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GENPRU 2.1 Calculation of capital resources requirements

Application

GENPRU 2.1.1RRP

1This section applies to:

  1. (1)

    a BIPRU firm; and

  2. (2)

    an insurer, unless it is:

    1. (a)

      a non-directive friendly society; or

    2. (b)

      a Swiss general insurer; or

    3. (c)

      an EEA-deposit insurer; or

    4. (d)

      an incoming EEA firm; or

    5. (e)

      an incoming Treaty firm.

GENPRU 2.1.2G

The scope of application of this section is not restricted to firms that are subject to the relevant EU6 Directives.

6
GENPRU 2.1.3R

  1. (1)

    This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

  2. (2)

    Where an insurer carries on both long-term insurance business and general insurance business, except where a particular provision provides otherwise, this section applies separately to each type of business.

GENPRU 2.1.4GRP

The adequacy of a firm's capital resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise.

GENPRU 2.1.5G

The requirements in this section apply to a firm on a solo basis.

Purpose

GENPRU 2.1.6GRP

Principle 4 requires a firm to maintain adequate financial resources. GENPRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. The adequacy of a firm's capital resources needs to be assessed both by that firm and the appropriate regulator. Through its rules, the appropriate regulator sets minimum capital resources requirements for firms. It also reviews a firm's own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate (see GENPRU 1.2 (Adequacy of financial resources), BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment)).

GENPRU 2.1.7GRP

This section sets capital resources requirements for a firm. GENPRU 2.2 (Capital resources) sets out how, for the purpose of meeting capital resources requirements, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are set out in GENPRU 1.3 (Valuation) and, for an insurer, INSPRU and, for a BIPRU firm, BIPRU.

GENPRU 2.1.8GRP

  1. (1)

    This section implements minimum EC standards for the capital resources required to be held by an insurer undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC), the Reinsurance Directive (2005/68/EC) or the First Non-Life Directive (1973/239/EEC) as amended.

  2. (2)

    This section also implements provisions of the Capital Adequacy Directive and Banking Consolidation Directive concerning the level of capital resources which a BIPRU firm is required to hold. In particular it implements (in part) Articles 9, 10 and 75 of the Banking Consolidation Directive and Articles 5, 9, 10 and 18 of the Capital Adequacy Directive.

  3. (3)

    In the case of a UCITS investment firm this section implements (in part) Article 77of the UCITS Directive.

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Monitoring requirements

GENPRU 2.1.9RRP

A firm must at all times monitor whether it is complying with GENPRU 2.1.13 R (the main capital adequacy rule for insurer) or the main BIPRU firm Pillar 1 rules and be able to demonstrate that it knows at all times whether it is complying with those rules.

GENPRU 2.1.10GRP

For the purposes of GENPRU 2.1.9 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with GENPRU 2.1.13 R and the main BIPRU firm Pillar 1 rules (as applicable) at all times. This does not necessarily mean that a firm needs to measure the precise amount of its capital resources and its CRR on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by the appropriate regulator.

GENPRU 2.1.11RRP

A firm must notify the appropriate regulator immediately of any breach, or expected breach, of GENPRU 2.1.13 R (in the case of an insurer) or the main BIPRU firm Pillar 1 rules (in the case of a BIPRU firm).

Additional capital requirements

GENPRU 2.1.12GRP

The appropriate regulator may impose a higher capital requirement than the minimum requirement set out in this section as part of the firm's Part 4A permission (see GENPRU 1.2 (Adequacy of financial resources), BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment)).

Main requirement: BIPRU firms

GENPRU 2.1.40RRP

A BIPRU firm must maintain at all times capital resources equal to or in excess of the amount specified in the table in GENPRU 2.1.45 R (Calculation of the variable capital requirement for a BIPRU firm).

GENPRU 2.1.41RRP

A BIPRU firm must maintain at all times capital resources equal to or in excess of the base capital resources requirement (see the table in GENPRU 2.1.48 R).

GENPRU 2.1.42RRP

At the time that it first becomes a bank, building society or BIPRU investment firm, a firm must hold initial capital of not less than the base capital resources requirement applicable to that firm.

GENPRU 2.1.43GRP

The purpose of the base capital resources requirement for a BIPRU firm is to act as a minimum capital requirement or floor. It has been written as a separate requirement as there are restrictions in GENPRU 2.2 (Capital resources) on the types of capital that a BIPRU firm may use to meet the base capital resources requirement which do not apply to some other parts of the capital requirement calculation. In order to preserve the base capital resources requirement's role as a floor rather than an additional requirement, GENPRU 2.2.60 R allows a BIPRU firm to meet the base capital resources requirement with capital that is also used to meet the variable capital requirements in GENPRU 2.1.40 R.

GENPRU 2.1.44GRP

The base capital resources requirement and the variable capital requirement in GENPRU 2.1.40 R are together called the capital resources requirement (CRR) in the case of a BIPRU firm.

Calculation of the variable capital requirement for a BIPRU firm

GENPRU 2.1.45RRP

Adjustment of the variable capital requirement calculation for UCITS investment firms

GENPRU 2.1.46RRP

When a3 UCITS investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only3 in respect of designated investment business. For this purpose scheme management activity is excluded from designated investment business.

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Calculation of the base capital resources requirement for a BIPRU firm

GENPRU 2.1.47RRP

The amount of a BIPRU firm's base capital resources requirement is set out in the table in GENPRU 2.1.48 R.

Table: Base capital resources requirement for a BIPRU firm

GENPRU 2.1.48RRP

This table belongs to GENPRU 2.1.47 R

Firm category

Amount: Currency equivalent of

Bank

€5 million

Building society

The higher of €1 million and £1 million

BIPRU 730K firm

€730,000

BIPRU 125K firm

€125,000

BIPRU 50K firm

€50,000

UCITS investment firm

€125,000 plus, if the funds under management exceed €250,000,000, 0.02% of the excess, subject to a maximum of €10,000,000.3

Definition of BIPRU 730K firm, BIPRU 125K firm and BIPRU 50K firm

GENPRU 2.1.49GRP

The terms BIPRU 730K firm, BIPRU 125K firm and BIPRU 50K firm are defined in BIPRU 1.1 (Application and purpose). However for convenience the table in GENPRU 2.1.50 G briefly summarises them.

Table: Definition of BIPRU 730K firm, BIPRU 125K firm and BIPRU 50K firm

GENPRU 2.1.50G

This table belongs to GENPRU 2.1.49 G

Category of BIPRU investment firm

Definition

BIPRU 50K firm

(1)

it does not deal in any financial instruments for its own account or underwrite issues of financial instruments on a firm commitment basis;

(2)

it offers one or more of the following services:

(a)

reception and transmission of investors' orders for financial instruments; or

(b)

the execution of investors' orders for financial instruments; or

(c)

the management of individual portfolios of investments in financial instruments; and

(3)

it does not hold clients' money and/or securities and it is not authorised to do so (it should have a limitation or requirement prohibiting the holding of client money and its permission should not include safeguarding and administering investments).

BIPRU 125K firm

(1)

it does not deal in any financial instruments for its own account or underwrite issues of financial instruments on a firm commitment basis;

(2)

it offers one or more of the following services:

(a)

reception and transmission of investors' orders for financial instruments; or

(b)

the execution of investors' orders for financial instruments; or

(c)

the management of individual portfolios of investments in financial instruments; and

(3)

it holds clients' money and/or securities or it is authorised to do so.

BIPRU 730K firm

is subject to the Capital Adequacy Directive and is neither a BIPRU 50K firm nor a BIPRU 125K firm.

Calculation of the credit risk capital requirement (BIPRU firm only)

GENPRU 2.1.51RRP

Calculation of the market risk capital requirement (BIPRU firm only)

GENPRU 2.1.52RRP

  1. (1)

    A BIPRU firm must calculate its market risk capital requirement as the sum of:

    1. (a)

      the interest rate PRR (including the basic interest rate PRR for equity derivatives set out in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives));

    2. (b)

      the equity PRR;

    3. (c)

      the commodity PRR;

    4. (d)

      the foreign currency PRR;

    5. (e)

      the option PRR; and

    6. (f)

      the collective investment undertaking PRR.

  2. (2)

    Any amount calculated under BIPRU 7.1.9 R - BIPRU 7.1.13 R (Instruments for which no PRR treatment has been specified) must be allocated between the PRR charges in (1) in the most appropriate manner.

Calculation of the fixed overheads requirement (BIPRU investment firm only)

GENPRU 2.1.53RRP

In relation to a BIPRU investment firm which is required to calculate a fixed overheads requirement, the amount of that requirementis equal to one quarter of the firm's relevant fixed expenditure calculated in accordance with GENPRU 2.1.54 R.

GENPRU 2.1.54RRP

For the purpose of GENPRU 2.1.53 R, and subject to GENPRU 2.1.55 R to GENPRU 2.1.57 R,a BIPRU investment firm's relevant fixed expenditure is the amount described as total expenditure in its most recent audited annual report and accounts, less the following items (if they are included within such expenditure):

  1. (1)

    staff bonuses, except to the extent that they are guaranteed;

  2. (2)

    employees' and directors' shares in profits, except to the extent that they are guaranteed;

  3. (3)

    other appropriations of profits;

  4. (4)

    shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue;

  5. (5)

    interest charges in respect of borrowings made to finance the acquisition of the firm's readily realisable investments;

  6. (6)

    interest paid to customers on client money;

  7. (7)

    interest paid to counterparties;

  8. (8)

    fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;

  9. (9)

    foreign exchange losses; and

  10. (10)

    other variable expenditure.

GENPRU 2.1.55RRP

The relevant fixed expenditure of a firm in the following circumstances is:

  1. (1)

    where its most recent audited annual report and accounts do not represent a twelve month period, an amount calculated in accordance with GENPRU 2.1.54 R, pro-rated so as to produce an equivalent annual amount; and

  2. (2)

    where it has not completed twelve months' trading, an amount based on forecast expenditure included in the budget for the first twelve months' trading, as submitted with its application for authorisation.

GENPRU 2.1.56RRP

A firm must adjust its relevant fixed expenditure calculation so far as necessary if and to the extent that since the date covered by the most recent audited annual report and accounts or (if GENPRU 2.1.55R (2) applies) since the budget was prepared:

  1. (1)

    its level of fixed expenditure changes materially; or

  2. (2)

    its regulated activities comprised within its permission change.

GENPRU 2.1.57RRP

If a firm has a material proportion of its expenditure incurred on its behalf by third parties and such expenditure is not fully recharged to that firm then the firm must adjust its relevant fixed expenditure calculation by adding back in the whole of the difference between the amount of the expenditure and the amount recharged.

GENPRU 2.1.58GRP

For the purpose of GENPRU 2.1.57 R, the FCA would consider as material 10% of a firm's expenditure incurred on its behalf by third parties.

GENPRU 2.1.59GRP

For the purpose of GENPRU 2.1.54 R to 2.1.57 R, fixed expenditure is expenditure which is inelastic relative to fluctuations in a firm's levels of business. Fixed expenditure is likely to include most salaries and staff costs, office rent, payment for the rent or lease of office equipment, and insurance premiums. It may be viewed as the amount of funds which a firm would require to enable it to cease business in an orderly manner, should the need arise. This is not an exhaustive list of such expenditure and a firm will itself need to identify (taking appropriate advice where necessary) which costs amount to fixed expenditure.