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  1. Point in time
    2016-07-16

IPRU-INV 13.15 CALCULATION OF CAPITAL RESOURCES TO MEET THE CAPITAL RESOURCES REQUIREMENT FOR A CATEGORY B FIRM WHOSE PERMISSION DOES NOT INCLUDE ESTABLISHING, OPERATING OR WINDING UP A PERSONAL PENSION SCHEME

Application

IPRU-INV 13.15.1RRP

1This section applies to a personal investment firm which is a category B firm whose permission does not include establishing, operating or winding up a personal pension scheme.

IPRU-INV 13.15.2GRP

The calculation of own funds by an exempt CAD firm is in IPRU-INV 13.1A.14R.

IPRU-INV 13.15.3RRP

A firm must calculate its capital resources in accordance with table 13.15.3(1).

Table 13.15.3(1)

This table forms part of IPRU-INV 13.15.3R.

Capital resources

Companies

Sole traders: Partnerships

Paid-up share capital (excluding preference shares2 redeemable by shareholders2 within two years)

Eligible LLP members’ capital

Share premium account

Retained profits (see IPRU-INV 13.15.4R) and interim net profits (Note 1)

Revaluation reserves

Subordinated loans (see IPRU-INV 13.15.7R)

Debt capital

Balances on proprietor’s or partners’

- capital accounts2

- current accounts2

(see IPRU-INV 13.15.4R)

Revaluation reserves

Subordinated loans (see IPRU-INV 13.15.7R)

less

- Intangible assets

- Material current year losses

- Excess LLP members’ drawings

less

- Intangible assets

- Material current year losses

- Excess of current year drawings over current year profits2

Note 1

Retained profits must be audited and interim net profits 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.
IPRU-INV 13.15.4RRP

When calculating a firm’s capital resources, the following adjustments apply to retained profits or (for sole traders or partnerships) current accounts figures:

  1. (1)

    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;

  2. (2)

    a firm must de-recognise any defined benefit asset;

  3. (3)

    a firm may substitute for a defined benefit liability its deficit reduction amount and that election must be applied consistently in respect of any one financial year;

  4. (4)

    a firm must deduct any unrealised gains on investment property and include these within revaluation reserves; and

  5. (5)

    where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

IPRU-INV 13.15.5GRP

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.

Personal assets

IPRU-INV 13.15.6GRP

Where a firm is a sole trader or a partnership:

  1. (1)

    it can use (to the extent necessary to make up any shortfall in the required resources) any of its personal assets (not being needed to meet liabilities arising from its personal activities and any business activities not regulated by the FCA);

  2. (2)

    the firm's total financial resources, from whatever source, must at all times be sufficient to cover its total liabilities.

Subordinated loans – Category B firm

IPRU-INV 13.15.7RRP

A category B firm may include a short-term subordinated loan as capital resources (see table in IPRU-INV 13.15.3R), if all the conditions in IPRU-INV 13.15.8R are satisfied.

IPRU-INV 13.15.8RRP

The conditions referred to in IPRU-INV 13.15.7R are:

  1. (1)

    the subordinated loan must have an original maturity of at least two years or, if it has no fixed term, it is subject to not less than two years' notice of repayment;

  2. (2)

    the agreement governing the subordinated loan must not permit payment of interest unless a firm has at least 120% of its capital resources requirement after that payment2;

  3. (3)

    the agreement governing the subordinated loan must only permit repayment, prepayment or termination on:

    1. (a)

      maturity, or on expiration of the period of notice, if a firm has at least 120% of its capital resources requirement after that payment2 or termination; or

    2. (b)

      winding up after the claims of all other creditors and all outstanding debts have been settled;

  4. (4)

    the agreement governing the subordinated loan is in the standard form for short term subordinated loans prescribed by the FCA (see form 13.1 Form of subordinated loan agreement for personal investment firms); and

  5. (5)

    the restrictions in IPRU-INV 13.15.9R and IPRU-INV 13.15.10R are complied with.

Restrictions

IPRU-INV 13.15.9RRP

A Category B firm must calculate:

  1. (1)

    the aggregate amount of its short-term subordinated loans and its preference shares which are not redeemable within two years;

  2. (2)

    the amount of the firm's total capital and reserves excluding preference share capital, less the amount of its intangible assets, multiplied by 400%.

IPRU-INV 13.15.10RRP

A category B firm must treat as a liability in the calculation or its capital resources any amount by which the sum of IPRU-INV 13.15.9R(1) exceeds the product of IPRU-INV 13.15.9R(2).