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FPCOB 15.1 Application and purpose

General application

FPCOB 15.1.1 R

1Subject to FPCOB 15.1.2R, this chapter applies to firms with a Part 4A permission for regulated funeral plan activities.

FPCOB 15.1.2 R

This chapter does not apply to a PRA-authorised person.

Purpose

FPCOB 15.1.3 G
  1. (1)

    1The purpose of FPCOB 15 is to set out the detailed prudential obligations that apply to regulated funeral plan activity.

  2. (2)

    1Adequate 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)

    1The 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)

    1The rules also place a core capital resources requirement on a firm to which this chapter applies. This core capital resources requirement varies depending on the nature of the activities undertaken by the firm.

FPCOB 15.2 General solvency requirement

FPCOB 15.2.1 R

1A firm must at all times maintain overall financial 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. This includes capital resources and liquidity resources.

FPCOB 15.2.2 G

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.

FPCOB 15.2.3 G

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.

FPCOB 15.2.4 G

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.

FPCOB 15.2.5 G

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.

FPCOB 15.2.6 G

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.

FPCOB 15.2.7 G

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.

FPCOB 15.2.8 G
  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:

    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’sgeneral 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.

FPCOB 15.2.9 G

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.

FPCOB 15.2.10 G

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.

FPCOB 15.2.11 G

1 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.

FPCOB 15.2.12 G

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.

FPCOB 15.2.13 G

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.

FPCOB 15.2.14 G

1 1The 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.

FPCOB 15.4 Capital resources: relevant accounting principles

FPCOB 15.4.1 R

1A 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.

FPCOB 15.5 Core capital resources requirement for funeral plan provision activities

FPCOB 15.5.1 R

1Subject to FPCOB 15.7.1R, for a firm with a Part 4A permission to carry on regulated funeral plan provision activities to which FPCOB 15.6.1R does not apply, the core capital resources requirement is the higher of:

  1. (1)

    £20,000;

  2. (2)

    2.5% of the firm’sannual income; or

  3. (3)

    the sum of:

    1. (a)

      the number of undrawn funeral plan contracts backed by trust arrangements, multiplied by the median of the amounts that would be payable to the firm under each trust arrangement if a funeral were required on the day following the end of the firm’s previous period for submitting its funeral plan financials return in accordance with SUP 16.12, multiplied by 0.5%; and

    2. (b)

      the number of undrawn funeral plan contracts backed by a whole of life insurance policy, multiplied by the median of the amounts payable to the firm under each whole of life insurance policy if a funeral were required on the day following the end of the firm’s previous period for submitting its Funeral plan financials return in accordance with SUP 16.12, multiplied by 0.5%.

FPCOB 15.5.2 R

1The calculation in FPCOB 15.5.1R(3) does not include any undrawn legacy funeral plan contracts held by the firm.

FPCOB 15.8 Calculation of annual income

Annual income

FPCOB 15.8.1 R

1A firm’sannual income refers to all income received or receivable, whether arising from the firm’spermitted activities or not, as reported in its most recent audited annual financial statements.

Annual income: periods of less than 12 months

FPCOB 15.8.2 R

1If 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

FPCOB 15.8.3 R

1If 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 FCA in accordance with its reporting obligations in SUP 16.12.

FPCOB 15.8.4 R

1If 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.

FPCOB 15.8.5 R

1If a firm is a network, it should include the relevant income due to all of its appointed representatives in its annual income.

FPCOB 15.9 Calculation of core capital resources

The calculation of a firm’s core capital resources

FPCOB 15.9.1 R

1A firm must calculate its capital resources for the core capital resources requirement from the items that are eligible to contribute to a firm’scapital resources, as set out in items 1 to 6 in the table in FPCOB 15.9.3R.

FPCOB 15.9.2 R

1In arriving at its calculation of its capital resources for the core capital resources requirement a firm must deduct the items set out in items 1 to 5 in the table in FPCOB 15.9.5R.

FPCOB 15.9.3 R

1The items that are eligible to contribute to the capital resources of a firm are set out in the following table:

Item

Additional explanation

1

Share capital

1This must be fully paid and may include:

(1)

ordinary share capital; or

(2)

preference share capital (excluding preference shares redeemable by shareholders within 2 years).

2

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

(1)

The capital of a sole trader is the net balance on the firm’s capital account and current account.

(2)

The capital of a partnership is the capital made up of the partners’:

(a)

Capital account, which is the account:

(i)

into which capital contributed by the partners is paid; and

(ii)

from which, under the terms of the partnership agreement, into which capital contributed by the partners is paid; and from which an amount representing capital may be withdrawn by a partner only if:

(A)

the person ceases to be a partner and an equal amount is transferred to another such account by their former partners or any person replacing them as their partner, or

(B)

the partnership is otherwise dissolved or wound up; and

(b)

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)

These are (subject to the Note) 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, 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’s reduction amount, provided that the election is applied consistently in respect of any one financial year.

4

Interim net profits (Note)

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

5

Revaluation reserves

[Editor’s note: Deliberately left blank.]

6

Subordinated loans/debt

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

Note: Reserves

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 16 of the Companies Act 2006 (section 477 (Small companies: conditions for exemption from audit)) relating to the audit of accounts.
FPCOB 15.9.4 G

1A 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.

FPCOB 15.9.5 R

1In arriving at its calculation of its capital resources for the core capital resources requirement a firm must deduct the items set out in the following table:

Item

Additional explanation

1

Investments in own shares

2

Investments in subsidiaries (Note 1)

3

Intangible assets (Note 2)

4

Interim net losses (Note 3)

5

Excess of drawings over profits for a sole trader or a partnership (Note 3)

Notes:

1. Investments in subsidiaries are the full balance sheet value.

2. Intangible assets are the full balance sheet value.

3. The interim net losses in row 4, and the excess of drawings in row 5, are in relation to the accounting period following the date as at which the capital resources are being computed.

Personal assets

FPCOB 15.9.6 R

1In relation to a sole trader’s firm or a firm which is a partnership, the sole trader or a partner in the firm may use personal assets to meet the core capital resources requirement, to the extent necessary to make up any shortfall in meeting that requirement, 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 FCA; or

  2. (2)

    the firm holds client money or other client assets in relation to regulated activities other than regulated funeral plan activity.

FPCOB 15.9.7 G

1A 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

FPCOB 15.9.8 R

1A subordinated loan/debt must not form part of the capital resources for the core capital resources requirement of the firm unless it meets the following conditions:

  1. (1)

    it has an original maturity of:

    1. (a)

      at least 5 years; or

    2. (b)

      it is subject to 5 years’ notice of repayment;

  2. (2)

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

  3. (3)

    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;

  4. (4)

    the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated loan/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;

  5. (5)

    the subordinated loan/debt must not become due and payable before its stated final maturity date, except on an event of default complying with (3);

  6. (6)

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

  7. (7)

    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;

  8. (8)

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

  9. (9)

    the loan/debt must be unsecured and fully paid up.

FPCOB 15.9.9 R

1When calculating its capital resources, the firm must exclude any amount by which the aggregate amount of its subordinated loans/debts exceeds the amount calculated as follows:

A - B

where:

A is equal to the sum of items 1 to 6 (inclusive) in the table of items in FPCOB 15.9.3R, which are eligible to contribute to a firm’scapital resources.

B is equal to the sum of items 1 to 5 (inclusive) in the table of items in FPCOB 15.9.5R which must be deducted in arriving at firm’scapital resources.

FPCOB 15.10 Systems, strategies, processes and reviews

Purpose

FPCOB 15.10.1 G

1In addition to adequate financial resources, adequate systems and controls are necessary for the effective management of prudential risks. The rules in this section therefore impose requirements relating to such systems and controls.

FPCOB 15.10.2 G

1This section also has rules requiring a firm to identify, assess and document:

  1. (1)

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

  2. (2)

    how it intends to mitigate these risks; and

  3. (3)

    the amount and nature of financial resources that the firms consider necessary to address any remaining risks.

FPCOB 15.10.3 G

1The FCA may review this assessment as part of its own assessment of the adequacy of a firm’s financial resources.

Systems, strategies, processes

FPCOB 15.10.4 R

1A firm must use sound, effective and comprehensive systems, strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources that it considers adequate to cover:

  1. (1)

    the nature and level of the risks to which it is or might be exposed; and

  2. (2)

    the risk that the firm might not be able to meet its core capital resources requirement and general solvency requirement in the future.

Documentation of risk assessments

FPCOB 15.10.5 R

1A firm must make a written record of the assessments required under FPCOB 15.10.4R. In particular, it must make a written record of:

  1. (1)

    the major sources of risk identified in accordance with FPCOB 15.10.4R; and

  2. (2)

    how it intends to deal with those risks.

FPCOB 15.10.6 R

1A firm must retain the records of its assessments referred to in FPCOB 15.10.5R for at least 3 years.

FPCOB 15.10.7 G

1The FCA may review the written record of the assessment as set out under FPCOB 15.10.5R 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.