PDCOB 13 Prudential requirements

1. (1)

   The purpose of PDCOB 13 is to set out the detailed prudential obligations that apply to regulated pensions dashboard activity.

2. (2)

   Adequate financial resources are necessary for the effective management of prudential risks. The rules in this chapter therefore impose requirements relating to the financial resources of a firm to which this chapter applies.

3. (3)

   The rules concern the adequacy of the financial resources that a firm needs to hold in order to be able to meet its liabilities as they fall due (the general solvency requirement). These resources include both capital and liquidity resources.

4. (4)

   The rules also place a core capital resources requirement on a firm to which this chapter applies.

The liabilities referred to in the general solvency requirement include:

1. (1)

   a firm’s contingent and prospective liabilities;

2. (2)

   liabilities that arise both in scenarios where the firm is a going concern and where the firm ceases to be a going concern; and

3. (3)

   claims that could be made against a firm, which ought to be paid in accordance with fair treatment of customers, even if such claims could not be legally enforced.

The liabilities referred to in the general solvency requirement exclude liabilities that might arise from transactions that a firm has not entered into and which it could avoid. This could include, for example, by taking realistic management actions such as ceasing to transact new business after a suitable period of time has elapsed.

A firm should therefore make its assessment of adequate financial resources on realistic valuation bases of assets and liabilities, taking into account the actual amounts and timing of cash flows under realistic adverse projections.

Risks may be addressed through holding capital to absorb losses that unexpectedly materialise. The ability to pay liabilities as they fall due also requires liquidity. Therefore, firms should consider both capital and liquidity needs in assessing the adequacy of their financial resources. A firm should also consider the quality of its financial resources such as the loss-absorbency of different types of capital and the time required to liquidate different types of assets.

As part of its day-to-day supervision of a firm, the FCA may review whether the amount and quality of capital and liquidity resources that a firm holds to comply with its general solvency requirement is sufficient.

Where necessary, the FCA may consider the use of its powers under section 166 of the Act (Reports by skilled persons) to assist with the review referred to in PDCOB 13.2.6G.

1. (1)

   Following such a review, the FCA may conclude that a firm should hold an additional amount or quality of capital or liquidity resources to comply with the general solvency requirement.

2. (2)

   Where this is the case, the FCA will normally specify an amount or quality of capital or liquidity resources that the firm should hold by:

   1. (a)

      issuing individual capital guidance;

   2. (b)

      issuing individual liquidity guidance; or

   3. (c)

      imposing a requirement on the firm.

3. (3)

   The amounts in (2) will typically represent the FCA’s assessment of the firm’s general solvency requirement. However, in some cases, it may be specified on a different basis (such as by reference to a specific component of the general solvency requirement or to a particular risk or harm).

4. (4)

   The FCA may choose to conduct reviews of the sector of firms carrying on regulated pensions dashboard activity, or aspects of it. In such cases, the FCA may subsequently choose to issue guidance on a sectoral basis or to impose additional requirements on all, or only a subset of, the entities included within that review. The guidance or requirement may relate to:

   1. (a)

      additional amounts or quality of capital or liquidity resources that such firms must hold; or

   2. (b)

      other actions that such firms must undertake.

The FCA will determine whether a requirement or guidance is more appropriate. Where the FCA chooses to issue guidance, this will normally explain how the FCA will approach supervising the general solvency requirement in relation to the firm. The FCA expects that the firm would normally confirm to the FCA that the firm will hold the amounts specified in that guidance going forward (and will therefore hold the relevant capital and or liquidity resources to comply with the general solvency requirement), unless the firm subsequently determines that higher amounts are required.

Where the FCA considers that it is appropriate to apply a requirement in connection with the general solvency requirement, it may invite a firm to make a voluntary application under section 55L(5) of the Act to impose a requirement on the firm to hold the level of capital or liquidity resources that the FCA has assessed as being required by the firm in order to meet the general solvency requirement.

Guidance on the general solvency requirement issued by the FCA will apply until the FCA issues revised guidance (or varies or removes the requirement relating to the general solvency requirement) in relation to the firm.

If a firm subsequently determines, as a result of its own assessment, that it needs to hold a higher level or quality of capital or liquidity resources to satisfy the general solvency requirement, it must hold that higher level. This is because the FCA’s assessment (or a requirement applied to the firm by the FCA) reflects an assessment carried out at that point in time and does not relieve the firm of its obligation to ensure that it is meeting the general solvency requirement at all times.

A firm’s business model or operating model may undergo a significant change, with the result that the firm considers that the amount or quality of capital or liquidity resources specified in the guidance issued by, or the requirement applied by, the FCA exceeds the amount or quality of capital or liquidity resources that the firm requires to comply with the general solvency requirement. In this case, the firm:

1. (1)

   should undertake its own assessment of the amount that the firm now requires to comply with the general solvency requirement or, where applicable, to address the risks in relation to which the requirement was imposed; and

2. (2)

   having undertaken the determination in (1), may contact the FCA to request a review of the existing guidance or requirement.

The FCA will not give individual capital guidance or individual liquidity guidance to the effect that the amount of capital advised in that guidance is lower than the amount of capital which a firm should hold to meet its core capital resources requirement.

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

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.

In addition to adequate financial resources, adequate systems and controls are necessary for the effective management of prudential risks. This section therefore imposes requirements relating to such systems and controls.

This section requires a firm to identify and assess:

1. (1)

   risks to the firm being able to meet its liabilities as they fall due;

2. (2)

   how the firm intends to mitigate these risks; and

3. (3)

   the amount and nature of financial resources that the firm considers necessary to address any remaining risks.

The FCA may review this assessment as part of its own assessment of the adequacy of a firm’s financial resources.

A firm should consider taking out professional indemnity insurance and insurance to cover the risk of cyber-attacks in relation to its regulated pensions dashboard activity.

The FCA may review the written record of the assessment in PDCOB 13.8.4R as required under PDCOB 16.12.1R as part of its own assessment of the adequacy of a firm’s financial resources as part of its day-to-day supervision of firms.