1. (1)

   This chapter applies to an exempt CAD firm which is:

   1. (a)

      an investment management firm; or

   2. (b)

      a securities and futures firm.

2. (2)

   This chapter also applies to a local firm.

A firm must be able to meet its liabilities as they fall due.

An exempt CAD firm that carries on any regulated activity other than MiFID business must also have and maintain at all times financial resources calculated in accordance with the chapter of IPRU(INV) to which the firm is otherwise subject (Chapters 3 or 5) at least equal to the requirements set out in the relevant chapter (except that if the only designated investment business an exempt CAD firm is carrying on in addition to investment services and activities is making arrangements with a view to transactions in investments (article 25(2)Regulated Activities Order) or agreeing to carry on that regulated activity or both, it only needs to comply with requirements set out in this chapter and not chapters 3 or 5).

1. (1)

   An exempt CAD firm which is not an IMD insurance intermediary must have:

   1. (a)

      initial capital of EUR 50,000; or

   2. (b)

      professional indemnity insurance covering the whole territory of the

      EEA

      or some other comparable guarantee against liability arising from professional negligence, representing at least EUR 1,000,000 applying to each claim and in aggregate EUR 1,500,000 per year for all claims; 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]

1. (2)

   If a firm chooses to meet the requirements of either (b) or (c) above, it must nevertheless have initial capital of at least £5,000.

1. (1)

   An exempt CAD firm that is also an IMD insurance intermediary must comply with the professional indemnity insurance requirements at least equal to those set out in 9.2.4R(1)(b) (except that the minimum limits of indemnity are at least EUR 1,120,200 for a single claim and EUR 1,680,300 in aggregate) and in addition has to have:

   1. (a)

      initial capital of EUR 25,000; or

   2. (b)

      professional indemnity insurance covering the whole territory of the EEA or some other comparable guarantee against liability arising from professional negligence, representing at least EUR 500,000 applying to each claim and in aggregate EUR 750,000 per year for all claims; 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]

2. (2)

   If a firm chooses to meet the requirements of either (b) or (c) above, it must nevertheless have initial capital of at least £5,000.

1. (a)

   If another authorised person which has net tangible assets of more than £10 million provides a comparable guarantee, an exempt CAD firm can treat it as an alternative to effecting or maintaining professional indemnity insurance pursuant to the rules relating to professional indemnity insurance above.

2. (b)

   If the exempt CAD firm is a member of a group in which there is an authorised person with net tangible assets of more than £10 million, the comparable guarantee must be from that person.

3. (c)

   A comparable guarantee means a written agreement on terms at least equal to those required by the initial capital and professional indemnity insurance requirements above to finance the claims that might arise as a result of the breach by the exempt CAD firm of its duties under the regulatory system or civil law.

A local firm must:

1. (a)

   have initial capital of EUR 50,000; and

[Note: Article 67(2) of MiFID and article 30 of the CRD]

1. (b)

   maintain own funds calculated in accordance with the rules relating to own funds in 9.5, at least to the requirement for initial capital.

1. (1)

   An exempt CAD firm must, at all times, maintain a combination of professional indemnity insurance and own funds, (own funds to be calculated in accordance with (2)), at least equal to the requirements in this chapter for professional indemnity insurance and initial capital.

2. (2)
   1. (a)

      If the exempt CAD firm is an investment management firm its own funds must be calculated in accordance with the rules in

      IPRU-INV 5.2.1(1) to 5.2.7(5).

   2. (b)

      If the exempt CAD firm is a securities and futures firm its own funds must be calculated in accordance with the rules relating to own funds in 9.5.

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 includes 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.

An exempt CAD firm that has professional indemnity insurance in accordance with this chapter must take out and maintain professional indemnity insurance that is at least equal to the requirements of the rule below 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.

The policy of professional indemnity insurance must incorporate terms which make provision for:

1. (1)

   cover in respect of claims for which an exempt CAD firm may be liable as a result of the conduct of itself, its employees and its appointed representatives or where applicable, its tied agent (acting within the scope of their appointment);

2. (2)

   the minimum levels of indemnity per year as set out in the rules relating to professional indemnity insurance above;

3. (3)

   appropriate cover in respect of legal defence costs; and

4. (4)

   cover in respect of Ombudsman awards made against the exempt CAD firm.

If a professional indemnity insurance policy is denominated in any currency other than euros, an exempt CAD firm must take reasonable FCA steps to ensure that the limits of indemnity are, when the policy is effected and at renewal, at least equivalent to those required for the purposes of the rules relating to professional indemnity insurance above.

A professional indemnity insurance policy must not be subject to conditions or exclusions which unreasonably limit the cover provided (whether by exclusion of cover, by policy excesses or otherwise).

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 long-term subordinated loans and perpetual cumulative preference share capital may not be included in the calculation of own funds unless they meet the following requirements:

1. (1)

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

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 provide 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.

A firm may include a subordinated loan in the calculation of its own funds only:

1. (a)

   if it is drawn up in accordance with the standard forms obtained from the FCA;

2. (b)

   if it is signed by authorised signatories of all the parties; and

3. (c)

   to the extent that it is fully paid up.

A long-term subordinated loan may not be included in the calculation of own funds unless it meets the following requirements:

1. (1)

   it must be fully paid-up;

2. (2)

   it has an original maturity of at least five years;

3. (3)

   the extent to which it may be used in the calculation of own funds shall be amortised on a straight line basis during at least the five years before repayment; and

4. (4)

   it must not become repayable before the agreed repayment date other than in the winding-up of the firm or unless the firm has provided the FCA with at least five years' written notice.

A firm must not (except in accordance with the terms of the loan) make any payment of interest if after such action the firm'sown funds will fall below 120% of its own funds requirement.

A firm may include perpetual non-cumulative and cumulative preference share capital in its initial capital and its own funds only if there is an agreement between the firm and the shareholders which provides that redemption of the shares may not take place, if after such redemption the firm would be in breach of its own funds requirement

1. (1)

   In calculating own funds:

   1. (i)

      the total amount of revaluation reserves, perpetual cumulative preference share capital, long-term subordinated loans, perpetual long-term subordinated loans and fixed term preference share capital must not exceed 100% of initial capital minus 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 B.

1. (1)

   A firm must reconcile all balances and positions with:

   1. (a)

      banks and building societies (other than a client bank account subject to the client money rules), exchanges, approved exchanges, clearing houses and intermediate brokers; and

   2. (b)

      eligible counterparties which are members of an exchange or approved exchange

as recorded by the firm to the balance or position on a statement or circularisation obtained by the firm from those entities and must correct any differences by agreement on a timely basis, unless:

1. (i)

   the balances and positions due to and from the eligible counterparties have been agreed by other means; or

   1. (ii)

      it arises solely as a result of identified differences in timing between the records of the firm and the bank or building society.

2. (2)

   A firm must perform reconciliations under (1) above as frequently as is appropriate for the volume of transactions on the accounts and in any event not less than once every five weeks or, in relation to positions with eligible counterparties, not less than once every year.

3. (3)

   A firm must circularise or request statements from banks,building societies, exchanges, approved exchanges, clearing houses, intermediate brokers and eligible counterparties which are members of an exchange or an approved exchange in good time in order to be able to comply with (1) and (2) above.

4. (4)

   A firm must use its best endeavours to respond within one month of receipt to any circularisation from another firm requesting confirmation of outstanding balances.

A firm must notify the FCA in writing as soon as it has reason to believe that it is in breach of its own funds requirement.