MIFIDPRU 4.5 Fixed overheads requirement

1. (1)

   1The fixed overheads requirement of a MIFIDPRU investment firm is an amount equal to one quarter of the firm’s relevant expenditure during the preceding year.

2. (2)

   When calculating its fixed overheads requirement in (1), a firm must use the figures resulting from the accounting framework applied by the firm in accordance with MIFIDPRU 4.5.2R.

3. (3)

   This rule is subject to MIFIDPRU 4.5.7R and MIFIDPRU 4.5.9R.

1. (1)

   1For the purposes of the calculation in MIFIDPRU 4.5.1R, a firm must use the figures in its most recent:

   1. (a)

      audited annual financial statements; or

   2. (b)

      unaudited annual financial statements, where audited financial statements are not available.

2. (2)

   If a firm has used unaudited annual financial statements in accordance with (1)(b) and audited annual financial statements subsequently become available, the firm must update the calculation in MIFIDPRU 4.5.1R using the audited figures.

3. (3)

   Where the financial statements in (1) do not cover a 12-month period, the firm must:

   1. (a)

      divide the amounts included in those statements by the number of months the financial statements cover; and

   2. (b)

      multiply the result of the calculation in (a) by 12 to produce an equivalent annual amount.

1. (1)

   1For the purpose of MIFIDPRU 4.5.1R(1), a firm must calculate its relevant expenditure by:

   1. (a)

      calculating the firm’s total expenditure before distribution of profits; and

   2. (b)

      deducting any of the items in (2) from the total expenditure in (1)(a) to the extent that those items have been included in the expenditure.

2. (2)

   The items that a firm may deduct from its total expenditure are:

   1. (a)

      any of the following, if they are fully discretionary:

      1. (i)

         staff bonuses and other variable remuneration;

      2. (ii)

         employees’, directors’, partners’ and limited liability partnership members’ shares in profits; and

      3. (iii)

         other appropriations of profits;

   2. (b)

      shared commission and fees payable that meet all of the following conditions:

      1. (i)

         they are directly related to commission and fees receivable;

      2. (ii)

         the commission and fees receivable are included within total revenue; and

      3. (iii)

         the payment of the commission and fees payable is contingent on receipt of the commission and fees receivable;

   3. (c)

      fees paid to tied agents;

   4. (d)

      non-recurring expenses from non-ordinary activities;

   5. (e)

      unless MIFIDPRU 4.5.4R applies, fees, brokerage and other charges paid to central counterparties, exchanges and other trading venues and intermediate brokers for the purposes of executing, registering and clearing transactions, provided that the fees, brokerage and charges are directly passed on and charged to customers;

   6. (f)

      80% of the value of any fees, brokerage and other charges, excluding any fees or charges to which MIFIDPRU 4.5.4R applies, paid to central counterparties, exchanges and other trading venues and intermediate brokers for the purposes of executing, registering and clearing transactions in relation to which:

      1. (i)

         the firm is dealing on own account; and

      2. (ii)

         the fees, brokerage or charges have not already been deducted under (e);

   7. (g)

      interest paid to customers on client money, where there is no obligation of any kind to pay the interest;

   8. (h)

      taxes where they fall due in relation to the annual profits of the firm;

   9. (i)

      losses from trading on own account in financial instruments;

   10. (j)

       payments related to contract-based profit and loss transfer agreements according to which the firm is obliged to transfer its annual profit to the parent undertaking following the preparation of the firm’s annual financial statements;

   11. (k)

       payments into a fund for general banking risk in accordance with article 26(1)(f) of the UK CRR, as applied by MIFIDPRU 3.3.1R; and

   12. (l)

       other expenses, to the extent that their value has already been reflected in a deduction from own funds under MIFIDPRU 3.3.6R.

1The deducted amounts in MIFIDPRU 4.5.3R(2)(e) and (f) must not include fees and other charges necessary to maintain membership of, or otherwise meet loss-sharing financial obligations to, central counterparties, exchanges and other trading venues.

1In addition to the deductions in MIFIDPRU 4.5.3R(2), a commodity and emission allowance dealer may deduct expenditure on raw materials in connection with the underlying commodity of the commodity derivatives the firm trades.

1. (1)

   1A firm must add any fixed expenses that have been incurred on its behalf by a third party, including a tied agent, to the firm’s total expenditure for the purposes of MIFIDPRU 4.5.3R in accordance with this rule.

2. (2)

   A firm is not required to add fixed expenses incurred on its behalf by a third party to the firm’s expenditure if the expenses are already included in the figures resulting from MIFIDPRU 4.5.2R.

3. (3)

   Where a breakdown of the third party’s expenses is available, the firm must add to the firm’s total expenditure the share of the third party’s expenses incurred on behalf of the firm.

4. (4)

   Where a breakdown of the third party’s expenses is not available, the firm must:

   1. (a)

      add to the firm’s total expenditure the share of the third party’s expenses incurred on behalf of the firm as projected in the firm’s business plan; or

   2. (b)

      if the firm does not have a business plan that projects the third party’s expenses, reasonably estimate the share of those expenses that are attributable to the firm’s business and add that estimated share of expenses to the firm’s total expenditure.

1. (1)

   1This rule applies where there:

   1. (a)

      is an increase of 30% or more in the firm’s projected relevant expenditure for the current year; or

   2. (b)

      would be an increase of £2 million or more in the firm’s fixed overheads requirement based on projected relevant expenditure for the current year.

2. (2)

   Where this rule applies, a firm must:

   1. (a)

      immediately recalculate its fixed overheads requirement by applying the methodology in MIFIDPRU 4.5.3R to the projected relevant expenditure, taking into account the increase in (1);

   2. (b)

      immediately substitute the revised fixed overheads requirement that results from the calculation in (a) for the firm’s original fixed overheads requirement under MIFIDPRU 4.5.1R(1); and

   3. (c)

      immediately recalculate its basic liquid assets requirement using the revised fixed overheads requirement in (b) and substitute the updated amount for its original basic liquid assets requirement.

1. (1)

   1This rule applies where there:

   1. (a)

      is a decrease of 30% or more in the firm’s projected relevant expenditure for the current year; or

   2. (b)

      would be a decrease of £2 million or more in the firm’s fixed overheads requirement based on projected relevant expenditure for the current year.

2. (2)

   Where this rule applies, a firm may:

   1. (a)

      recalculate its fixed overheads requirement by applying the methodology in MIFIDPRU 4.5.3R to the projected relevant expenditure, taking into account the decrease in (1); and

   2. (b)

      if it has obtained prior permission from the FCA, substitute the revised fixed overheads requirement that results from the calculation in (a) for the firm’s original fixed overheads requirement under MIFIDPRU 4.5.1R.

3. (3)

   To obtain the permission in (2), a firm must:

   1. (a)

      complete the application form in MIFIDPRU 4 Annex 11R and submit it to the FCA in accordance with the instructions on that form;

   2. (b)

      demonstrate all of the following:

      1. (i)

         that one of the conditions in (1)(a) or (b) is met and the projected reduction in the firm’s relevant expenditure is a reasonable projection;

      2. (ii)

         that the firm has adequately considered the impact of the reduction on the firm’s ICARA process and the conclusions documented in the firm’s last ICARA document; and

      3. (iii)

         that there is a reasonable basis to conclude that, following the reduction in the firm’s fixed overheads requirement, the firm will continue to hold sufficient own funds and liquid assets to comply with its obligations under MIFIDPRU 7.

1. (1)

   1This rule applies where a firm has been in business for less than one year.

2. (2)

   For the purposes of the calculation in MIFIDPRU 4.5.1R, a firm must use the relevant expenditure included in its projections for the first 12 months’ trading, as submitted in its application for authorisation.