IPRU-INV 13 Financial Resources Requirements for Personal Investment Firms

A firm must at all times:

1. (1)

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

2. (2)

   be able to meet its liabilities as they fall due.

1. (1)

   Unless a rule provides otherwise, a firm must:

   1. (a)

      recognise an asset or liability; and

   2. (b)

      measure the amount of that asset or liability,

   by using the accounting principles it applies in preparing the firm's reporting form in (2).

2. (2)

   The accounting principles are referred to in the Notes for completion of the Retail Mediation Activities Return (RMAR) (under the heading “Accounting Principles”) in SUP 16 Annex 18BG.

A firm must take out and maintain at all times professional indemnity insurance that is at least equal to the requirements in this section from:

1. (1)

   an insurance undertaking which is authorised to transact professional indemnity insurance in the UK

2. (2)

   a person of equivalent status in:

   1. (a)

      a Zone A country;

   2. (b)

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

[Note: articles 10(4) and 10(5) of the IDD

1. (1)

   A firm is not required to effect or maintain professional indemnity insurance if a bank, building society or an insurer provides the firm with a comparable guarantee.

2. (2)

   If the firm is a member of a group in which there is a bank, building society or an insurer, the firm's comparable guarantee must be from that bank, building society or insurer.

3. (3)

   A comparable guarantee means an enforceable, written agreement on terms at least equal to those required by IPRU-INV 13.1.9R to 13.1.13R, as appropriate.

The term "relevant income" in this section refers to all income received or receivable which is commission, brokerage, fees or other related income, whether arising from the firm's permitted activities or not, for the last accounting year prior to inception or renewal of the professional indemnity insurance policy ("the policy").

The policy must incorporate terms which are appropriate and must make provision for cover in respect of any claim for loss or damage, for which the firm may be liable as a result of an act or omission by:

1. (1)

   the firm; or

2. (2)

   any person acting on behalf of the firm including employees, appointed representatives or its other agents.

If the firm is an IDD insurance intermediary, the appropriate minimum limits of indemnity per year are no lower than:

1. (1)

   EUR 1,300,380 for a single claim against the firm; and

2. (2)

   EUR 1,924,560 in the aggregate.

[Note: articles 10(4) and 10(5) of the IDD]

If the firm is not an IDD insurance intermediary, then the following limits of indemnity apply:

1. (1)

   if the firm has relevant income of up to £3,000,000, no lower than £500,000 for a single claim against the firm and £500,000 in the aggregate; or

2. (2)

   if the firm has relevant income of more than £3,000,000, no lower than £650,000 for a single claim against the firm and £1,000,000 in the aggregate.

If a policy is denominated in any currency other than euros, a firm must take reasonable steps to ensure that the limits of indemnity are, when the policy is effected (i.e. agreed) and at renewal, at least equivalent to those denominated in euros.

If the policy provides cover to more than one firm then:

1. (1)

   The relevant income for calculating the limits of indemnity is that of all the firms named in the policy combined;

2. (2)

   each firm named in the policy must have the benefit of the minimum limits of indemnity as required in this section; and

3. (3)

   each firm named in the policy must notify the FCA if the aggregate cover in the policy falls below the minimum limits of indemnity.

The policy must not be subject to conditions or exclusions which unreasonably limit its cover.

The policy must not limit cover which would otherwise be provided by the policy where:

1. (1)

   any of the following default:

   1. (a)

      the firm; or

   2. (b)

      a person or fund relevant to a potential claim; or

2. (2)

   a person other than the firm is entitled to make a claim on the policy.

1. (1)

   IPRU(INV) 13.1.20AR does not limit the generality of the scope of IPRU(INV) 13.1.20R.

2. (2)

   In IPRU(INV) 13.1.20R and IPRU(INV) 13.1.20AR, “limit cover” includes limiting by exclusion, by policy excesses or otherwise.

3. (3)

   In IPRU(INV) 13.1.20AR, “default” means becoming:

   1. (a)

      in default;

   2. (b)

      insolvent or likely to be unable to satisfy claims against it; or

   3. (c)

      the subject of one or more of the proceedings listed in COMP 6.3.3R in the United Kingdom (or of equivalent or similar proceedings in another jurisdiction) whether or not a determination under COMP 6.3.3R has been made.

The policy’s terms must include a statement confirming that the policy complies with IPRU(INV) 13.1.20AR.

The policy must not:

1. (1)

   exclude any type of business or activity that has been carried out by the firm in the past or will be carried out by the firm during the time for which the policy is in force; or

2. (2)

   exclude liabilities which are identified or crystallised as a result of regulatory action against the firm (either individually or as a member of a class of authorised persons);

unless the firm holds additional capital resources, in accordance with 13.1.23R.

The policy must not make provision for payment by the firm of an excess on any claim of more than £5,000, unless the firm holds additional capital resources, in accordance with 13.1.27R.

The reference to "excess" is to the highest excess level required to be paid under the policy unless that excess relates to a type of business that has not been carried out by the firm in the past. In those circumstances, the reference is to the next highest excess level required by the policy applicable to a type of business that has been carried out by the firm in the past.

A firm must notify the FCA immediately if it becomes aware, or has information which reasonably suggests, that any of the following matters in relation to its professional indemnity insurance has occurred, may have occurred or may occur in the foreseeable future:

1. (1)

   professional indemnity insurance cannot be obtained within 28 days of the inception or renewal date;

2. (2)

   professional indemnity insurance is cancelled;

3. (3)

   the amount of aggregate cover is exhausted;

4. (4)

   the firm commences business lines for which it had not obtained cover;

5. (5)

   the firm is relying on a policy cover for more than one firm; or

6. (6)

   the firm is relying on a comparable guarantee provided in accordance with the rules in this chapter.

This section applies to a personal investment firm.

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

1. (1) the capital resources requirement that is applied under IPRU-INV 13.13.2R(2) or IPRU-INV 13.13.3R(2); and
2. (2) the financial resources requirement calculated in accordance with IPRU-INV 5 (Investment Management Firms), disregarding IPRU-INV 5.4.10R(i)(C) and IPRU-INV 5.4.10R(ii)(C).

This section applies to a personal investment firm.

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

1. (1)

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

2. (2)

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

3. (3)

   The relevant reporting form under SUP 16.12 is the Retail Mediation Activities Return (RMAR) (Section B: Profit and Loss Account).

4. (4)

   If the firm’s most recent reporting form does not cover a 12-month period, the annual income is derived by converting the amount reported, proportionally, to a 12-month period.

5. (5)

   If the firm does not yet have a reporting form under (1), the annual income is taken from the forecast or other appropriate accounts which the firm has submitted to the FCA.

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

1. (1)

   brokerage;

2. (2)

   fees;

3. (3)

   commissions; and

4. (4)

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

If a firm is a principal, its annual income includes amounts due to its appointed representative for activities related to designated investment business for which the firm has accepted responsibility.

This section applies to a personal investment firm.

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

1. (1)

   a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on cash flow hedges of financial instruments measured at cost or amortised cost;

2. (2)

   a firm must de-recognise any defined benefit asset;

3. (3)

   a firm may substitute for a defined benefit liability its deficit reduction amount and that election must be applied consistently in respect of any one financial year;

4. (4)

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

5. (5)

   where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

A firm may include a short-term subordinated loan as capital resources (see table in IPRU-INV 13.15.3R), if all the conditions in IPRU-INV 13.15.8R are satisfied.

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

1. (1)

   the subordinated loan must have an original maturity of at least two years or, if it has no fixed term, it is subject to not less than two years' notice of repayment;

2. (2)

   the agreement governing the subordinated loan must not permit payment of interest unless a firm has at least 120% of its capital resources requirement after that payment;

3. (3)

   the agreement governing the subordinated loan must only permit repayment, prepayment or termination on:

   1. (a)

      maturity, or on expiration of the period of notice, if a firm has at least 120% of its capital resources requirement after that payment or termination; or

   2. (b)

      winding up after the claims of all other creditors and all outstanding debts have been settled;

4. (4)

   the agreement governing the subordinated loan is in the standard form for short term subordinated loans prescribed by the FCA (see form 13.1 Form of subordinated loan agreement for personal investment firms); and

5. (5)

   the restrictions in IPRU-INV 13.15.9R and IPRU-INV 13.15.10R are complied with.

A firm must calculate:

1. (1)

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

2. (2)

   the amount of the firm's total capital and reserves excluding preference share capital, less the amount of its intangible assets, multiplied by 400%.

A firm must treat as a liability in the calculation or its capital resources any amount by which the sum of IPRU-INV 13.15.9R(1) exceeds the product of IPRU-INV 13.15.9R(2).