity6 or home finance mediation activity1 (and no other regulated activity) (see MIPRU 4.2.11 R); and

    21
  2. (2)
    1. (a)

      in the case of a firm carrying on home financing which is not connected to regulated mortgage contracts, or home finance administration which is not connected to regulated mortgage contracts, the amount which is applied to a firm under MIPRU 4.2.12 R; or 2

      1111112
    2. (aa)

      in the case of a firm carrying on any home financing which is connected to regulated mortgage contracts or any home finance administration that it administers on its balance sheet which is connected to regulated mortgage contracts, the amount which is applied to a firm under MIPRU 4.2.23 R; or2

    3. (b)

      in the case of a firm carrying on home finance administration with all the home finance transactions that it administers off balance sheet, the amount which is applied to a firm under MIPRU 4.2.19 R.2

      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 resources2 requirement is:

    1111112
    1. (a)

      in the case of a firm carrying on home financing which is not connected to regulated mortgage contracts or home finance administration which is not connected to regulated mortgage contracts, the amount applied to a firm under MIPRU 4.2.12 R; or 2

      1111112
    2. (aa)

      in the case of a firm carrying on any home financing which is connected to regulated mortgage contracts or any home finance administration that it administers on its balance sheet which is connected to regulated mortgage contracts, the amount applied to a firm under MIPRU 4.2.23 R; or 2

    3. (b)

      in the case of a firm carrying on home finance administration with all the home finance transactions that it administers off balance sheet, the amount applied to a firm under MIPRU 4.2.19 R2

      112
  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 distribution activity6 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 on any combination of regulated activities which is not set out in MIPRU 4.2.10 R to MIPRU 4.2.21 R and MIPRU 4.2.23 R is: 2

1 1 1 1 2
  1. (1)

    2if the combination of regulated activities includes carrying on any home financing connected to regulated mortgage contracts or home finance administration connected to regulated mortgage contracts, the sum of the amounts which are applied to a firm under:

    1. (a)

      MIPRU 4.2.20R (1); and

    2. (b)

      MIPRU 4.2.23 R; or

  2. (2)

    2in all other cases, the sum of the amounts which are applied to a firm under:

    1. (a)

      MIPRU 4.2.20R (1); and

    2. (b)

      MIPRU 4.2.12 R.

Capital resources requirement: home financing and home finance administration connected to regulated mortgage contracts

MIPRU 4.2.23 R RP

2The capital resources requirement4for a firm carrying on any home financing which is connected to regulated mortgage contracts, or home financing and home finance administration which is connected to regulated mortgage contracts (and no other regulated activity), is the higher of:

4
  1. (1)

    £100,000; and

  2. (2)

    the sum of:

    1. (a)

      the creditrisk capital requirement4calculated in accordance with MIPRU 4.2A; and

      4
    2. (b)

      1% of:

      1. (i)

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

      2. (ii)

        intangible assets (see Note 1 in the table in MIPRU 4.4.4 R) plus loans, securitisation positions and fund4 positions subject to MIPRU 4.2A.4 R.

        4

MIPRU 4.2A Credit risk capital requirement

Application

MIPRU 4.2A.1 R RP

Purpose

MIPRU 4.2A.2 G RP

MIPRU 4.2A sets out how a firm should calculate its creditrisk capital requirement.

3 3
MIPRU 4.2A.3 G RP

A firm may use credit risk mitigation to reduce the credit risk associated with an exposure. The firm 3should refer to MIPRU 4.2C3 to determine the effect of credit risk mitigation on its 3risk weighted exposure amounts.

3 3

Calculation of credit risk capital requirement3

MIPRU 4.2A.4 R RP

The credit risk capital requirement3of a firm is 8% of the total of its risk weighted exposure amounts for exposures that:

3
  1. (1)

    are on its balance sheet; and

  2. (2)

    derive from:

    1. (a)

      a loan entered into; or

    2. (b)

      a securitisation position originated; or

    3. (c)

      a fund3position entered into;

      3

    on or after 26 April 2014; and

  3. (3)

    have not been deducted from the firm'scapital resources under MIPRU 4.4.4 R or MIPRU 4.2BA;

calculated in accordance with MIPRU 4.2A.

MIPRU 4.2A.4A R RP

Loans, securitisation positions and fund positions entered into before 26 April 2014 are excluded from the credit risk capital requirement calculation.

MIPRU 4.2A.5 R RP

Any arrangements entered into on or after 26 April 20142 which increase the amount of a loan already advanced or change the security to a loan already advanced or change the contractual terms (other than if the firm is exercising forbearance) of a loan already advanced will be subject to the credit risk capital requirement under MIPRU 4.2A.4R (2)(a) provided that, where the arrangements only increase the amount of a loan already advanced, such requirement shall only apply to the amount of such increase.

MIPRU 4.2A.5A G RP

The arrangements excluded from the credit risk capital requirement3 include:

3
  1. (1)

    a loan acquired by a firm on or 3after 26 April 2014 if that loan was made before 26 April 2014;

  2. (2)

    arrangements made as a result of forbearance procedures, including:

    1. (a)

      a change in the basis of interest payments from variable to fixed rate; or

    2. (b)

      a change from a repayment mortgage to interest only; or

    3. (c)

      the capitalisation of interest which increases the principal outstanding, where there is no element of new borrowing.

MIPRU 4.2A.5B G RP

3A firm may exclude loans or home reversion plans entered into before 26 April 2014 where they meet the conditions in MIPRU 4.2.14 R, applied in accordance with MIPRU 4.2.15 E to MIPRU 4.2.17 E.

MIPRU 4.2A.6 R RP

Unless a rule requires otherwise, the 3exposure value of an asset or liability held on the balance sheet of a firm3must be its balance sheet value.

3 3

Exposure classes3

MIPRU 4.2A.6A R RP

3A firm must assign each exposure to one of the following exposure classes:

  1. (1)

    loans or contingent loans secured on real estate property;

  2. (2)

    other loans;

  3. (3)

    securitisation positions;

  4. (4)

    exposures in the form of funds; or

  5. (5)

    past due items.

Risk weights

MIPRU 4.2A.9 R RP

For the purposes of applying a risk weight, the exposure value must be multiplied by the risk weight determined in accordance with MIPRU 4.2A.10 R, MIPRU 4.2A.10A R, MIPRU 4.2A.10B R, 3MIPRU 4.2A.11 R, MIPRU 4.2A.12 R or 3MIPRU 4.2A.17 R, unless it is deducted from capital resources under MIPRU 4.4.4 R or MIPRU 4.2BA3.

MIPRU 4.2A.10 R RP

To calculate risk weighted exposure amounts on exposures secured by mortgages on residential property, risk weights must be applied to all such exposures, in accordance with MIPRU 4.2F.4 R to MIPRU 4.2F.10 G3.

3 3
MIPRU 4.2A.10A R RP

3To calculate risk weighted exposure amount on exposures secured by mortgages on commercial property, risk weights must be applied to all such exposures in accordance with MIPRU 4.2F.37 R.

MIPRU 4.2A.10B R RP

3To calculate risk weighted exposure amounts on other loans, risk weights must be applied to all such exposures in accordance with MIPRU 4.2F.38 R.

MIPRU 4.2A.11 R RP

To calculate risk weighted exposure amounts on exposures in funds3, risk weights must be applied to all such exposures, in accordance with MIPRU 4.2F.39 R to MIPRU 4.2F.49 R3.

3 3 3
MIPRU 4.2A.12 R RP

To calculate risk weighted exposure amounts3for securitised exposures, risk weights3 must be calculated in accordance with 3MIPRU 4.2BA (Securitisation)3.

3
MIPRU 4.2A.17 R

A firm must apply MIPRU 4.2F.50 R to MIPRU 4.2F.55 R to all past due items3

3
MIPRU 4.2A.17A R RP
  1. (1)

    3The application of risk weights must be based on the exposureclass to which the exposure is assigned and, to the extent specified in MIPRU 4.2BA and MIPRU 4.2F (Exposures and risk weights), its credit quality.

  2. (2)

    Credit quality must be determined by reference to solicited credit assessments of eligible ECAIs where these are available, in accordance with MIPRU 4.2E (Use of external credit assessments).

MIPRU 4.2A.17B R RP

3Where an exposure is subject to credit risk mitigation, the risk weighted exposure amount applicable to that item may be modified in accordance with MIPRU 4.2C (Credit risk mitigation).

MIPRU 4.2BA Securitisation

Application

MIPRU 4.2BA.1 R RP

1This section applies to a firm carrying on any home financing connected to regulated mortgage contracts or home financing and home financing administration connected to regulated mortgage contracts (see MIPRU 4.2.23 R).

Purpose

MIPRU 4.2BA.2 R RP
MIPRU 4.2BA.3 G RP

Where a firm has transferred significant credit risk associated with securitised exposures which it has originated under MIPRU 4.2BA.5 R (High-level principles) and has complied with other applicable requirements in this section, it may exclude those securitised exposures from the calculation of its risk weighted exposure amount and expected loss amounts.

Organisation

MIPRU 4.2BA.4 G

This section is organised as follows.

  1. (1)

    High-level principles (MIPRU 4.2BA.5 R to MIPRU 4.2BA.8 G)

  2. (2)

    Systems and controls (MIPRU 4.2BA.9 R to MIPRU 4.2BA.16 R)

  3. (3)

    Structural features (MIPRU 4.2BA.17 R to MIPRU 4.2BA.22 R)

  4. (4)

    Implied future support (MIPRU 4.2BA.23 R to MIPRU 4.2BA.30 R)

  5. (5)

    Calculation of risk weighted exposure amounts (MIPRU 4.2BA.31 R to MIPRU 4.2BA.53 R)

  6. (6)

    Disclosure to investors (MIPRU 4.2BA.54 R)

High-level principles

MIPRU 4.2BA.5 R RP
  1. (1)

    Economic substance: the risk management and capital treatment of a securitisation must be determined on the basis of its economic substance and not its legal form.

  2. (2)

    Eligible structures: only standalone traditional securitisations are eligible.

  3. (3)

    Eligible underlying assets: term assets (e.g. residential mortgages) originated by the firm are eligible.

  4. (4)

    Effective credit-risk transfer: the securitisation mechanism (e.g. true sale) must effectively transfer the risks of the securitised exposures to the holders of the securitisation positions, except those risks that remain adequately covered by the firm's capital. The securities issued must not represent payment obligations of the firm.

  5. (5)

    Significant credit risk transfer: the proportion of risk transferred must be commensurate with, or exceed, the proportion by which risk weighted exposure amounts are reduced.

  6. (6)

    Implied future support: a firm must not provide any support (direct or indirect) to investors in the securitisation beyond the firm's contractual obligations, with a view to reducing potential or actual losses, unless permitted in MIPRU 4.2BA.27 R.

  7. (7)

    Maximum regulatory capital: the maximum regulatory capital requirement for retained securitisation exposure is the lowest of:

    1. (a)

      the regulatory capital resources requirement plus expected losses for the securitised exposures before entering into the securitisation; or

    2. (b)

      the capital resources requirement from the application of a risk weight of 1250% to the retained securitisation positions; or

    3. (c)

      deduction of the retained securitisation positions from capital resources.

MIPRU 4.2BA.6 G RP

Eligible structures exclude, for example, structures such as master trusts, synthetic securitisations and asset-backed commercial paper programmes. Financial derivatives (e.g. interest-rate swaps) used to structure the securitisation should be with third-party counterparties, not the firm or connected entities.

MIPRU 4.2BA.7 G RP

Eligible underlying assets would exclude, for example, assets purchased from third-party entities, those arising from re-securitisations and any revolving exposures such as credit cards.

MIPRU 4.2BA.8 G

Further provisions on implied future support are contained in MIPRU 4.2BA.23 R to MIPRU 4.2BA.30 R.

Systems and controls

MIPRU 4.2BA.9 R RP

Policies and procedures: a firm must evaluate and address all risks, including reputational risks, through appropriate policies and procedures, to ensure in particular that the economic substance of the transaction is fully reflected in risk assessments and management decisions.

MIPRU 4.2BA.10 R RP

Monitoring: a firm must continuously monitor risks that it may be subject to when it has excluded the securitised exposures from its calculation of risk weighted exposure amounts.

MIPRU 4.2BA.11 R RP

Exposure quality: a firm must consider the impact that securitisation has on the quality of the remaining exposures it holds and the capital planning implications.

MIPRU 4.2BA.12 R RP

Stress testing: the firm must carry out regular stress testing which takes into account:

  1. (1)

    the firm-wide impact of securitisation activities and exposures in stressed market conditions; and

  2. (2)

    the implications for other sources of risk including, but not limited to, credit risk, concentration risk, counterparty risk, market risk, liquidity risk and reputational risk.

MIPRU 4.2BA.13 G RP

Stress testing of securitisation activities should take into account both existing securitisations and pipeline transactions, as there is a risk that the latter would not be completed in a stressed market scenario.

MIPRU 4.2BA.14 G RP

The frequency and extent of the stress testing should be determined by the materiality of the firm'ssecuritisation activities. A firm should have procedures in place to assess and respond to the stress-testing results.

MIPRU 4.2BA.15 R RP
  1. (1)

    Credit-granting: a firm must apply the same sound and well-defined criteria used under SYSC 7.1.9 R for credit-granting in respect of exposures held on the balance sheet to exposures to be securitised.

  2. (2)

    These criteria must include the processes for approving and, where relevant, amending, renewing and re-financing credits.

MIPRU 4.2BA.16 R RP

Legal opinions: legal opinions obtained in the context of securitisation transactions must be reviewed by an independent legal adviser periodically, or when there is a change in law (including case law) or any applicable rules that may affect the opinion.

Structural features

MIPRU 4.2BA.17 R RP

The transferee must be a securitisation special purpose entity.

MIPRU 4.2BA.18 R RP

A firm must not maintain effective or indirect control over the transferred exposures.

MIPRU 4.2BA.19 G RP

For the purposes of MIPRU 4.2BA.18 R, a firm will be considered to have maintained effective control over the transferred exposures if:

  1. (1)

    it has the right to repurchase previously transferred exposures to realise their benefits; or

  2. (2)

    it is required to re-assume any previously transferred risk.

MIPRU 4.2BA.20 G RP

For the purposes of MIPRU 4.2BA.18 R, the originator's retention of servicing rights or obligations in respect of the exposures does not, of itself, constitute indirect control of the exposures.

MIPRU 4.2BA.21 R RP

A clean-up call option must satisfy all of the following conditions:

  1. (1)

    it must be exercisable at the discretion of the firm;

  2. (2)

    it must only be exercised when 10% or less of the original value of the exposures securitised remains unamortised;

  3. (3)

    it must not be structured so that allocating losses to credit enhancement positions or other positions held by investors can be avoided; and

  4. (4)

    it must not otherwise be structured to provide credit enhancement.

MIPRU 4.2BA.22 R RP

The credit enhancement documentation must not contain clauses that require securitisation positions to be improved by the firm in response to a deterioration in the credit quality of the securitised exposures, including:

  1. (1)

    altering the credit quality of the underlying exposures; or

  2. (2)

    increasing the yield payable to investors in the securitisation positions.

Implied future support

MIPRU 4.2BA.23 R RP

The securitisation documentation must make clear, where applicable, that any repurchase of securitised exposures or securitisation positions by the firm beyond its contractual obligations is not mandatory and may only be made at fair market value.

MIPRU 4.2BA.24 R RP

In general, any such repurchase must be subject to the firm's credit-granting process, which should be adequate to ensure that the repurchase does not provide support.

MIPRU 4.2BA.25 R RP

If a firm repurchases securitised exposures or securitisation positions, it must:

  1. (1)

    be able to demonstrate that it has adequately considered the following:

    1. (a)

      the price of the repurchase;

    2. (b)

      the firm's capital and liquidity position before and after repurchase;

    3. (c)

      the performance of the securitised exposures; and

    4. (d)

      the performance of the securitisation positions;

  2. (2)

    have concluded, taking into account the factors in (1) and any other relevant information, that the repurchase is not structured to provide support; and

  3. (3)

    keep adequate records of the considerations and conclusions under (1) and (2).

MIPRU 4.2BA.26 R RP

A firm must consider at least the following situations to determine whether there may be a breach of the prohibition against implied future support in MIPRU 4.2BA.5R (6):

  1. (1)

    support given under a contractual obligation;

  2. (2)

    support which is not provided for under the contractual documentation for the securitisation; and

  3. (3)

    support given under the contractual documentation for the securitisation which the firm is entitled, but not obliged, to give.

MIPRU 4.2BA.27 R RP
  1. (1)

    The support described in MIPRU 4.2BA.26R (1) is permitted.

  2. (2)

    The support described in MIPRU 4.2BA.26R (2) is not permitted.

  3. (3)

    The support described in MIPRU 4.2BA.26R (3) is permitted if the following conditions are met:

    1. (a)

      contractual and marketing documents of the securitisation expressly envisage and allow for the possibility of the firm providing such support;

    2. (b)

      the nature of any support that the firm may give is precisely described in the contractual and marketing documents of the securitisation;

    3. (c)

      both the firm and a person, whose only information comes from the marketing documents, must be able to ascertain at the time of the securitisation the maximum amount of support that can be given in future;

    4. (d)

      an assessment has been made by the firm of significant risk transfer, that must include the maximum possible contractual support; and

    5. (e)

      the firm'scapital resources and capital resources requirement are adjusted at the time of the securitisation on the basis that the firm has provided support to the maximum amount possible, whether by an immediate deduction from capital resources or appropriate risk weighting.

MIPRU 4.2BA.28 G RP

A waiver of the right to future margin income will not breach the prohibition against implied future support in MIPRU 4.2BA.5R (6) provided that:

  1. (1)

    the degree of support that can be given can be defined precisely by reference to the contractual documentation for the securitisation, even if the amount of support may not be ascertainable in absolute monetary terms; and

  2. (2)

    no adjustment to the firm'scapital resources or capital resources requirement is required, as a firm should not include future margin income in its income or capital resources.

MIPRU 4.2BA.29 G RP

If a firm is found to have provided support to a securitisation this implies that the firm may be likely to provide future support to its securitisations, thus failing to achieve a significant transfer of risk. The FCA will consider taking appropriate measures to reflect this increased expectation after any instance of support is found.

MIPRU 4.2BA.30 R RP

If a firm is found to have provided support to a securitisation it will be required to:

  1. (1)

    hold capital resources against all of the securitised exposures associated with the securitisation transaction as if they had not been securitised; and

  2. (2)

    disclose publicly in a timely fashion:

    1. (a)

      where it has provided such support; and

    2. (b)

      the regulatory capital impact of doing so.

Calculation of risk weighted exposure amounts

MIPRU 4.2BA.31 R RP

The risk weighted exposure amount equals the on-balance sheet exposure value multiplied by the risk weight associated with the credit quality step with which the credit assessment of that exposure value is associated.

MIPRU 4.2BA.32 R RP

Where there is an exposure to different tranches in a securitisation, the exposure to each tranche must be considered as a separate securitisation position.

MIPRU 4.2BA.33 R RP

The providers of credit protection to securitisation positions must be treated as holding positions in the securitisation.

MIPRU 4.2BA.34 R RP

Securitisation positions include exposures to a securitisation arising from interest rate or currency derivative contracts.

MIPRU 4.2BA.35 R RP

The ECAI rating of a securitisation position must, at a minimum, comply with the following:

  1. (1)

    there must be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which the firm is entitled under the contract giving rise to the securitisation position in question;

  2. (2)

    the rating must be publicly available to the market; and

  3. (3)

    the rating must not be based, or partly based, on support provided by the firm itself.

MIPRU 4.2BA.36 G RP

Credit assessments may only be treated as publicly available under MIPRU 4.2BA.35R (2) if they have been published in a publicly accessible forum and they are included in the ECAI's transition matrix; a rating that is only made available to a limited number of entities may not be treated as publicly available.

MIPRU 4.2BA.37 G RP

MIPRU 4.2BA.35R (3) refers, for example, to situations where a firm holds securitisation positions which receive a lower risk weight by virtue of credit protection provided by the firm itself acting in a different capacity in the securitisation transaction.

MIPRU 4.2BA.38 R RP

The assessment of whether a firm is providing unfunded support to its securitisation positions must take into account the economic substance of that support in the context of the overall transaction and any circumstances in which the firm could become exposed to a higher credit risk in the absence of that support. In this case the firm must consider the relevant position as if it were not rated and must apply the relevant treatment for unrated positions.

Multiple credit assessments for a rated position

MIPRU 4.2BA.39 R RP

Where a rated position has credit assessments from two nominated ECAIs, the firm must use the less favourable credit assessment.

MIPRU 4.2BA.40 R RP

Where a rated position has more than two nominated ECAI credit assessments, the two most favourable credit assessments must be used. If the two most favourable credit assessments are different, the less favourable of the two must be used.

MIPRU 4.2BA.41 R RP

Where eligible credit protection under MIPRU 4.2C (Credit risk mitigation) is provided directly to the securitisation special purpose entity and that protection is reflected in the credit assessment of a position by a nominated ECAI, the risk weight associated with that credit assessment may be used. Where the credit protection is not provided to the securitisation special purpose entity but provided directly to a securitisation position, the credit assessment must not be recognised

Minimum operational requirements

MIPRU 4.2BA.42 R RP

A firm must attribute to an unrated position an inferred rating equivalent to the rating of those rated positions (the reference positions) which are the most senior positions and are, in all respects, subordinate to the unrated securitisation position in question when the following minimum operational requirements are satisfied:

  1. (1)

    the reference positions must be subordinate in all respects to the unrated securitisation position;

  2. (2)

    the maturity of the reference positions must be equal to or longer than that of the unrated position in question; and

  3. (3)

    on an ongoing basis, any inferred rating must be updated to reflect any changes in the credit assessment of the reference positions.

MIPRU 4.2BA.43 R RP

Where publicly available credit assessments for securitisation positions are available from eligible ECAIs, a firm must:

  1. (1)

    nominate one or more of the eligible ECAIs;

  2. (2)

    use the credit assessments of nominated ECAIs in the calculation of its risk weightedexposure amounts under this section; and

  3. (3)

    apply those credit assessments consistently in respect of its rated positions.

MIPRU 4.2BA.44 R RP

Where a firm holds a rated position it must use the credit assessment from the nominated ECAIs to determine the risk weight for the position using:

  1. (1)

    the table in MIPRU 4.2E.14 R to determine the credit quality step associated with that credit assessment; and

  2. (2)

    the table in MIPRU 4.2BA.45 R to determine the risk weight to be applied to the rated position, based on the associated credit quality step.

MIPRU 4.2BA.45 R RP

Table: Rated positions in securitisations for which a credit assessment by a nominated ECAI is available

This table belongs to MIPRU 4.2BA.44 R.

Credit quality step

1

2

3

4

Other credit quality steps

Securitisation positions

20%

50%

100%

350%

1250%

Resecuritisation positions

40%

100%

225%

650%

1250%

Concentration ratio approach for unrated securitisation positions

MIPRU 4.2BA.46 R RP

When calculating its risk weighted exposure amount for securitised positions, subject to satisfying the conditions in MIPRU 4.2BA.47 R, a firm may apply the weighted-average risk weight that would be applied to the securitised exposures multiplied by a concentration ratio.

MIPRU 4.2BA.47 R RP

The use of the concentration ratio approach for unrated securitisation positions is only permitted where all the following conditions are met:

  1. (1)

    the concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to, or equal to, the tranche in which the position is held, including that tranche itself;

  2. (2)

    where the resulting risk weight for a securitisation position is lower than any risk weight applicable to a more senior tranche then that higher risk weight must be applied to the securitisation position;

  3. (3)

    the composition of the pool of securitised exposures is known at all times;

  4. (4)

    the firm must be able, at all times, to calculate accurately the risk weighted exposure amounts of the pool of securitised exposures based on its knowledge of the composition of the pool;

  5. (5)

    any change to the composition of the pool of securitised exposures during the life of the transaction that would lead to an increase in the total risk weighted exposure amount of the pool, using the risk weights specified in MIPRU 4.2F (Exposures and risk weights), is either

    1. (a)

      prohibited by the documentation; or

    2. (b)

      included in the firm's calculation of its capital resources.

MIPRU 4.2BA.48 G RP

It is sufficient for the purposes of MIPRU 4.2BA.47R (4) for the composition of the pool of securitised exposures to be reported to the firm at least daily through information service providers, secure websites or other appropriate sources.

MIPRU 4.2BA.49 R RP

Where the firm is unable to determine the risk weights that would be applied to the securitised exposures, it must apply a risk weight of 1250%.

Conversion factor for unrated liquidity facilities

MIPRU 4.2BA.50 R RP
  1. (1)

    A conversion factor of 100% must be applied to the nominal amount of unrated liquidity facilities unless the conditions in MIPRU 4.2BA.51 R or MIPRU 4.2BA.53 R for a conversion factor of 50% or 0% are met.

  2. (2)

    The risk weight to be applied is the highest risk weight that would be applied to any of the securitised exposures by a firm holding those exposures.

MIPRU 4.2BA.51 R RP
  1. (1)

    A conversion factor of 50% may be applied to the nominal amount of an unrated liquidity facility where all the conditions in MIPRU 4.2BA.52 R are met.

  2. (2)

    The risk weight to be applied is the highest risk weight that would be applied to any of the securitised exposures by a firm holding those exposures.

MIPRU 4.2BA.52 R RP

The conditions for the application of a conversion factor of 50% are:

  1. (1)

    the liquidity facility documentation must clearly identify and limit the circumstances under which the facility may be drawn;

  2. (2)

    it must not be possible for the facility to be drawn so as to provide credit support by covering losses already incurred at the time of drawdown, for example by providing liquidity for exposures in default at the time of drawdown or by acquiring assets at more than fair value;

  3. (3)

    the facility must not be used to provide permanent or regular funding for the securitisation;

  4. (4)

    repayment of drawdowns on the facility must not be subordinated to the claims of investors, other than to claims arising in respect of interest rate or currency derivative contracts, fees or other such payments, nor be subject to waiver or deferral;

  5. (5)

    it must not be possible for the facility to be drawn after all applicable credit enhancements from which the liquidity facility would benefit are exhausted; and

  6. (6)

    the facility must include a provision that results in an automatic reduction in the amount that can be drawn by the amount of exposures that are in default.

MIPRU 4.2BA.53 R RP

A conversion factor of 0% may be applied to the nominal amount of an unrated liquidity facility where the following conditions are met:

  1. (1)

    the conditions for a conversion factor of 50% in MIPRU 4.2BA.52 R are met;

  2. (2)

    the liquidity facility is unconditionally cancellable; and

  3. (3)

    repayment of any drawings on the facility are senior to any other claims on the cashflows arising from the securitised exposures.

Disclosure to investors

MIPRU 4.2BA.54 R RP

A firm must ensure that investors have access to all materially relevant data determined as at the date of the securitisation and, where appropriate due to the nature of the securitisation, thereafter. These data must include:

  1. (1)

    the credit quality, performance, cashflows and supporting collateral of the securitisation exposures; and

  2. (2)

    information necessary to conduct comprehensive and well-informed stress tests on the cashflows and collateral values supporting the securitisation exposures.

MIPRU 4.2C Credit risk mitigation

Application

MIPRU 4.2C.1 R RP

This section applies to a firm carrying on any home financing connected to regulated mortgage contracts or home financing and home financing administration connected to regulated mortgage contracts see 1MIPRU 4.2.23 R where it applies credit risk mitigation1 to the calculation of its risk weighted exposure amounts under MIPRU 4.2A (Credit risk capital requirement)1.

1 1

Purpose

MIPRU 4.2C.2 G RP

MIPRU 4.2C sets out the provisions a firm should comply with when calculating risk weighted exposure amounts for calculating the credit risk capital requirement1 under MIPRU 4.2.23 R.

1 1

Organisation1

MIPRU 4.2C.2A G

1This section is organised as follows:

  1. (1)

    High-level principles (MIPRU 4.2C.5 R to MIPRU 4.2C.9 R)

  2. (2)

    Minimum operational requirements (MIPRU 4.2C.10 R to MIPRU 4.2C.15 R)

  3. (3)

    Eligibility (MIPRU 4.2C.16 R)

  4. (4)

    Calculating the effects of credit risk mitigation (MIPRU 4.2C.17 R to MIPRU 4.2C.31 G)

  5. (5)

    Sovereign guarantees (MIPRU 4.2C.32 R)

  6. (6)

    Combinations of credit risk mitigation (MIPRU 4.2C.33 R to MIPRU 4.2C.34 R)

1

High-level principles1

MIPRU 4.2C.5 R RP

1A firm may recognise credit risk mitigation under this section in calculating risk weighted exposure amounts for calculating the credit risk capital requirement.

MIPRU 4.2C.6 R RP
  1. (1)

    1If a firm transfers part of the risk of a loan in one or more tranches, MIPRU 4.2BA (Securitisation) applies.

  2. (2)

    Materiality thresholds below which no payment shall be made by the provider of credit protection in the event of loss are considered to be equivalent to retained first-loss positions and to give rise to a tranched transfer of risk.

MIPRU 4.2C.7 R RP

1The technique used to provide credit protection, together with the actions and steps taken and procedures and policies implemented by a firm, must result in credit protection arrangements which are legally effective and enforceable in all relevant jurisdictions.

MIPRU 4.2C.8 R RP
  1. (1)

    1A firm must not recognise credit protection as eligible until it has conducted an adequate legal review confirming that the credit protection arrangements are legally effective and enforceable in all relevant jurisdictions, in accordance with MIPRU 4.2C.7 R.

  2. (2)

    A firm must conduct further legal reviews as necessary, to ensure continuing enforceability and effectiveness.

MIPRU 4.2C.9 R RP

1A firm must take steps to ensure the effectiveness of the credit protection arrangement and to address related risks.

1Minimum requirements: operational

MIPRU 4.2C.10 R RP
  1. (1)

    1A firm must satisfy the FCA that it has adequate risk management processes to control the risks to which it may be exposed as a result of carrying out credit risk mitigation.

  2. (2)

    These processes must include appropriate stress tests and scenario analyses relating to those risks, including residual risk and the risks relating to the intrinsic value of the credit risk mitigation.

MIPRU 4.2C.11 R RP

1A firm must:

  1. (1)

    satisfy the FCA that it has systems to manage risks arising from its use of credit protection; and

  2. (2)

    demonstrate how its strategy on the use of credit protection interacts with the firm's management of its overall risk profile.

MIPRU 4.2C.12 R RP

1Even where a firm recognises credit risk mitigation when calculating risk weighted exposure amounts, it must:

  1. (1)

    continue to undertake full credit-risk assessment of the underlying exposure; and

  2. (2)

    demonstrate to the FCA the fulfilment of the requirement in (1).

1Minimum requirements: effectiveness

MIPRU 4.2C.13 R RP

1For credit protection to be recognised, the following conditions must be met:

  1. (1)

    it must be direct;

  2. (2)

    the extent of the credit protection must be clearly defined and incontrovertible;

  3. (3)

    the credit protection contract must not contain any clause which is outside the direct control of the lender to fulfil and which:

    1. (a)

      would allow the protection provider unilaterally to cancel the protection; or

    2. (b)

      would increase the effective cost of protection as a result of deteriorating credit quality of the protected exposure; or

    3. (c)

      could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original borrower fails to make any payments due; or

    4. (d)

      could allow the maturity of the credit protection to be reduced by the protection provider; and

  4. (4)

    it must be legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.

MIPRU 4.2C.14 G RP

1A clause that allows the protection provider unilaterally to cancel the contract after a reasonable period due to non-payment of premiums and other monies due under the contract will not normally indicate non-compliance with MIPRU 4.2C.13R (3)(a). The reason is that payment of such monies is within the control of the firm.

MIPRU 4.2C.15 R RP

1For a guarantee, including those in the form of mortgage indemnity products, to be recognised, the following conditions must be met in addition to those in MIPRU 4.2C.13 R:

  1. (1)

    on the qualifying default of and/or non-payment by the borrower, the firm must have the right to pursue, in a timely manner, the guarantor for any monies due under the claim for which the protection is provided;

  2. (2)

    payment by the guarantor must not be subject to the firm first having to pursue the borrower;

  3. (3)

    for credit protection covering residential mortgage loans, the requirement in MIPRU 4.2C.13R (3)(c) and in this rule have only to be satisfied within 24 months;

  4. (4)

    the guarantee must contain an explicitly documented obligation assumed by the guarantor;

  5. (5)

    unless (6) applies, the guarantee must cover all types of payments the borrower is expected to make in respect of the claim, such as principal, interest payments and fees; and

  6. (6)

    where certain types of payment are excluded from the guarantee, the recognised value of the guarantee must be adjusted to reflect the limited coverage.

1Eligibility

MIPRU 4.2C.16 R RP

1For unfunded credit protection:

  1. (1)

    to be eligible for recognition:

    1. (a)

      the party giving the undertaking must be sufficiently reliable; and

    2. (b)

      the protection agreement must be legally effective and enforceable in the relevant jurisdictions, to provide appropriate certainty as to the credit protection achieved, having regard to the approach used to calculate risk weighted exposure amounts and to the degree of recognition allowed; and

  2. (2)

    protection must be provided by central governments or central banks.

1Calculating the effects of credit risk mitigation

MIPRU 4.2C.17 R RP

1The calculation of risk weighted exposure amounts may be modified in accordance with this section where a firm has complied with MIPRU 4.2C.7 R to MIPRU 4.2C.16 R.

MIPRU 4.2C.18 R RP

1No exposure for which credit risk mitigation is obtained may produce a higher risk weighted exposure amount than an otherwise identical exposure for which there is no credit risk mitigation.

MIPRU 4.2C.19 R RP

1Where the risk weighted exposure amount already takes account of credit protection, the calculation of the credit protection must not be further recognised under MIPRU 4.2C (Credit risk mitigation).

1Valuation

MIPRU 4.2C.20 R RP

1The value of unfunded credit protection is the amount that the protection provider has undertaken to pay in the event of the default of, or non-payment by, the borrower or on the occurrence of other specified credit events.

1Currency mismatches

MIPRU 4.2C.21 R RP

1Where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated (a currency mismatch) the value of the credit protection must be reduced by the application of a volatility adjustment HFX as follows:

G* = G x (1-HFX)

where:

  1. (1)

    G is the nominal amount of the credit protection;

  2. (2)

    G* is G adjusted for any foreign currency risk; and

  3. (3)

    HFX is the volatility adjustment for any currency mismatch between the credit protection and the underlying obligation.

MIPRU 4.2C.22 R RP

1For the purpose of MIPRU 4.2C.21 R, HFX is set at 10%.

MIPRU 4.2C.23 R RP

1For the purpose of MIPRU 4.2C.21 R, where there is no currency mismatch:

G* = G

1Maturity mismatches

MIPRU 4.2C.24 R RP
  1. (1)

    1In calculating risk weighted exposure amounts, a maturity mismatch occurs where the residual maturity of the credit protection is less than that of the protected exposure.

  2. (2)

    Protection of less than three months residual maturity, the maturity of which is less than the maturity of the underlying exposure, must not be recognised.

MIPRU 4.2C.25 R RP

1Where there is a maturity mismatch the credit protection must not be recognised if the original maturity of the protection is less than one year.

MIPRU 4.2C.26 R RP
  1. (1)

    1Subject to a maximum of five years, the effective maturity of the underlying exposure is the longest possible remaining time before the borrower is scheduled to fulfil its obligations.

  2. (2)

    Unless MIPRU 4.2C.27 R applies, the maturity of the credit protection is the length of time to the earliest date at which the protection may terminate or be terminated.

MIPRU 4.2C.27 R RP
  1. (1)

    1Where there is an option to terminate the protection which is at the discretion of the protection seller, the maturity of the protection must be taken to be the length of time to the earliest date at which that option may be exercised.

  2. (2)

    Where there is an option to terminate the protection which is at the discretion of the protection buyer and the terms of the arrangement at the origination of the protection contain a positive incentive for the firm to call the transaction before contractual maturity, the maturity of the protection must be taken to be the length of time to the earliest date at which that option may be exercised; otherwise such an option may be considered not to affect the maturity of the protection.

MIPRU 4.2C.28 R RP
  1. (1)

    1The maturity of the credit protection and that of the exposure must be reflected in the adjusted value of the credit protection according to the following formula:

    GA = G* x (t-t*)/(T-t*)

    where:

    1. (a)

      G* is the amount of the protection adjusted for any currency mismatch;

    2. (b)

      GA is G* adjusted for any maturity mismatch;

    3. (c)

      t is the number of years remaining to the maturity date of the credit protection calculated in accordance with MIPRU 4.2C.27 R to MIPRU 4.2C.28 R, or the value of T, whichever is the lower;

    4. (d)

      T is the number of years remaining to the maturity date of the exposure calculated in accordance with MIPRU 4.2C.27 R to MIPRU 4.2C.28 R, or five years, whichever is the lower; and

    5. (e)

      t* is 0.25.

  2. (2)

    GA is then taken as the value of the credit protection for the purposes of MIPRU 4.2C.6 R, MIPRU 4.2C.21 R to MIPRU 4.2C.23 R and MIPRU 4.2C.29 R to MIPRU 4.2C.31 G.

Full protection

MIPRU 4.2C.29 R RP

1Under MIPRU 4.2A.9 R, MIPRU 4.2A.12 R, MIPRU 4.2A.17A R and MIPRU 4.2A.17B R, g is the risk weight to be assigned to an exposure, the exposure value (E) of which is fully protected by unfunded credit protection (GA), where:

  1. (1)

    g is the risk weight of exposures to the protection provider;

  2. (2)

    GA is the value of G* as calculated under MIPRU 4.2C.22 R further adjusted for any maturity mismatch under MIPRU 4.2C.24 R to MIPRU 4.2C.28 R; and

  3. (3)

    E is the exposure value according to MIPRU 4.2A.6 R.

1Partial protection: equal seniority

MIPRU 4.2C.30 R RP
  1. (1)

    1Proportional regulatory capital relief is afforded if:

    1. (a)

      the protected amount is less than the exposure value; and

    2. (b)

      the protected and unprotected portions are of equal seniority, i.e. the firm and the protection provider share losses on a pro-rata basis.

  2. (2)

    Under MIPRU 4.2A.9 R, MIPRU 4.2A.12 R, MIPRU 4.2A.17A R and MIPRU 4.2A.17B R, risk weighted exposure amounts must be calculated in accordance with the following formula:

    (E-GA) x r + GA x g

    where:

    1. (a)

      E is the exposure value according to MIPRU 4.2A.6 R;

    2. (b)

      GA is the value of G* as calculated under MIPRU 4.2C.21 R further adjusted for any maturity mismatch under MIPRU 4.2C.24 R to MIPRU 4.2C.28 R;

    3. (c)

      r is the risk weight of exposures to the borrower; and

    4. (d)

      g is the risk weight of exposures to the protection provider.

MIPRU 4.2C.31 G RP

1Where the protected and unprotected portions of the exposure are not of equal seniority, MIPRU 4.2C.6 R applies.

1Sovereign guarantees

MIPRU 4.2C.32 R RP

1A firm may assign a risk weight of 0% to exposures or parts of exposures guaranteed by the UK government or its central bank if the following conditions are met:

  1. (1)

    the guarantee is denominated in the domestic currency of the borrower; and

  2. (2)

    the exposure is funded in that currency.

Combinations of credit risk mitigation

MIPRU 4.2C.33 R RP

1Where a firm calculating risk weighted exposure amounts has more than one form of credit risk mitigation covering a single exposure:

  1. (1)

    it must divide the exposure into parts covered by each type of credit risk mitigation; and

  2. (2)

    the risk weighted exposure amount for each portion must be calculated separately in accordance with MIPRU 4.2A (Credit risk capital requirement).

MIPRU 4.2C.34 R RP

1When credit protection provided by a single protection provider has differing maturities, a similar approach to that described in MIPRU 4.2C.33 R must be applied.

MIPRU 4.2D Liquidity resources requirements

Application

MIPRU 4.2D.1 R RP

This section applies to a firm carrying on any home financing or home finance administration connected to regulated mortgage contracts, unless as at 26 April 2014 its Part 4A permission was and continues to remain subject to a restriction preventing it from undertaking new home financing or home finance administration connected to regulated mortgage contracts.

Adequacy of liquidity resources

MIPRU 4.2D.2 R RP

A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

MIPRU 4.2D.3 G RP

In assessing the adequacy of liquidity resources, a firm should have regard to the overall character of the resources available to it, which enable it to meet its liabilities as they fall due. A firm should ensure that:

  1. (1)

    it holds sufficient assets which are marketable, or otherwise realisable;

  2. (2)

    it is able to generate funds from those assets in a timely manner; and

  3. (3)

    it maintains a prudent funding profile in which its assets are of appropriate maturities, taking into account the expected timing of its liabilities.

Systems and controls requirements

MIPRU 4.2D.4 R RP

A firm must have in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and monitor liquidity risk over the appropriate set of time horizons for its business activities, to ensure that it maintains adequate levels of liquidity resources. These strategies, policies, processes, and systems must be appropriate to the firm's business lines, currencies in which it operates, and its group companies and must include adequate allocation mechanisms of liquidity costs, benefits and risks.

MIPRU 4.2D.5 R RP

The strategies, policies, processes and systems referred to in MIPRU 4.2D.4 R must be proportionate to the nature, scale and complexity of the firm's activities and the risk profile of the firm.

MIPRU 4.2D.6 R RP

A firm must have in place reliable management information systems to provide its governing body, senior managers and other appropriate personnel with timely and forward-looking information on the liquidity position of the firm.

MIPRU 4.2D.7 R RP

A firm must ensure that its governing body reviews regularly (and not less frequently than annually) the continued adequacy of any strategies, policies, processes and systems in place in accordance with MIPRU 4.2D.4 R

Stress testing and contingency funding plans

MIPRU 4.2D.8 R RP

A firm must consider alternative scenarios in which its liquidity position could be impacted. The consideration of alternative scenarios must include and deal with off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities (SSPEs) or other special purpose entities, in relation to which the firm acts as sponsor or provides material liquidity support. These scenarios must be incorporated into the stress testing under MIPRU 4.2D.9 R.

MIPRU 4.2D.9 R RP

In order to ensure compliance with MIPRU 4.2D.2 R, a firm must:

  1. (1)

    conduct on a regular basis appropriate stress tests so as to:

    1. (a)

      identify sources of potential liquidity strain; and

    2. (b)

      ensure that the risks of current liquidity exposures can be adequately managed; and

  2. (2)

    analyse the separate and combined impact of possible future liquidity stresses on its:

    1. (a)

      cash flows;

    2. (b)

      liquidity position; and

    3. (c)

      solvency; and

  3. (3)

    make, as soon as is practicable after a test has been performed, and maintain a written record of all stress tests and their results

MIPRU 4.2D.10 R RP

A firm must ensure that its governing body reviews regularly the stresses and scenarios tested and the assumptions underlying the funding position of the firm to ensure that their nature and severity remain appropriate and relevant to it.

MIPRU 4.2D.11 G RP

For the purpose of MIPRU 4.2D.10 R a review should take into account:

  1. (1)

    changes in market conditions;

  2. (2)

    changes in funding sources and inflows;

  3. (3)

    changes in the nature, scale or complexity of the firm's business model and activities; and

  4. (4)

    the firm's practical experience in periods of stress.

MIPRU 4.2D.12 R RP

A firm must adjust its strategies, internal policies and limits on liquidity risk, taking into account the outcome of the alternative scenarios referred to in MIPRU 4.2D.8 R.

MIPRU 4.2D.13 R RP
  1. (1)

    A firm must have in place contingency funding plans setting out adequate strategies and proper implementation measures in order to address potential liquidity shortfalls.

  2. (2)

    The contingency funding plans must be:

    1. (a)

      in writing;

    2. (b)

      approved by the firm'sgoverning body;

    3. (c)

      regularly tested; and

    4. (d)

      updated on the basis of the outcome of the stress tests, testing alternative scenarios set out in MIPRU 4.2D.8 R.

MIPRU 4.2D.14 G RP

A contingency funding plan sets out a firm's strategies for managing liquidity shortfalls in emergency situations. Its aim should be to ensure that, in each of the stresses set out in MIPRU 4.2D.11 G, it would have sufficient liquidity resources to ensure that it can meet its liabilities as they fall due.

MIPRU 4.2E 1Use of external credit assessments

MIPRU 4.2E.1 R RP

1For the calculation of risk weighted exposure amounts, a firm must use solicited credit assessments from ECAIs in the following manner:

  1. (1)

    consistently and in accordance with this section; and

  2. (2)

    not selectively.

1Treatment

MIPRU 4.2E.2 R RP

A firm must nominate one or more eligible ECAIs to be used for the determination of risk weights to be assigned to on-balance sheet items.

MIPRU 4.2E.3 R RP

A firm must only use a nominated ECAI's credit assessments that take into account all amounts of both principal and interest owed to it.

MIPRU 4.2E.4 R RP

A firm which uses the credit assessments produced by a nominated ECAI must do so in a continuous and consistent way over time.

MIPRU 4.2E.5 R RP

A firm which uses the credit assessments produced by a nominated ECAI for a certain exposure class must use those credit assessments consistently for all exposures belonging to that class.

MIPRU 4.2E.6 R RP

If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment must be used to determine the risk weight for that item.

MIPRU 4.2E.7 R RP

If two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight must be applied.

MIPRU 4.2E.8 R RP
  1. (1)

    If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights must be referred to.

  2. (2)

    If the two lowest risk weights are different, the higher risk weight must be assigned.

  3. (3)

    If the two lowest risk weights are the same, that risk weight must be assigned.

Issuer and issue credit assessment

MIPRU 4.2E.9 R RP

Where a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure belongs, this credit assessment must be used to determine the risk weight to be assigned to that item.

MIPRU 4.2E.10 R RP

Where no directly applicable credit assessment exists for a certain item but a general credit assessment exists for the issuer, that general credit assessment must be used where it produces either of the following:

  1. (1)

    a higher risk weight than would otherwise be the case;

  2. (2)

    a lower risk weight and the exposure in question ranks as equally senior or senior in all respects to senior unsecured exposures of that issuer, as relevant.

MIPRU 4.2E.11 R RP

Credit assessments for issuers within a group cannot be used as the credit assessment of another issuer within the same group.

Domestic and foreign currency items

MIPRU 4.2E.12 R RP

A credit assessment that refers to an item denominated in the borrower's domestic currency cannot be used to derive a risk weight for another exposure on that same borrower that is denominated in a foreign currency.

Mapping of credit assessments of nominated ECAIs to credit quality steps

MIPRU 4.2E.13 R RP

Exposures for which a credit assessment by a nominated ECAI is available must be assigned a credit quality step according to the table in MIPRU 4.2E.14 R.

MIPRU 4.2E.14 R RP

Table: Exposures for which a credit assessment by a nominated ECAI is available

This table belongs to MIPRU 4.2E.13 R.

Credit Quality Step

1

2

3

4

5

6

Credit assessment

Fitch

AAA to AA-

A+ to A-

BBB+ to BBB-

BB+ to BB-

B+ to B-

CCC+ and below

Moody’s

Aaa to Aa3

A1 to A3

Baa1 to Baa3

Ba1 to Ba3

B1 to B3

Caa1 and below

S & P

AAA to AA-

A+ to A-

BBB+ to BBB-

BB+ to BB-

B+ to B-

CCC+ and below

DBRS

AAA to AAL

AH to AL

BBBH to BBBL

BBH to BBL

BH to BL

CCCH and below

MIPRU 4.2F 1Exposures and risk weights

Application

MIPRU 4.2F.1 R RP

1This section applies to a firm carrying on any home financing connected to regulated mortgage contracts or home financing and home financing administration connected to regulated mortgage contracts (see MIPRU 4.2.23 R).

Purpose

MIPRU 4.2F.2 R RP

MIPRU 4.2F sets out the risk weights that a firm should apply to exposures in the form of loans secured on real estate property, other loans, exposures in the form of funds, and past due items, when calculating risk weighted exposure amounts for calculating the credit risk capital requirement under MIPRU 4.2.23 R.

Organisation

MIPRU 4.2F.3 G RP

This section is broadly organised according to the type of exposure class.

  1. (1)

    Exposures secured by mortgages on residential property (MIPRU 4.2F.4 R to MIPRU 4.2F.36 R)

  2. (2)

    Exposures secured by mortgages on commercial property (MIPRU 4.2F.37 R)

  3. (3)

    Exposures to other loans (MIPRU 4.2F.38 R)

  4. (4)

    Exposures to funds (MIPRU 4.2F.39 R to MIPRU 4.2F.49 R)

  5. (5)

    Exposures to past due items (MIPRU 4.2F.50 R to MIPRU 4.2F.56 G)

Exposures secured by mortgages on residential property

MIPRU 4.2F.4 R RP

Without prejudice to MIPRU 4.2F.36 R, an exposure or any part of an exposure must be assigned a risk weight of 35% where:

  1. (1)

    the exposure is fully and completely secured, to the satisfaction of the firm, by mortgages on residential property; and

  2. (2)

    the residential property is, or will be, occupied or let by the owner or the beneficial owner in the case of personal investment companies.

MIPRU 4.2F.5 R RP

Without prejudice to MIPRU 4.2F.36 R, an exposure, or any part of an exposure, must be assigned a risk weight of 75% where:

  1. (1)

    the exposure arises from a mortgage on residential property up to a limit of 100% of the value of the property which is not fully and completely secured, to the satisfaction of the firm, by that mortgage; and

  2. (2)

    the residential property is, or will be, occupied or let by the owner or the beneficial owner in the case of personal investment companies.

MIPRU 4.2F.6 R RP

An exposure or any part of an exposure must be assigned a risk weight of 100% where the exposure arises from a mortgage on residential property that exceeds the value of the available collateral, as assessed in accordance with MIPRU 4.2F.29 R.

Exposures secured by mortgages on residential property: lifetime mortgages

MIPRU 4.2F.7 R RP
  1. (1)

    A firm must not treat a lifetime mortgage as an exposure fully and completely secured on residential property for the purposes of MIPRU 4.2F.4 R unless the amount of the exposure is calculated according to the following formula:

    MIPRU-4.2F.7

    where:

    1. (a)

      P is the current outstanding balance on the lifetime mortgage;

    2. (b)

      i is the interest rate charged on the lifetime mortgage, which for the purposes of this calculation must not be lower than the discount rate referred to in (c);

    3. (c)

      d is the discount rate which is the risk-free rate as represented by the yield on 10-year UK government bonds; and

    4. (d)

      T is the projected number of years to maturity of the exposure.

  2. (2)

    Notwithstanding MIPRU 4.2F.7R (1)(c), a firm may calculate an annual average discount rate, provided there is no obvious bias in its calculation and it is consistent in its approach.

MIPRU 4.2F.8 G RP
  1. (1)

    For the purposes of MIPRU 4.2F.7R (2), a firm may use the FTSE UK gilt 10-year yield index which the Council of Mortgage Lenders makes available to its members.

  2. (2)

    If a firm offers a variable interest rate on a lifetime mortgage, it should calculate an average interest rate in a way which is consistent with the calculation of the discount rate.

  3. (3)

    To determine the projected number of years to maturity of the exposure, a firm may use the standard mortality tables published by the Institute of Actuaries or the Faculty of Actuaries.

  4. (4)

    For internal risk management purposes, the firm should use factual data or seek actuarial advice to determine how the information in these tables may be adjusted to take account of regional and other relevant variations.

Exposures secured by property leasing transactions

MIPRU 4.2F.9 R RP

Without prejudice to MIPRU 4.2F.36 R, an exposure, or any part of an exposure, to a tenant under a property leasing transaction must be assigned a risk weight of 35% where:

  1. (1)

    the transaction concerns residential property;

  2. (2)

    under the transaction, the firm is the lessor and the tenant has an option to purchase; and

  3. (3)

    the firm is satisfied that the exposure is fully and completely secured by its ownership of the property.

MIPRU 4.2F.10 G RP

An Ijara mortgage is an example of an exposure described in MIPRU 4.2F.9 R.

Conditions for mortgages

MIPRU 4.2F.11 R RP
  1. (1)

    In exercising its judgment under MIPRU 4.2F.4 R to MIPRU 4.2F.9 R, a firm may be satisfied only if the conditions in (2) to (6) are met.

  2. (2)
    1. (a)

      The value of the property does not materially depend upon the credit quality of the borrower.

    2. (b)

      The condition in (a) does not preclude situations where purely macroeconomic factors affect both the value of the property and the performance of the borrower.

  3. (3)

    The minimum requirements about:

    1. (a)

      legal certainty in MIPRU 4.2F.12 R;

    2. (b)

      monitoring of property values in MIPRU 4.2F.14 R;

    3. (c)

      documentation in MIPRU 4.2F.20 R; and

    4. (d)

      insurance in MIPRU 4.2F.21 R;

    are met.

  4. (4)

    The valuation provisions in MIPRU 4.2F.26 G to MIPRU 4.2F.29 R are met.

  5. (5)

    The value of the property exceeds the exposures by a substantial margin, as set out in MIPRU 4.2F.29 R.

Legal certainty

MIPRU 4.2F.12 R RP

The requirements about legal certainty referred to in MIPRU 4.2F.11R (3)(a) are as follows:

  1. (1)

    the mortgage or charge must be enforceable in all relevant jurisdictions which are relevant at the time of conclusion of the credit agreement, and the mortgage or charge must have been properly filed on a timely basis;

  2. (2)

    the arrangements must reflect a perfected lien (i.e. all legal requirements for establishing the pledge must have been fulfilled); and

  3. (3)

    the protection agreement and the legal process underpinning it must enable the firm to realise the value of the protection within a reasonable timeframe.

MIPRU 4.2F.13 G RP

The term ‘protection agreement’ in MIPRU 4.2F.12R (3) refers to the contract or deed by which the mortgage or charge is established.

Monitoring of property values

MIPRU 4.2F.14 R RP
  1. (1)

    The requirements about monitoring of property values referred to in MIPRU 4.2F.11R (3)(b) are as follows:

    1. (a)

      the value of the property must be monitored on a frequent basis and, at a minimum, once every three years;

    2. (b)

      more frequent monitoring must be carried out where the market is subject to significant changes in conditions;

    3. (c)

      statistical methods may be used to monitor the value of the property and to identify property that needs revaluation;

    4. (d)

      the property valuation must be reviewed promptly by an independent valuer when information indicates that the value of the property may have declined materially relative to general market prices; and

    5. (e)

      for loans exceeding the higher of £2.5 million or 5% of the capital resources of the firm, the property valuation must be reviewed by an independent valuer at least every three years.

  2. (2)

    In (1), ‘independent valuer’ means a person who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process.

MIPRU 4.2F.15 G RP

A property will need to be revalued over time to ensure that the original purchase price does not overstate the degree of security provided by the property. Ijara providers should undertake revaluations in the same way as providers of conventional mortgages.

MIPRU 4.2F.16 G RP

For MIPRU 4.2F.14R (1)(a), the monitoring of property values should be an ongoing part of risk managing and tracking the portfolio. The requirement to monitor property values does not include the physical assessment of each property in the portfolio.

MIPRU 4.2F.17 G RP

For MIPRU 4.2F.14R (1)(d) and MIPRU 4.2F.14R (1)(e), the review of a property valuation is more in-depth than the normal monitoring process required by MIPRU 4.2F.14R (1)(a). This requirement is likely to include a review of the property value on an individual exposure basis. Where an exposure is secured by multiple properties, the review can be undertaken at the level of the exposure, rather than at the level of each individual property.

MIPRU 4.2F.18 G RP

The review of property values required by MIPRU 4.2F.14R (1)(e) may lead to an amendment of the value assigned to the property under MIPRU 4.2F.29 R.

MIPRU 4.2F.19 G RP

For MIPRU 4.2F.14R (2), necessary qualifications need not be professional qualifications, but the firm should be able to demonstrate that the person has the necessary ability and experience to undertake the review.

Documentation

MIPRU 4.2F.20 R RP

The requirements in MIPRU 4.2F.11R (3)(c) are that the types of residential real estate accepted by the firm and its lending policies in this regard must be clearly documented.

Insurance

MIPRU 4.2F.21 R RP

The requirements about insurance in MIPRU 4.2F.11R (3)(d) are that the firm must have procedures to monitor that the property taken as protection is adequately insured against damage.

MIPRU 4.2F.22 G RP

For MIPRU 4.2F.12 R, a firm should, as a minimum, ensure that it is a requirement of each loan that the property taken as collateral must have adequate buildings insurance at all times, which should be reviewed when any new loan is extended against the property.

MIPRU 4.2F.23 G RP

A firm may deal with the risk that insurance on properties taken as protection may be inadequate by taking out insurance at the level of the portfolio.

Valuation rules

MIPRU 4.2F.24 G

The valuation provisions in MIPRU 4.2F.11R (4) are set out in MIPRU 4.2F.25 R to MIPRU 4.2F.29 R.

MIPRU 4.2F.25 R RP

The property must be valued by an independent valuer at or less than the market value using reliable standards for the valuation of residential property.

MIPRU 4.2F.26 G RP

For MIPRU 4.2F.25 R:

  1. (1)

    reliable standards for the valuation of residential property include internationally recognised valuation standards, in particular those developed by the International Valuation Standards Committee (IVSC), the European Group of Valuers’ Associations (EGoVA) or the Royal Institution of Chartered Surveyors (RICS) as well as the standards in MIPRU 4.2F.27 R to MIPRU 4.2F.29 R; and

  2. (2)

    the requirement to use reliable standards of valuation of residential property is not limited to on-site inspections where it is possible to demonstrate that any risks posed have been adequately assessed through the overall collateral management process.

MIPRU 4.2F.27 R RP
  1. (1)

    Market value means the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing, where the parties had each acted knowledgeably, prudently and without compulsion.

  2. (2)

    The market value must be documented in a transparent and clear manner.

MIPRU 4.2F.28 R RP
  1. (1)

    Mortgage lending value means the value of the property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, and the current use and alternative appropriate uses of the property.

  2. (2)

    Speculative elements must not be taken into account in the assessment of the mortgage lending value.

  3. (3)

    The mortgage lending value must be documented in a transparent and clear manner.

MIPRU 4.2F.29 R RP

The value of the collateral must be the market value or mortgage lending value reduced as appropriate to reflect the results of the monitoring required under MIPRU 4.2F.11R (3)(b) and MIPRU 4.2F.14 R and to take account of any prior claims on the property, such as a first-charge mortgage from another lender.

Treatment of secured and unsecured portions of residential mortgages

MIPRU 4.2F.30 R RP

A firm may not treat an exposure as fully and completely secured by residential property located in the United Kingdom for MIPRU 4.2F.4 R (residential mortgages) or MIPRU 4.2F.9 R (property leasing transactions) unless either of the following is 80% or less of the value of the residential property on which it is secured:

  1. (1)

    the amount of the exposure;

  2. (2)

    the secured part of the exposure in MIPRU 4.2F.4 R or MIPRU 4.2F.9 R.

MIPRU 4.2F.31 G RP
  1. (1)

    The application of MIPRU 4.2F.30 R may be illustrated by an example. If a firm has a mortgage exposure of £100,000 secured on residential property in the United Kingdom that satisfies the criteria listed in MIPRU 4.2F.4 R to MIPRU 4.2F.9 R and the value of that property is £100,000, then £80,000 of that exposure may be treated as fully and completely secured and risk weighted at 35%. The remaining £20,000 should be risk weighted at 75%. A diagrammatic illustration of this example is in MIPRU 4.2F.31G (2).

  2. (2)

    A diagrammatic illustration of the example in MIPRU 4.2F.31G (1).

    Unsecured component risk weighted at 75%

    Example

    Secured component risk weighted at 35%

    £100,000 loan secured on residential property valued at £100,000

    First £80,000 (i.e. 80% LTV) risk weighted at 35%

    Remaining £20,000 (i.e. above 80% LTV) risk weighted at 75%

    Overall risk weight is 43%

  3. (3)

    The same approach applies to exposures described in MIPRU 4.2F.9 R. On inception, a risk weight of 35% should be applied to the first 80% of the principal/"purchase price" outstanding, with a risk weight of 75% being applied to the remainder of the principal exposure.

MIPRU 4.2F.32 G RP

If a firm has more than one exposure secured on the same property they should be aggregated and treated as if they were a single exposure secured on the property for the purposes of MIPRU 4.2F.4 R, MIPRU 4.2F.9 R and MIPRU 4.2F.30 R.

MIPRU 4.2F.33 R RP

If a firm has an exposure arising through a second-charge mortgage secured on the same property as a first-charge loan from a different firm, the exposure, taking into account the first-charge mortgage, must be split into the following components and risk weighted as follows, after taking into account the seniority of the first-charge loan:

  1. (1)

    the amount of the exposure or any part of the exposure, up to a limit of 80% of the value of the residential property, must be assigned a risk weight of 35% where:

    1. (a)

      the exposure is fully and completely secured, to the satisfaction of the firm, by a mortgage on residential property; and

    2. (b)

      the residential property is, or will be, occupied or let by the owner, or the beneficial owner in the case of personal investment companies; and

  2. (2)

    the amount of the same exposure that is unsecured, above 80% of the value of the residential property up to a limit of 100% of the value of the residential property, must be assigned a risk weight of 75%; and

  3. (3)

    any remaining part of the exposure, above 100% of the value of the property, must be assigned a risk weight of 100%.

MIPRU 4.2F.34 G RP
  1. (1)

    The application of MIPRU 4.2F.33 R may be illustrated by an example. Where a first-charge mortgage exposure of £50,000 from another lender is secured on residential property in the United Kingdom that satisfies the criteria in MIPRU 4.2F.4 R to MIPRU 4.2F.29 R and the value of that property is £100,000, then a firm with a second-charge mortgage of £60,000 on the same property may treat £30,000 of that exposure as fully and completely secured and risk weight it at 35%, treat a further £20,000 as unsecured and risk weight it at 75%, and risk weight the remaining £10,000 at 100%. A diagrammatic illustration of this example is in (2).

  2. (2)

    A diagrammatic illustration of the example in (1)

    Property value

    Exposure and risk weightings

    Example

    £10,000 of second-charge - risk weighted at 100%

    • Remaining second-charge mortgage, i.e. £10,000

    £100,000

    £20,000 of second-charge - risk weighted at 75%

    • Second-charge mortgage up to maximum of 100% of property value, i.e. £20,000

    £30,000 of second-charge - risk weighted at 35%

    • Second-charge mortgage up to maximum of 80% of property value, i.e. £30,000

    First-charge mortgage (£50,000)

    • Other lender has first-charge over property with outstanding loan balance of £50,000

MIPRU 4.2F.35 G RP

If an exposure is secured on property that is used partly for residential purposes under MIPRU 4.2F.4 R and partly for commercial purposes (such as a farm, public house, guest house or shop) it may be treated as secured by residential real estate if the firm can demonstrate that:

  1. (1)

    the property's main use is, or will be, residential; and

  2. (2)

    the value of the property is not significantly affected by its commercial use.

MIPRU 4.2F.36 R RP

Exposures to residential property situated in an EEA State or a third-country must be assigned a risk weight of 75% up to a limit of 100% of the value of the property.

Exposures secured by mortgages on commercial property

MIPRU 4.2F.37 R RP

Exposures, or any part of an exposure, secured by mortgages on offices or other commercial premises must be assigned a risk weight of 100% where the exposure:

  1. (1)

    cannot properly be considered to fall within any other standardised credit risk exposure class specified in MIPRU 4.2A.6A R (Exposure classes); or

  2. (2)

    does not qualify for a lower risk weight under this section.

Exposures to other loans

MIPRU 4.2F.38 R RP

Exposures to other loans must be assigned a risk weight of 100%.

Exposures to funds

MIPRU 4.2F.39 R RP

Except where a different risk weight is assigned to exposures in the form of funds by MIPRU 4.2F.40 R, MIPRU 4.2F.42 R or MIPRU 4.2F.45 R, these exposures must be assigned a risk weight of 100%.

MIPRU 4.2F.40 R RP

Exposures in the form of funds for which a credit assessment by a nominated ECAI is available must be assigned a risk weight using:

  1. (1)

    the table in MIPRU 4.2E.14 R to determine the credit quality step associated with that credit assessment; and

  2. (2)

    the table in MIPRU 4.2F.41 R to determine the risk weight to be applied to the rated position, based on the associated credit quality step.

MIPRU 4.2F.41 R RP

Table: Exposures in the form of funds for which a credit assessment by a nominated ECAI is available

This table belongs to MIPRU 4.2F.40 R.

Credit quality step

1

2

3

4

5

6

Risk weight

20%

50%

100%

100%

150%

150%

MIPRU 4.2F.42 R RP

Where a firm considers that a position in a fund is associated with particularly high risks, it must assign that position a risk weight of 150%.

MIPRU 4.2F.43 G RP

A firm should consider a fund as being high risk where there is no external credit assessment from an eligible ECAI and where the fund has specific features (such as high levels of leverage or lack of transparency).

MIPRU 4.2F.44 G RP

Other examples of high-risk funds are:

  1. (1)

    those in which a substantial element of the fund's property is made up of items that would attract a risk weight of over 100%; and

  2. (2)

    those whose mandate (as referred to in MIPRU 4.2F.46 R would permit it to invest in a substantial amount of items that would attract a risk weight of over 100%.

MIPRU 4.2F.45 R RP

If the eligibility criteria in MIPRU 4.2F.46 R are met, a firm must decide whether to:

  1. (1)

    assign a 100% risk weight to its exposures in funds, as required by MIPRU 4.2F.39 R; or

  2. (2)

    determine the risk weight for an exposure in funds, as set out in MIPRU 4.2F.47 R to MIPRU 4.2F.48 R.

MIPRU 4.2F.46 R RP

The eligibility criteria in MIPRU 4.2F.45 R are:

  1. (1)

    the fund's prospectus or equivalent document includes:

    1. (a)

      the categories of assets in which the fund is authorised to invest; and

    2. (b)

      if investment limits apply, the relative limits and the methodologies to calculate them; and

  2. (2)

    the business of the fund is reported on at least an annual basis to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period.

MIPRU 4.2F.47 R RP

Where a firm is not aware of the underlying exposures of a fund, it may calculate an average risk weight for the fund in the following manner:

  1. (1)

    it will be assumed that the fund first invests, to the maximum extent allowed under its mandate, in the exposure classes attracting the highest capital resources requirement; and

  2. (2)

    then continues making investments in descending order until the maximum total investment limit is reached.

MIPRU 4.2F.48 R RP

A firm may rely on a third party to calculate and report, in accordance with the method in MIPRU 4.2F.47 R, a risk weight for the fund, provided that the correctness of the calculation and report is adequately ensured.

MIPRU 4.2F.49 R RP

Exposures in the form of funds that are not past due items, that have been assigned a risk weight of 150% or greater, and for which value adjustments have been established, may be assigned a risk weight of:

  1. (1)

    100% if value adjustments are no less than 20% of the exposure value gross of value adjustments; or

  2. (2)

    50%, if value adjustments are no less than 50% of the exposure value gross of value adjustments

Exposures to past due items

MIPRU 4.2F.50 R RP

Exposures must be treated as past due in their entirety where any payment due is past its contractual date by more than 90 days.

Exposures to past due item: treatment of secured part of mortgages on residential property

MIPRU 4.2F.51 R RP

Where value adjustments are taken against the secured part of an exposure secured by a mortgage on residential property and that is past due, the secured part net of value adjustments must be assigned a risk weight of:

  1. (1)

    100% if value adjustments are less than 20% of the secured part of the exposure gross of value adjustments; or

  2. (2)

    50% if value adjustments are no less than 20% of the secured part of the exposure gross of value adjustments.

MIPRU 4.2F.52 G RP

A firm may treat the secured part of an exposure covered by a mortgage indemnity product that meets the relevant eligibility criteria for credit risk mitigation as secured for the purposes of MIPRU 4.2F.51 R.

Exposures to past due items: treatment of secured part of other exposures

MIPRU 4.2F.53 R RP

For the purpose of defining the secured part of a past due item other than exposures secured on residential property, credit protection must be eligible for credit risk mitigation purposes under MIPRU 4.2C (Credit risk mitigation).

MIPRU 4.2F.54 G
  1. (1)

    For MIPRU 4.2F.53 R, the secured part of a past due item is dealt with under MIPRU 4.2C (Credit risk mitigation).

  2. (2)

    The risk weight to be applied to the secured part is determined under MIPRU 4.2C.6 R, and MIPRU 4.2C.29 R to MIPRU 4.2C.30 R.

  3. (3)

    The risk weight of the unsecured part of the past due item is determined in accordance with MIPRU 4.2F.55 R.

Treatment of unsecured part: all exposures

MIPRU 4.2F.55 R RP

The unsecured part of any past due item, net of any value adjustments taken against the unsecured part, must be assigned a risk weight of:

  1. (1)

    150% if value adjustments are less than 20% of the unsecured part of the exposure gross of value adjustments; or

  2. (2)

    100% if value adjustments are no less than 20% of the unsecured part of the exposure gross of value adjustments.

Example: mortgages on residential property

MIPRU 4.2F.56 G RP

The application of value adjustments to either the secured or the unsecured component of an exposure secured on residential property may be illustrated on the basis of a £110,000 loan on a property valued at £100,000, where £80,000 of the loan is secured, £30,000 of the exposure is unsecured and a value adjustment of £20,000 is taken.

  1. (1)

    Value adjustment applied to unsecured component:

    1. (a)

      Value adjustment of £20,000 taken on £30,000 unsecured exposure.

    2. (b)

      Value adjustment exceeds 20%, so the firm should risk weight the remaining £10,000 unsecured exposure at 100% (as per MIPRU 4.2F.55 R).

    3. (c)

      The risk weight to be applied to the secured exposure of £80,000 is 100% (as per MIPRU 4.2F.51 R).

  2. (2)

    Value adjustment applied to secured component:

    1. (a)

      Value adjustment of £20,000 taken on £80,000 secured exposure.

    2. (b)

      Value adjustment exceeds 20%, so the firm should risk weight the remaining £60,000 secured exposure at 50% (as per MIPRU 4.2F.51 R).

    3. (c)

      The risk weight to be applied to the unsecured exposure of £30,000 is 150% (as per MIPRU 4.2F.55 R).

  3. (3)

    A diagrammatic illustration of how MIPRU 4.2F.56G (1) and MIPRU 4.2F.56G (2) operate is as follows:

    Value adjustment applied to unsecured component (MIPRU 4.2F.51 R)

    Risk weightings

    Exposure

    Risk weightings

    Value adjustment to secured component (MIPRU 4.2F.55 R)

    £20,000

    Unsecured component of £30,000

    £30,000 risk weighted at 150%

    £10,000 risk weighted at 100%

    £80,000 risk weighted at 100%

    Secured component of £80,000

    £20,000

    £60,000 risk weighted at 50%

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 distribution activity4 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. But it does not include income generated from carrying on any home finance mediation activity for:3

1
  1. (1)

    second charge regulated mortgage contracts; or3

  2. (2)

    legacy CCA mortgage contracts.3

2
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.

MIPRU 4.3.7A R RP

2In the calculation of the capital resources of a firm that carries on any home finance administration activity, the annual income does not include annual income from:3

  1. (1)

    second charge regulated mortgage contracts; or3

  2. (2)

    legacy CCA mortgage contracts.3

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 appropriate regulator.

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 Investment Firms and the EU CRR, the General Prudential sourcebook6, 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 and regulations6.

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 appropriate regulator 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 appropriate regulator; 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 distribution activity7 , 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 distribution activity7 ; or

      2. (ii)

        home finance mediation activity1(or both); and

        1

    in relation to those activities, holds client money or other client assets; or5

    1. (b)

      carries on home financing or home finance administration connected to regulated mortgage contracts (or both) unless as at 26 April 2014 its Part IV permission was and continues to remain subject to a restriction preventing it from undertaking new home financing or home finance administration connected to regulated mortgage contracts.5

      5
1 1 1 1 5
  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.