A firm must at all times:

1. (1)

   have and maintain capital resources at least equal to its relevant capital resources requirement1; and

2. (2)

   be able to meet its liabilities as they fall due.

1. (1)

   1Unless a rule provides otherwise, a firm must:

   1. (a)

      recognise an asset or liability; and

   2. (b)

      measure the amount of that asset or liability,

   by using the accounting principles it applies in preparing the firm's reporting form in (2).

2. (2)

   The accounting principles are referred to in:

   1. (a)

      the Notes for completion of the Retail Mediation Activities Return (RMAR) (under the heading “Accounting Principles”) in SUP 16 Annex 18BG for a category B firm; and

   2. (b)

      the Guidance notes for data items in FSA032 (under the heading “Defined terms”) in SUP 16 Annex 25AG for an exempt CAD firm.

A firm must take out and maintain at all times professional indemnity insurance that is at least equal to the requirements in this section from:

1. (1)

   an insurance undertaking which is authorised to transact professional indemnity insurance in the EEA; or

2. (2)

   a person of equivalent status in:

   1. (a)

      a Zone A country;

   2. (b)

      the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

[Note:

Article 4(3) of the Insurance Mediation Directive]

An exempt CAD firm is not required to effect and maintain professional indemnity insurance unless it chooses this option (see 13.1A).

1. (1)

   A firm is not required to effect or maintain professional indemnity insurance if a bank, building society or an insurer provides the firm with a comparable guarantee.

2. (2)

   If the firm is a member of a group in which there is a bank, building society or an insurer, the firm's comparable guarantee must be from that bank, building society or insurer.

3. (3)

   A comparable guarantee means an enforceable, written agreement on terms at least equal to those required by IPRU-INV 13.1.9R to 13.1.13R, as appropriate.

The term "relevant income" in this section refers to all income received or receivable which is commission, brokerage, fees or other related income, whether arising from the firm'spermitted activities or not, for the last accounting year prior to inception or renewal of the professional indemnity insurance policy ("the policy").

The policy must incorporate terms which are appropriate and must make provision for cover in respect of any claim for loss or damage, for which the firm may be liable as a result of an act or omission by:

1. (1)

   the firm; or

2. (2)

   any person acting on behalf of the firm including employees, appointed representatives or its other agents.

If the firm is an IMD insurance intermediary, whether or not it is also an exempt CAD firm, the appropriate minimum limits of indemnity per year are no lower than:

1. (1)

   EUR 1,120,200 for a single claim against the firm; and

2. (2)

   EUR 1,680,300 in the aggregate.

[Note: Article 4(3) of the Insurance Mediation Directive]

If the firm is an exempt CAD firm that maintains professional indemnity insurance under 13.1A.3(1)(b), the appropriate minimum limits of indemnity per year are no lower than:

1. (1)

   EUR 1,000,000 for a single claim against the firm; and

2. (2)

   EUR 1,500,000 in the aggregate.

[Note: Article 67(3) of MiFID and article 31(1) of the CRD (see also rule 13.1A.3)]

If the firm is both an IMD insurance intermediary and an exempt CAD firm that maintains professional indemnity insurance under 13.1A.4(1)(b), the appropriate additional limits of indemnity to 13.1.10R per year are no lower than:

1. (1)

   EUR 500,000 for a single claim against the firm; and

2. (2)

   EUR 750,000 in the aggregate.

[Note: Article 67(3) of MiFID and article 31(2) of the CRD (see also rule 13.1A.4)]

If the firm is not an IMD insurance intermediary or an exempt CAD firm, then the following limits of indemnity apply:

1. (1)

   if the firm has relevant income of up to £3,000,000, no lower than £500,000 for a single claim against the firm and £500,000 in the aggregate; or

2. (2)

   if the firm has relevant income of more than £3,000,000, no lower than £650,000 for a single claim against the firm and £1,000,000 in the aggregate.

If a policy is denominated in any currency other than euros, a firm must take reasonable steps to ensure that the limits of indemnity are, when the policy is effected (i.e. agreed) and at renewal, at least equivalent to those denominated in euros.

If the policy provides cover to more than one firm then:

1. (1)

   The relevant income for calculating the limits of indemnity is that of all the firms named in the policy combined;

2. (2)

   each firm named in the policy must have the benefit of the minimum limits of indemnity as required in this section; and

3. (3)

   each firm named in the policy must notify the FCA1 if the aggregate cover in the policy falls below the minimum limits of indemnity.

The policy must not be subject to conditions or exclusions which unreasonably limit its cover (whether by exclusion of cover, by policy excesses or otherwise).

The policy must not:

1. (1)

   exclude any type of business or activity that has been carried out by the firm in the past or will be carried out by the firm during the time for which the policy is in force; or

2. (2)

   exclude liabilities which are identified or crystallised as a result of regulatory action against the firm (either individually or as a member of a class of authorised persons);

unless the firm holds additional capital resources, in accordance with 13.1.23R.

The policy must not make provision for payment by the firm of an excess on any claim of more than £5,000, unless the firm holds additional capital resources, in accordance with 13.1.27R.

The reference to "excess" is to the highest excess level required to be paid under the policy unless that excess relates to a type of business that has not been carried out by the firm in the past. In those circumstances, the reference is to the next highest excess level required by the policy applicable to a type of business that has been carried out by the firm in the past.

A firm must notify the FCA1 immediately if it becomes aware, or has information which reasonably suggests, that any of the following matters in relation to its professional indemnity insurance has occurred, may have occurred or may occur in the foreseeable future:

1. (1)

   professional indemnity insurance cannot be obtained within 28 days of the inception or renewal date;

2. (2)

   professional indemnity insurance is cancelled;

3. (3)

   the amount of aggregate cover is exhausted;

4. (4)

   the firm commences business lines for which it had not obtained cover;

5. (5)

   the firm is relying on a policy cover for more than one firm; or

6. (6)

   the firm is relying on a comparable guarantee provided in accordance with the rules in this chapter.

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)

   2the requirement that is applied by sections 13.13 to 13.142.

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 13.1.11R1and 13.1.15R1 to 13.1.27R1; 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 13.1.11R1)]

2. (2)

   A2firm applying2 (b) or (c) above, must have initial capital of at least £20,0002.

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 13.1.10R1 and in addition must2 have:

   1. (a)

      initial capital of EUR 25,000; or

   2. (b)

      professional indemnity insurance at least equal to the requirements1 of 13.1.12R1and 13.1.15R1 to 13.1.27R1; or

      2
   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 13.1.12R1)]

1. (2)

   A2firm applying2 (b) or (c) above2 must2 have initial capital of at least £20,000.

A firm'sinitial 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'sdeficit reduction amount. The election must be applied consistently in respect of any one financial year.

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'sinitial 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 FCA2

   ;

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.

2 IPRU-INV 13.1A.19R to IPRU-INV 13.1A.20R apply to an exempt CAD firm.

2A firm may include a long-term subordinated loan as own funds (see item C(3) table 13.1A.15R) if all the conditions in IPRU-INV 13.1A.20R are satisfied.

2The conditions referred to in IPRU-INV 13.1A.19R are:

1. (1)

   the subordinated loan must be fully paid up;

2. (2)

   the subordinated loan must have an original maturity of at least five years or, where there is no fixed term, the subordinated loan must be subject to not less than five years' notice of repayment3;

3. (3)

   the agreement governing the subordinated loan must only permit repayment3, prepayment or termination on:

   1. (a)

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

   2. (b)

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

4. (4)

   the amount of the subordinated loan used in the calculation of a firm’sown funds must be reduced on a straight-line basis over the last five years of the term of the subordinated loan;

5. (5)

   the subordinated loan is in the standard form prescribed by the FCA for long-term subordinated loans (see form 13.1 Form of subordinated loan agreement for personal investment firms).

1This section applies to a personal investment firm which is either:

1. (1)

   an exempt CAD firm; or

2. (2)

   a category B firm1.

1A firm whose permission includes establishing, operating or winding up a personal pension scheme must calculate its capital resources requirement as the sum of:

1. (1)

   the capital resources requirement that is applied under IPRU-INV 13.13.2R(2) or IPRU-INV 13.13.3R(2); and

2. (2)

   the financial resources requirement calculated in accordance with IPRU-INV 5 (Investment Management Firms).

1This section applies to a personal investment firm which is either:

1. (1)

   an exempt CAD firm;

2. (2)

   a category B firm1.

This section applies to a firm when it calculates annual income for its capital resources requirement.

1. (1)

   “Annual income” is the annual income from the firm’sdesignated investment business as given in its reporting form in (3) drawn up at its most recent accounting reference date.

2. (2)

   In (1), the most recent accounting reference date is the last one for which the firm reported annual income.

3. (3)

   The relevant reporting form under SUP 16.12 is:

   1. (a)

      the Retail Mediation Activities Return (RMAR) (Section B: Profit and Loss Account) for a category B firm; and

   2. (b)

      FSA030 (Income Statement) for an exempt CAD firm.

4. (4)

   If the firm’s most recent reporting form does not cover a 12-month period, the annual income is derived by converting the amount reported, proportionally, to a 12-month period.

5. (5)

   If the firm does not yet have a reporting form under (1), the annual income is taken from the forecast or other appropriate accounts which the firm has submitted to the FCA.

Annual income must include the following amounts due to the firm in respect of its designated investment business:

1. (1)

   brokerage;

2. (2)

   fees;

3. (3)

   commissions; and

4. (4)

   other related income (for example, administration charges2 or profit shares).

If a firm is a principal, its annual income includes amounts due to its appointed representative for activities related to designated investment business for which the firm has accepted responsibility.

1This section applies to a personal investment firm which is a category B firm1.

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.

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.

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.

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%.

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).