IPRU-INV 13.1A FINANCIAL RESOURCES REQUIREMENTS FOR AN EXEMPT CAD FIRM

This section applies to a personal investment firm which is an exempt CAD firm.

The financial resources requirement for a personal investment firm which is an exempt CAD firm is the higher of:

1. (1)

   the requirement that is applied by section 13.1A; and

2. (2)
   1. (a)

      the requirement that is applied by sections 13.2 to 13.8

   2. (b)

      if it is an opted-in exempt CAD firm, the requirement that is applied by sections 13.9 to 13.12 (but reading references to Category B firm as references to the firm).

1. (1)

   A firm which is not an IMD insurance intermediary must have:

   1. (a)

      initial capital of EUR 50,000; or

   2. (b)

      professional indemnity insurance at least equal to the requirements of

      13.1.4(2)(b) and 13.1.4(3) to 13.1.6; or

   3. (c)

      a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to (a) or (b).

      [Note: Article 67(3) of MiFID and article 31(1) of the CRD (see also rule

      13.1.4(2)(b))]

2. (2)

   If a firm chooses to comply with either (b) or (c) above, it must nevertheless have initial capital of at least £10,000.

1. (1)

   A firm that is also an IMD insurance intermediary must have professional indemnity insurance at least equal to the limits set out in 13.1.4(2)(b) and in addition has to have:

   1. (a)

      initial capital of EUR 25,000; or

   2. (b)

      professional indemnity insurance at least equal to the

      requirements of 13.1.4(2)(c) and 13.1.4(3) to 13.1.6; or

   3. (c)

      a combination of initial capital and professional indemnity insurance in a form resulting in a level of coverage equivalent to (a) or (b).

[Note: Article 67(3) of MiFID and article 31(2) of the CRD (see also

rule

13.1.12 )]

1. (2)

   If a firm chooses to comply with either (b) or (c) above, it must nevertheless have initial capital of at least £20,000.

A firm's initial capital consists of the sum of the following items:

1. (1)

   ordinary share capital which is fully paid;

2. (2)

   perpetual non-cumulative preference share capital which is fully paid;

3. (3)

   share premium account;

4. (4)

   reserves excluding revaluation reserves;

5. (5)

   audited retained earnings;

6. (6)

   externally verified interim net profits;

7. (7)

   partners' capital;

8. (8)

   eligible LLP members' capital (in accordance with the provisions of IPRU-INV Annex A); and

9. (9)

   sole trader capital.

A firm may include preference share capital in initial capital only where any coupon on it is not cumulative, and the firm is under no obligation to pay a coupon in any circumstances.

When calculating initial capital, a firm may include its audited retained earnings only after making the following adjustments:

1. (1)

   a firm must not recognise the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost;

2. (2)

   in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;

3. (3)

   a firm must not include any unrealised gains from investment property (these should be reported as part of revaluation reserves);

4. (4)

   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 excluding from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

A firm may include interim net profits or current account when calculating initial capital to the extent that they have been verified by the firm's external auditor and are net of any foreseeable tax, dividend and other appropriations.

When calculating initial capital, a firm may include its partners' capital only after making the following adjustments:

1. (1)

   a firm must not recognise the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost;

2. (2)

   in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;

3. (3)

   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 excluding from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

For the calculation of initial capital, a firm may substitute for a defined benefit liability the firm's deficit reduction amount. The election must be applied consistently in respect of any one financial year.

A firm should keep a record of and be ready to explain to its supervisory contacts in the FSA 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.

A firm must, at all times, maintain a combination of professional indemnity insurance and own funds, at least equal to the requirements in this chapter for professional indemnity insurance and initial capital.

A firm's initial capital:

minus the sum of the items set out against B

plus the sum of the items set out against C

minus material holdings in credit and financial institutions and material insurance holdings

equals own funds.

Perpetual cumulative preference share capital may not be included in the calculation of own funds unless it meets the following requirements:

1. (1)

   it may not be reimbursed on the holder's initiative or without the prior agreement of the

   FSA

   ;

2. (2)

   the instrument must provide for the firm to have the option of deferring the dividend payment on the share capital;

3. (3)

   the shareholder's claims on the firm must be wholly subordinated to those of all non-subordinated creditors;

4. (4)

   the terms of the instrument must provided for the loss-absorption capacity of the share capital and unpaid dividends, whilst enabling the firm to continue its business; and

5. (5)

   it must be fully paid-up.

1. (1)

   In calculating own funds:

   1. (i)

      the total amount of revaluation reserves, perpetual cumulative preference share capital, long-term subordinated loans and fixed term preference share capital must not exceed 100% of initial capital minus the sum of the items set out against B; and

   2. (ii)

      the total amount of fixed term preference share capital and long-term subordinated loans must not exceed 50% of initial capital minus the sum of the items set out against B.