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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 collective portfolio management investment firm9 this section implements article 9 of AIFMD and9 (in part) Article 77of the UCITS Directive.

    97

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

Adjustment of the variable capital requirement calculation for collective portfolio management investment firms9

GENPRU 2.1.46RRP

When a3 collective portfolio management investment firm9 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 managing an AIF or managing a UCITS9 is excluded from designated investment business.

3939

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

Collective portfolio management investment firm9

9

€125,000

39

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.

Requirements for collective portfolio management investment firms11

GENPRU 2.1.63R

11A collective portfolio management investment firm must maintain capital resources which equal or exceed the higher of (1) and (2).

  1. (1)
    1. (a)

      The higher of:

      1. (i)

        the funds under management requirement (in line with GENPRU 2.1.66 R); and

      2. (ii)

        the fixed overheads requirement (in line with GENPRU 2.1.53 R); plus

    2. (b)

      whichever is applicable of:

      1. (i)

        the professional negligence capital requirement (in line with GENPRU 2.1.67G (1)(a); or

      2. (ii)

        the PII capital requirement (in line with GENPRU 2.1.67G (1)(b).

  2. (2)

    The amount specified in the table in GENPRU 2.1.45 R.

[Note: article 9(5) and 9(7) of AIFMD and article 7(1)(a)(iii) of the UCITS Directive]

GENPRU 2.1.64R

11A collective portfolio management investment firm must hold liquid assets (in line with GENPRU 2.1.73 R) which equal or exceed:

  1. (1)

    the higher of:

    1. (a)

      the funds under management requirement (in line with GENPRU 2.1.66 R) less the base capital resources requirement in GENPRU 2.1.48 R; and

    2. (b)

      the fixed overheads requirement (in line with GENPRU 2.1.53 R); plus

  2. (2)

    whichever is applicable of:

    1. (a)

      the professional negligence capital requirement (in line with GENPRU 2.1.67G (1)(a)); or

    2. (b)

      the PII capital requirement (in line with GENPRU 2.1.67G (1)(b)).

GENPRU 2.1.65G
  1. (1)

    11The professional negligence capital requirement applies for a collective portfolio investment management firm which, in line with GENPRU 2.1.67G (1)(a), decides to cover professional liability risks by way of own funds.

  2. (2)

    The PII capital requirement applies for a collective portfolio management investment firm which, in line with GENPRU 2.1.67G (1)(b), decides to cover professional liability risks by way of professional indemnity insurance.

GENPRU 2.1.66R

11The funds under management requirement is (subject to a maximum of €10,000,000) the sum of:

  1. (1)

    the base capital resources requirement; plus

  2. (2)

    0.02% of the amount by which the funds under management exceed €250,000,000.

[Note: article 9(3) of AIFMD and article 7(1)(a)(i) of the UCITS Directive]

GENPRU 2.1.67G

11A firm should:

  1. (1)

    cover the professional liability risks in article 12 of the AIFMD level 2 regulation (professional liability risks) (as replicated in GENPRU 2.1.68 EU) by either:

    1. (a)

      maintaining an amount of own funds in accordance with article 14 of the AIFMD level 2 regulation (additional own funds) (as replicated in GENPRU 2.1.70 EU) (the professional negligence capital requirement); or

    2. (b)

      holding professional indemnity insurance and maintaining an amount of own funds to meet the PII capital requirement in accordance with article 15 of the AIFMD level 2 regulation (professional indemnity insurance) (as replicated in GENPRU 2.1.71 EU) and GENPRU 2.1.72 R; and

  2. (2)

    comply with the qualitative requirements addressing professional liability risks in article 13 of the AIFMD level 2 regulation (qualitative requirements addressing professional liability) (as replicated in GENPRU 2.1.69 EU).

GENPRU 2.1.68EU

11Professional liability risks

1.

The professional liability risks to be covered pursuant to Article 9(7) of Directive 2011/61/EU shall be risks of loss or damage caused by a relevant person through the negligent performance of activities for which the AIFM has legal responsibility.

2.

Professional liability risks as defined in paragraph 1 shall include, without being limited to, risks of:

(a)

loss of documents evidencing title of assets of the AIF;

(b)

misrepresentations or misleading statements made to the AIF or its investors;

(c)

acts, errors or omissions resulting in a breach of:

(i)

legal and regulatory obligations;

(ii)

duty of skill and care towards the AIF and its investors;

(iii)

fiduciary duties;

(iv)

obligations of confidentiality;

(v)

AIF rules or instruments of incorporation;

(vi)

terms of appointment of the AIFM by the AIF;

(d)

failure to establish, implement and maintain appropriate procedures to prevent dishonest, fraudulent or malicious acts;

(e)

improperly carried out valuation of assets or calculation of unit/share prices;

(f)

losses arising from business disruption, system failures, failure of transaction processing or process management.

3.

Professional liability risks shall be covered at all times either through appropriate additional own funds determined in accordance with Article 14 or through appropriate coverage of professional indemnity insurance determined in accordance with Article 15.

[Note: article 12 of the AIFMD level 2 regulation]

GENPRU 2.1.69EU

11Qualitative requirements addressing professional liability risks

1.

An AIFM shall implement effective internal operational risk management policies and procedures in order to identify, measure, manage and monitor appropriately operational risks including professional liability risks to which the AIFM is or could be reasonably exposed. The operational risk management activities shall be performed independently as part of the risk management policy.

2.

An AIFM shall set up a historical loss database, in which any operational failures, loss and damage experience shall be recorded. This database shall record, without being limited to, any professional liability risks as referred to in Article 12(2) that have materialised.

3.

Within the risk management framework the AIFM shall make use of its internal historical loss data and where appropriate of external data, scenario analysis and factors reflecting the business environment and internal control systems.

4.

Operational risk exposures and loss experience shall be monitored on an ongoing basis and shall be subject to regular internal reporting.

5.

An AIFM's operational risk management policies and procedures shall be well documented. An AIFM shall have arrangements in place for ensuring compliance with its operational risk management policies and effective measures for the treatment of non-compliance with these policies. An AIFM shall have procedures in place for taking appropriate corrective action.

6.

The operational risk management policies and procedures and measurement systems shall be subject to regular review, at least on an annual basis.

7.

An AIFM shall maintain financial resources adequate to its assessed risk profile.

[Note: article 13 of the AIFMD level 2 regulation]

GENPRU 2.1.70EU

11Additional own funds

1.

This Article shall apply to AIFMs that choose to cover professional liability risks through additional own funds.

2.

The AIFM shall provide additional own funds for covering liability risks arising from professional negligence at least equal to 0,01 % of the value of the portfolios of AIFs managed.

The value of the portfolios of AIFs managed shall be the sum of the absolute value of all assets of all AIFs managed by the AIFM, including assets acquired through use of leverage, whereby derivative instruments shall be valued at their market value.

3.

The additional own funds requirement referred to in paragraph 2 shall be recalculated at the end of each financial year and the amount of additional own funds shall be adjusted accordingly.

The AIFM shall establish, implement and apply procedures to monitor on an ongoing basis the value of the portfolios of AIFs managed, calculated in accordance with the second subparagraph of paragraph 2. Where, before the annual recalculation referred to in the first subparagraph, the value of the portfolios of AIFs managed increases significantly, the AIFM shall without undue delay recalculate the additional own funds requirement and shall adjust the additional own funds accordingly.

4.

The competent authority of the home Member State of the AIFM may authorise the AIFM to provide additional own funds lower than the amount referred to in paragraph 2 only if it is satisfied - on the basis of the historical loss data of the AIFM as recorded over an observation period of at least three years prior to the assessment - that the AIFM provides sufficient additional own funds to appropriately cover professional liability risks. The authorised lower amount of additional own funds shall be not less than 0,008 % of the value of the portfolios of AIFs managed by the AIFM.

5.

The competent authority of the home Member State of the AIFM may request the AIFM to provide additional own funds higher than the amount referred to in paragraph 2 if it is not satisfied that the AIFM has sufficient additional own funds to appropriately cover professional liability risks. The competent authority shall give reasons why it considers that the AIFM's additional own funds are insufficient.

[Note: article 14 of the AIFMD level 2 regulation]

GENPRU 2.1.71EU

11Professional indemnity insurance

1.

This Article shall apply to AIFMs that choose to cover professional liability risks through professional indemnity insurance.

2.

The AIFM shall take out and maintain at all times professional indemnity insurance that:

(a)

shall have an initial term of no less than one year;

(b)

shall have a notice period for cancellation of at least 90 days;

(c)

shall cover professional liability risks as defined in Article 12(1) and (2);

(d)

is taken out from an EU or non-EU undertaking authorised to provide professional indemnity insurance, in accordance with Union law or national law;

(e)

is provided by a third party entity.

Any agreed defined excess shall be fully covered by own funds which are in addition to the own funds to be provided in accordance with Article 9(1) and (3) of Directive 2011/61/EU.

3.

The coverage of the insurance for an individual claim shall be equal to at least 0,7 % of the value of the portfolios of AIFs managed by the AIFM calculated as set out in the second subparagraph of Article 14(2).

4.

The coverage of the insurance for claims in aggregate per year shall be equal to at least 0,9 % of the value of the portfolios of AIFs managed by the AIFM calculated as set out in the second subparagraph of Article 14(2).

5.

The AIFM shall review the professional indemnity insurance policy and its compliance with the requirements laid down in this Article at least once a year and in the event of any change which affects the policy's compliance with the requirements in this Article.

[Note: article 15 of the AIFMD level 2 regulation]

GENPRU 2.1.72R

11If a firm satisfies the requirement referred to in GENPRU 2.1.67 G with professional indemnity insurance, it must, in addition to maintaining an amount of own funds to cover any defined excess, hold adequate own funds to cover any exclusions in the insurance policy that would otherwise result in the firm having insufficient resources to cover liabilities arising. A firm may satisfy its requirements for professional indemnity insurance with a policy that also provides cover to one or more entities other than the firm, provided the policy satisfies the conditions of the AIFMD level 2 regulation, exclusive of the cover provided to other firms by the policy.

GENPRU 2.1.73R

11In GENPRU 2.1.64 R, liquid assets are assets which:

  1. (1)

    are readily convertible to cash within one month; and

  2. (2)

    have not been invested in speculative positions.

GENPRU 2.1.74G

11Examples of liquid assets that are acceptable for the purposes of GENPRU 2.1.73 R include cash, readily realisable investments that are not held for short-term resale, and debtors.

[Note: article 9(8) of AIFMD]