FPCOB 15.2 General solvency requirement

1The 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.

1The 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, taking realistic management actions such as ceasing to transact new business after a suitable period of time has elapsed.

1A 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 timings of cash flows under realistic adverse projections.

1Risks 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 asset.

1As 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.

1Where 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 FPCOB 15.2.6.

1. (1)

   1Following 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)

   1Where this is the case, the FCA will normally specify an amount or quality of capital or liquidity resources that the firm should hold by:

3. 1. (a)

      issuing individual capital guidance;

   2. (b)

      issuing individual liquidity guidance; or

   3. (c)

      imposing a requirement on the firm.

4. (3)

   1The 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).

5. (4)

   1The FCA may choose to conduct reviews of the regulated funeral plans activities sector, 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.

1The 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.

1Where 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.

1Guidance 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.

1If 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.

1A 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. (a)

   should undertake its own assessment of the amounts 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. (b)

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

11The 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.