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PDCOB 13.7 Calculation of core capital resources

The calculation of a firm’s core capital resources

PDCOB 13.7.1R

1A firm must calculate its capital resources for the core capital resources requirement from the items that are eligible to contribute to a firm’s capital resources, as set out in items 1 to 6 in the table at PDCOB 13.7.3R.

PDCOB 13.7.2R

1In arriving at its calculation of its capital resources for the core capital resources requirement, a firm must deduct the items set out in items 1 to 5 in the table at PDCOB 13.7.5R.

PDCOB 13.7.3R

1The items that are eligible to contribute to the capital resources of a firm are set out in the following table.

Item

Additional explanation

1

Share capital

This must be fully paid and may include:

(1)

ordinary share capital; or

(2)

preference share capital (excluding preference shares redeemable by shareholders within 2 years).

2

Capital other than share capital (for example, the capital of a sole trader, partnership or limited liability partnership)

(1)

The capital of a sole trader is the net balance on the firm’s capital account and current account.

(2)

The capital of a partnership is the capital made up of the partners’:

(a)

capital account, which is the account:

(i)

into which capital contributed by the partners is paid; and

(ii)

from which, under the terms of the partnership agreement, an amount representing capital may be withdrawn by a partner only if:

(A)

the person ceases to be a partner and an equal amount is transferred to another such account by their former partners or any person replacing them as their partner; or

(B)

the partnership is otherwise dissolved or wound up; and

(b)

current accounts according to the most recent financial statement.

(3)

For the purpose of calculating capital resources in respect of a defined benefit occupational pension scheme:

(a)

a firm must derecognise any defined benefit asset; and

(b)

a firm may substitute for a defined benefit liability the firm’s deficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

3

Reserves (Note)

(1)

These are (subject to the Note) the audited accumulated profits retained by the firm (after deduction of tax, dividends and proprietors’ or partners' drawings) and other reserves created by appropriations of share premiums and similar realised appropriations. Reserves also include gifts of capital, for example, from a parent undertaking.

(2)

For the purposes of calculating capital resources, a firm must make the following adjustments to its reserves, where appropriate:

(a)

A firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on debt instruments held, or formerly held, in the available-for-sale financial assets category.

(b)

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.

(c)

In respect of a defined benefit occupational pension scheme:

(i)

a firm must derecognise any defined benefit asset; and

(ii)

a firm may substitute for a defined benefit liability the firm’s reduction amount, provided that the election is applied consistently in respect of any one financial year.

4

Interim net profits (Note)

If a firm seeks to include interim net profits in the calculation of its capital resources, the profits must (subject to the Note) be verified by the firm’s external auditor, net of tax, anticipated dividends or proprietors’ drawings and other appropriations.

5

Revaluation reserves

Revaluation reserves include reserves arising from the revaluation of land and buildings, which include any net unrealised gains for the fair valuation of equities held in the available-for-sale financial assets category.

6

Subordinated loans/debt

Subordinated loans/debt must be included in capital on the basis of the provisions in this chapter that apply to subordinated loans/debts.

Note: Reserves and interim net profits

Reserves must be audited and interim net profits, general and collective provisions 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.
PDCOB 13.7.4G

1A 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.

PDCOB 13.7.5R

1In arriving at its calculation of its capital resources for the core capital resources requirement, a firm must deduct the items set out in the following table:

Item

Additional explanation

1

Investments in own shares

2

Investments in subsidiaries (Note 1)

3

Intangible assets (Note 2)

4

Interim net losses (Note 3)

5

Excess of drawings over profits for a sole trader or a partnership (Note 3)

Notes:

1. Investments in subsidiaries are the full balance sheet value.

2. Intangible assets are the full balance sheet value.

3. The interim net losses in row 4, and the excess of drawings in row 5, are in relation to the accounting period following the date as at which the capital resources are being computed.

Personal assets

PDCOB 13.7.6R

1In relation to a sole trader’s firm or a firm which is a partnership, the sole trader or a partner in the firm may use personal assets to meet the core capital resources requirement, to the extent necessary to make up any shortfall in meeting that requirement, unless:

  1. (1)

    those assets are needed to meet other liabilities arising from:

    1. (a)

      personal activities; or

    2. (b)

      another business activity not regulated by the FCA; or

  2. (2)

    the firm holds client money or other client assets in relation to regulated activities other than regulated pensions dashboard activity.

PDCOB 13.7.7G

1A sole trader or a partner may use any personal assets, including property, to meet the capital requirements of this chapter, but only to the extent necessary to make up a shortfall.

Subordinated loans

PDCOB 13.7.8R

1A subordinated loan or debt must not form part of the capital resources for the core capital resources requirement of the firm unless it meets the following conditions:

  1. (1)
    1. (a)

      1it has an original maturity of at least 5 years; or

    2. (b)

      it is subject to 5 years’ notice of repayment;

  2. (2)

    the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;

  3. (3)

    the only events of default must be non-payment of any interest or principal under the debt agreement or the winding up of the firm;

  4. (4)

    the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated loan or debt must be limited to petitioning for the winding up of the firm or proving the debt and claiming in the liquidation of the firm;

  5. (5)

    the subordinated loan or debt must not become due and payable before its stated final maturity date, except on an event of default complying with (3);

  6. (6)

    the agreement and the debt are governed by the law of England and Wales, or of Scotland or of Northern Ireland;

  7. (7)

    to the fullest extent permitted under the rules of the relevant jurisdiction, creditors must waive their right to set off amounts they owe the firm against subordinated amounts owed to them by the firm;

  8. (8)

    the terms of the subordinated loan or debt must be set out in a written agreement that contains terms that provide for the conditions set out in this rule; and

  9. (9)

    the loan/debt must be unsecured and fully paid up.

PDCOB 13.7.9R

1When calculating its capital resources, the firm must exclude any amount by which the aggregate amount of its subordinated loans or debts exceeds the amount calculated as follows:

A - B

where:

A is equal to the sum of items 1 to 6 (inclusive) in the table of items in PDCOB 13.7.3R, which are eligible to contribute to a firm’s capital resources.

B is equal to the sum of items 1 to 5 (inclusive) in the table of items in PDCOB 13.7.5R, which must be deducted in arriving at firm’s capital resources.