Integrated Prudential sourcebook

Export part as

PRU 1

PRU 1

PRU 1.8.1

See Notes

handbook-rule
A contravention of the rules in PRU does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).

Export chapter as

PRU 2

PRU 2

Purpose

PRU 2.2.2

See Notes

handbook-guidance
PRU 2.1 sets out minimum capital resources requirements for a firm. This section (PRU 2.2) sets out how, for the purpose of these requirements, capital resources are defined and measured. PRU 2.2 also implements minimum EC standards for the composition of capital resources required to be held by a firm undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC) or the First Non-Life Directive (73/239/EEC) as amended.

PRU 2.2.3

See Notes

handbook-guidance
The FSA has divided its definition of capital into categories, or tiers, reflecting differences in the extent to which the capital instruments concerned meet the purpose and conform to the characteristics of capital listed in PRU 2.2.5 G. The FSA generally prefers a firm to hold higher quality capital that meets the characteristics of permanency and loss absorbency that are features of tier one capital. Capital instruments falling into core tier one capital can be included in a firm's regulatory capital without limit. Typically, other forms of capital are either subject to limits (see PRU 2.2.16 R to PRU 2.2.26 R) or, in the case of some specialist types of capital, may only be included with the express consent of the FSA (which takes the form of a waiver under section 148 of the Act).

PRU 2.2.4

See Notes

handbook-guidance
Details of the individual components of capital are set out in PRU 2.2.14 R.

PRU 2.2.5

See Notes

handbook-guidance

Tier one capital typically has the following characteristics:

  1. (1) it is able to absorb losses;
  2. (2) it is permanent;
  3. (3) it ranks for repayment upon winding up after all other debts and liabilities; and
  4. (4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.

PRU 2.2.6

See Notes

handbook-guidance
The forms of capital that qualify for tier one capital are set out in PRU 2.2.14 R and include, for example, share capital, reserves, verified interim net profits and, for a mutual, the initial fund plus permanent members' accounts. Tier one capital is divided into core tier one capital, perpetual non-cumulative preference shares, and innovative tier one capital.

Upper and lower tier two capital

PRU 2.2.7

See Notes

handbook-guidance

Tier two capital includes forms of capital that do not meet the requirements for permanency and absence of fixed servicing costs that apply to tier one capital. Tier two capital includes, for example:

  1. (1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred - for example cumulative preference shares); perpetual capital instruments may be included in upper tier two capital; and
  2. (2) capital which is not perpetual (that is, it has a fixed term) and which may have fixed servicing costs that cannot generally be either waived or deferred, for example subordinated debt. Such capital should normally be of a medium to long-term maturity (that is, an original maturity of at least five years). Dated capital instruments are included in lower tier two capital.

PRU 2.2.8

See Notes

handbook-guidance
Deductions should be made at the relevant stage of the calculation of capital resources to reflect capital that may not be available to the firm or assets of uncertain value, for example, holdings of intangible assets and assets that are inadmissible for a firm.

PRU 2.2.10

See Notes

handbook-guidance
Capital resources can be calculated either as the total of eligible assets less foreseeable liabilities (which is the approach taken in the Insurance Directives) or by identifying the components of capital. Both calculations give the same result for the total amount of capital resources. The approach taken in this section has been to specify the components of capital and the relevant deductions. This is set out in PRU 2.2.14 R. This approach is the same as that used for the calculation of capital resources for banks, building societies and investment firms. A simple example, showing the reconciliation of the two methods, is given in PRU 2.2.11 G.

PRU 2.2.11

See Notes

handbook-guidance
Table: Approaches to calculating capital resources

PRU 2.2.12

See Notes

handbook-rule
A firm must calculate its capital resources for the purpose of PRU in accordance with PRU 2.2.14 R, subject to the limits in PRU 2.2.16 R to PRU 2.2.26 R.

PRU 2.2.13

See Notes

handbook-guidance
Where PRU 2.2.14 R refers to related text, it is necessary to refer to that text in order to understand fully what is included in the descriptions of capital items and deductions set out in the table.

PRU 2.2.14

See Notes

handbook-rule
Table: Capital resources (see PRU 2.2.12 R )

PRU 2.2.15

See Notes

handbook-guidance
As the various components of capital differ in the degree of protection that they offer the firm and its customers, restrictions are placed on the extent to which certain types of capital are eligible for inclusion in a firm's capital resources. These restrictions are set out in PRU 2.2.16 R to PRU 2.2.26 R.

PRU 2.2.16

See Notes

handbook-rule

At least 50% of a firm's MCR must be accounted for by the sum of:

  1. (1) the amount calculated at stage A of the calculation in PRU 2.2.14 R; and
  2. (2) notwithstanding PRU 2.2.20 R (1), the amount calculated at stage B of the calculation in PRU 2.2.14 R;
less the amount calculated at stage E of the calculation in PRU 2.2.14 R.

PRU 2.2.17

See Notes

handbook-rule

A firm carrying on long-term insurance business must meet the higher of:

with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.

PRU 2.2.18

See Notes

handbook-rule

A firm carrying on general insurance business must meet the higher of:

with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.

PRU 2.2.19

See Notes

handbook-guidance
The purposes of the requirements in PRU 2.2.16 R to PRU 2.2.18 R are to comply with the Insurance Directives' requirement that firms maintain a guarantee fund of higher quality capital resources items and to ensure that at least 50% of the firm's capital resources needed to meet its MCR provide maximum loss absorbency to protect the firm from insolvency.

PRU 2.2.20

See Notes

handbook-rule

In relation to a firm's tier one capital resources calculated at stage F of the calculation in PRU 2.2.14 R:

  1. (1) at least 50% must be accounted for by core tier one capital; and
  2. (2) no more than 15% may be accounted for by innovative tier one capital.

PRU 2.2.21

See Notes

handbook-guidance
The purpose of the requirement in PRU 2.2.20 R (1) is to ensure that at least 50% of the firm's tier one capital resources (net of tier one capital deductions) is met by core tier one capital which provides maximum loss absorbency on a going concern basis to protect the firm from insolvency. Although a perpetual non-cumulative preference share is in legal form a share, it behaves in many ways like a perpetual fixed interest debt instrument. Within the 50% limit on non-core tier one capital, PRU 2.2.20 R (2) places a further sub-limit on the amount of innovative tier one capital that a firm may include in its tier one capital resources. This limit is necessary to ensure that most of a firm's tier one capital comprises items of capital of the highest quality.

PRU 2.2.22

See Notes

handbook-guidance
The amount of any capital item excluded from a firm's tier one capital resources under PRU 2.2.20 R may form part of its tier two capital resources subject to the limits in PRU 2.2.23 R.

PRU 2.2.23

See Notes

handbook-rule

Subject to PRU 2.2.24 R, a firm must exclude from the calculation of its capital resources the following:

  1. (1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F of the calculation in PRU 2.2.14 R; and
  2. (2) the amount (if any) by which lower tier two capital resources exceed 50% of the amount calculated at stage F of the calculation in PRU 2.2.14 R.

PRU 2.2.24

See Notes

handbook-rule

At least 75% of a firm's MCR must be accounted for by the sum of:

  1. (1) the amount calculated at stage A plus stage B less stage E of the calculation in PRU 2.2.14 R; and
  2. (2) the amount calculated at stage G of the calculation in PRU 2.2.14 R.

PRU 2.2.25

See Notes

handbook-guidance
PRU 2.2.23 R and PRU 2.2.24 R give effect to the Insurance Directives' requirements that a firm's tier two capital resources must not exceed its tier one capital resources and that no more than 25% of a firm's "required solvency margin" should consist of lower tier two capital resources.

PRU 2.2.26

See Notes

handbook-rule
A firm that carries on both long-term insurance business and general insurance business must apply the limits in PRU 2.2.16 R to PRU 2.2.24 R separately for each type of business.

PRU 2.2.27

See Notes

handbook-rule

A firm may not include a share in, or another investment in, or external contribution to the capital of, that firm in its tier one capital resources unless it complies with the following conditions:

  1. (1) it is included in one of the categories in PRU 2.2.28 R;
  2. (2) it is not excluded by any of the rules in PRU 2.2; and
  3. (3) it complies with the conditions set out in PRU 2.2.29 R.

PRU 2.2.28

See Notes

handbook-rule

The categories referred to in PRU 2.2.27 R (1) are:

  1. (1) permanent share capital;
  2. (2) a perpetual non-cumulative preference share; and
  3. (3) an innovative tier one instrument.

PRU 2.2.29

See Notes

handbook-rule

Subject to PRU 2.2.30 R, an item of capital in a firm complies with PRU 2.2.27 R (3) if:

  1. (1) it is issued by the firm;
  2. (2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;
  3. (3) it:
    1. (a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or
    2. (b) complies with the conditions in PRU 2.2.38 R and PRU 2.2.39 R;
  4. (4) any coupon is either non-cumulative or, if it is cumulative, it complies with PRU 2.2.40 R;
  5. (5) it is able to absorb losses to allow the firm to continue trading and in the case of an innovative tier one instrument it complies with PRU 2.2.56 R to PRU 2.2.58 R;
  6. (6) it ranks for repayment upon winding up no higher than a share of a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share);
  7. (7) the firm has the right to choose whether or not to pay a coupon on it in cash at any time;
  8. (8) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy PRU 2.2.29 R (1) to PRU 2.2.29 R (7).

PRU 2.2.30

See Notes

handbook-rule
  1. (1) An item of capital does not comply with PRU 2.2.27 R (3) if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could produce the effect described in (2).
  2. (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.29 R (1) to (8).

PRU 2.2.32

See Notes

handbook-guidance
PRU 2.2.29 R (2) is stricter than the Companies Act definition of fully paid, which only requires an undertaking to pay.

PRU 2.2.33

See Notes

handbook-guidance
An item of capital does not comply with PRU 2.2.29 R (8) if it is marketed as a capital instrument that would only qualify for a lower level of capital or on the basis that investing in it is like investing in a lower tier two instrument. For example, an undated capital instrument should not be marketed as a dated capital instrument if the terms of the capital instrument include an option by the issuer to redeem the capital instrument at a specified date in the future.

PRU 2.2.35

See Notes

handbook-rule

A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in PRU 2.2):

  1. (1) (in the case of a firm that is a company as defined in the Companies Act 1985 or the Companies (Northern Ireland) Order 1986) it is "called-up share capital" within the meaning given to that term in that Act or, as the case may be, that Order; or
  2. (2) (in the case of any other firm) it is:
    1. (a) in economic terms; and
    2. (b) in its characteristics as capital (including loss absorbency, permanency, ranking for repayment and fixed costs);
  3. substantially the same as called-up share capital falling into (1).

PRU 2.2.36

See Notes

handbook-rule

Permanent share capital means an item of capital which (in addition to satisfying PRU 2.2.29 R) meets the following conditions:

  1. (1) it is:
    1. (a) an ordinary share; or
    2. (b) a members' contribution; or
    3. (c) part of the initial fund of a mutual;
  2. (2) any coupon on it is not cumulative, and the firm has both the right to choose whether or not to pay a coupon and the right to choose the amount of that coupon ; and
  3. (3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the degree of an ordinary share issued by a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).

PRU 2.2.37

See Notes

handbook-guidance
PRU 2.2.36 R has the effect that the firm should be under no obligation to make any payment in respect of a tier one instrument if it is to form part of its permanent share capital unless and until the firm is wound up. A tier one instrument that forms part of permanent share capital could not therefore count as a liability before the firm is wound up. The fact that relevant company law permits the firm to make earlier repayment does not mean that the tier one instruments are not eligible. However, the firm should not be required by any contractual or other obligation arising out of the terms of that capital to repay permanent share capital. Similarly a tier one instrument may still qualify if company law allows dividends to be paid on this capital, provided the firm is not contractually or otherwise obliged to pay them. There should therefore be no fixed costs.

PRU 2.2.38

See Notes

handbook-rule

In relation to a perpetual non-cumulative preference share which is redeemable, a firm may not include it in its tier one capital resources unless its contractual terms are such that:

  1. (1) it is redeemable only at the option of the firm; and
  2. (2) the firm cannot exercise that redemption right:
    1. (a) on or before the fifth anniversary of its date of issue;
    2. (b) unless it has given notice to the FSA in accordance with PRU 2.2.72 R; and
    3. (c) unless at the time of exercise of that right it complies with PRU 2.1.9 R and will continue to do so after redemption.

PRU 2.2.39

See Notes

handbook-rule

In relation to an innovative tier one instrument which is redeemable and which, either:

  1. (1) is or may become subject to a step-up; or
  2. (2) satisfies PRU 2.2.54 R (2);

a firm may not include it in its tier one capital resources unless it complies with the conditions in PRU 2.2.38 R, except that in PRU 2.2.38 R (2)(a) "fifth anniversary" is replaced by "tenth anniversary".

PRU 2.2.40

See Notes

handbook-rule
A potential tier one instrument with a cumulative coupon complies with PRU 2.2.29 R (4) only if any such coupon must, if deferred, be paid by the firm in the form of permanent share capital.

PRU 2.2.42

See Notes

handbook-guidance

The rules in PRU 2.2 about redemption of potential tier one instruments fall into three classes:

  1. (1) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all;
  2. (2) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its permanent share capital; and
  3. (3) rules defining whether a firm's potential tier one instruments must be classified as innovative tier one instruments.

PRU 2.2.43

See Notes

handbook-guidance

The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.

  1. (1) PRU 2.2.29 R (3) and PRU 2.2.39 R have the following provisions.
    1. (a) Any capital instrument that is redeemable at the option of the holder cannot form part of a firm's tier one capital resources. Instead, if it is redeemable at all, a capital instrument should only be redeemable at the option of the firm.
    2. (b) A redemption right should be exercisable no earlier than the fifth anniversary of the date of issue. However, if an instrument is an innovative tier one instrument which is subject to a step-up or any other economic incentive to redeem, any such redemption should be exercisable no earlier than the tenth anniversary.
    3. (c) Any redemption proceeds should be payable only in cash or in shares.
    4. (d) The terms of the capital instrument should provide that any redemption right should not be exercised unless and until the firm has given the notice to the FSA required under PRU 2.2.72 R.
    5. (e) Any redemption right should not be exercisable unless both before and after the redemption the firm complies with PRU 2.1.9 R (which requires that a firm has sufficient capital resources to meet its capital resources requirement).
  2. (2) Under PRU 2.2.70 R, a firm should not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources unless the firm has:
    1. (a) sufficient permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet any redemption obligations that have become due; and
    2. (b) a prudent reserve of permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet possible future redemption obligations.
  3. (3) PRU 2.2.65 R contains limits on the amount of permanent share capital that may be issued on a redemption of a potential tier one instrument redeemable in permanent share capital.

PRU 2.2.44

See Notes

handbook-guidance
The rules defining whether a firm's potential tier one instruments are eligible for inclusion in its permanent share capital are to be found in PRU 2.2.36 R. As far as redemption is concerned, it says that the capital instrument should be no more capable of being redeemed than a share under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986. PRU 2.2.38 R (which sets out the basic rules for redemption) does not apply to permanent share capital as a redeemable potential tier one instrument should not be included in permanent share capital.

PRU 2.2.45

See Notes

handbook-guidance

The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows.

  1. (1) Under PRU 2.2.53 R, a redeemable potential tier one instrument is always treated as an innovative tier one instrument if the redemption proceeds are payable otherwise than in cash.
  2. (2) Under PRU 2.2.54 R, any feature of a tier one instrument that in conjunction with a call would make a firm more likely to redeem it or to have an incentive to do so will make it an innovative tier one instrument.
  3. (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption results in a potential tier one instrument being treated as an innovative tier one instrument.

PRU 2.2.46

See Notes

handbook-guidance
The rules in PRU 2.2 about the coupons payable on potential tier one instruments fall into the same three classes that apply to the rules on redemption, as set out in PRU 2.2.42 G.

PRU 2.2.47

See Notes

handbook-guidance

The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.

  1. (1) Under PRU 2.2.29 R (4) and PRU 2.2.40 R, any deferred cumulative coupon should only be payable in permanent share capital. If a cumulative coupon is payable on a potential tier one instrument in another form, it should not be included in the firm's tier one capital resources.
  2. (2) Under PRU 2.2.29 R (7), the firm has the right not to pay a coupon in cash at any time.
  3. (3) PRU 2.2.63 R says that a potential tier one instrument that may be subject to a step-up that potentially exceeds defined limits should not be included in the firm's tier one capital resources. PRU 2.2.64 R says that any step-up should not arise before the tenth anniversary of the date of issue if it is to be included in the firm's tier one capital resources.
  4. (4) The provisions of PRU 2.2.70 R summarised in PRU 2.2.43 G (2) also apply to the payment of coupons.

PRU 2.2.48

See Notes

handbook-guidance
PRU 2.2.36 R (2) says that a capital instrument on which a cumulative coupon is payable must not be included in a firm's permanent share capital. The payment of a coupon must be purely discretionary.

PRU 2.2.49

See Notes

handbook-guidance

The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows:

  1. (1) Under PRU 2.2.60 R a potential tier one instrument with a cumulative coupon is an innovative tier one instrument.
  2. (2) Under PRU 2.2.40 R a potential tier one instrument with a coupon that if deferred must be paid in permanent share capital is an innovative tier one instrument.
  3. (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption by the firm results in a potential tier one instrument being treated as an innovative tier one instrument.

PRU 2.2.50

See Notes

handbook-rule

A perpetual non-cumulative preference share may be included at stage B of the calculation in PRU 2.2.14 R if:

  1. (1) it complies with PRU 2.2.29 R, PRU 2.2.35 R and PRU 2.2.38 R;
  2. (2) any coupon on it is not cumulative, and the firm has the right to choose whether or not to pay a coupon in all circumstances;
  3. (3) it is not excluded from tier one capital resources by any of the rules in PRU 2.2; and
  4. (4) it is not an innovative tier one instrument.

PRU 2.2.51

See Notes

handbook-guidance
Perpetual non-cumulative preference shares should be perpetual and redeemable only at the firm's option. Any feature that, in conjunction with a call, would make a firm more likely to redeem perpetual non-cumulative preference shares would normally result in classification as an innovative tier one instrument. Such features would include, but not be limited to, a step-up, bonus coupon on redemption or redemption at a premium to the original issue price of the share.

PRU 2.2.52

See Notes

handbook-rule
If an item of capital is stated to be an innovative tier one instrument by the rules in PRU 2.2, it cannot be included in stages A or B of the calculation in PRU 2.2.14 R.

PRU 2.2.53

See Notes

handbook-rule
If a tier one instrument is redeemable at the option of the firm, it is an innovative tier one instrument unless it is redeemable solely in cash.

PRU 2.2.54

See Notes

handbook-rule

If a tier one instrument:

  1. (1) is redeemable; and
  2. (2) is issued on terms that are (or its terms are amended and the amended terms are) such that a reasonable person would (judging at or around the time of issue or amendment) think that:
    1. (a) the firm is likely to redeem it; or
    2. (b) the firm is likely to have a substantial economic incentive to redeem it;

PRU 2.2.55

See Notes

handbook-guidance
Any feature that in conjunction with a call would make a firm more likely to redeem a tier one instrument would normally result in classification as innovative tier one capital resources. Innovative tier one instruments include but are not limited to those incorporating a step-up or principal stock settlement.

Innovative tier one instruments: loss absorbency

PRU 2.2.56

See Notes

handbook-rule

A capital instrument may only be included in innovative tier one capital resources if a firm's obligations under the instrument either:

  1. (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
  2. (2) do constitute such a liability but the terms of the instrument are such that:
    1. (a) any such liability is not relevant for the purposes of deciding whether:
      1. (i) the firm is, or is likely to become, unable to pay its debts; or
      2. (ii) its liabilities exceed its assets;
    2. (b) a creditor (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
    3. (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

PRU 2.2.57

See Notes

handbook-guidance
The effect of PRU 2.2.56 R is that if a potential tier one instrument does constitute a liability, this should only be the case when the firm is able to pay that liability but chooses not to do so. As tier one capital resources must be undated, this will generally only be relevant on a solvent winding up of the firm.

PRU 2.2.58

See Notes

handbook-rule
A firm wishing to issue an innovative tier one instrument must obtain an opinion from Queen's Counsel, or where the opinion relates to the law of a jurisdiction outside the United Kingdom, from a lawyer in that jurisdiction of equivalent status, confirming that the criteria in PRU 2.2.29 R (5) and PRU 2.2.31 R are met.

PRU 2.2.59

See Notes

handbook-guidance
The holder should agree that the firm has no liability (including any contingent or prospective liability) to pay any amount to the extent to which that liability would cause the firm to become insolvent if it made the payment or to the extent that its liabilities exceed its assets or would do if the payment were made. The terms of the capital instrument should be such that the directors can continue to trade in the best interests of the senior creditors even if this prejudices the interests of the holders of the instrument.

PRU 2.2.60

See Notes

handbook-rule
A tier one instrument with a cumulative coupon which complies with PRU 2.2.40 R is an innovative tier one instrument.

PRU 2.2.61

See Notes

handbook-guidance
An item of capital does not fall into PRU 2.2.60 R merely because a firm has come under an obligation to pay a particular coupon in permanent share capital where that obligation is the result of a voluntary election by the holder or the firm to be paid the coupon in that form. Thus, for example, if a shareholder of a firm is allowed to elect to be paid a dividend in the form of a conventional scrip dividend, that does not make the share into an innovative tier one instrument.

PRU 2.2.62

See Notes

handbook-rule

If:

  1. (1) a potential tier one instrument is or may become subject to a step-up; and
  2. (2) that potential tier one instrument is redeemable at any time (whether before, at or after the time of the step-up);
that potential tier one instrument is an innovative tier one instrument.

PRU 2.2.63

See Notes

handbook-rule

If a potential tier one instrument is or may become subject to a step-up, a firm must not include it in its tier one capital resources if the amount of the step-up exceeds or may exceed;

  1. (1) 100 basis points; and
  2. (2) 50% of the initial credit spread.

PRU 2.2.64

See Notes

handbook-rule
A firm must not include a potential tier one instrument that is or may become subject to a step-up in its tier one capital resources if the step-up can arise earlier than the tenth anniversary of the date of issue of that item of capital.

PRU 2.2.65

See Notes

handbook-rule

A firm must not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources if:

  1. (1) the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than 200%; or
  2. (2) the issue or market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price (or, as the case may be, market price) of that original capital item.

PRU 2.2.66

See Notes

handbook-rule

In PRU 2.2.65 R to PRU 2.2.69 R:

  1. (1) the original capital item means the capital item that is being redeemed; and
  2. (2) the conversion instrument means the permanent share capital issued on its redemption.

PRU 2.2.67

See Notes

handbook-rule

In PRU 2.2.65 R to PRU 2.2.69 R, the conversion ratio means the ratio of:

  1. (1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to
  2. (2) one unit of the original capital item.

PRU 2.2.68

See Notes

handbook-rule
In PRU 2.2.65 R, the conversion ratio as at the date of issue of the original capital item is calculated as if the original capital item were redeemable at that time.

PRU 2.2.70

See Notes

handbook-rule
  1. (1) This rule applies to a potential tier one instrument of a firm where either:
    1. (a) the redemption proceeds; or
    2. (b) any coupon on that capital item;
  2. can be satisfied by the issue of another tier one instrument.
  3. (2) A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued tier one instruments of the kind in question (and the authority to issue them):
    1. (a) that are sufficient to satisfy all such payments then due; and
    2. (b) are of such amount as is prudent in respect of such payments that could become due in the future.

PRU 2.2.71

See Notes

handbook-rule
A firm must not include any perpetual non-cumulative preference shares or innovative tier one instruments in its tier one capital resources for the purpose of PRU 2.2 unless it has notified the FSA of its intention at least one month before it first includes them.

PRU 2.2.73

See Notes

handbook-guidance
There may be examples of capital instruments that, although based on a standard form, contain structural features that make the rules in PRU 2.2 difficult to apply. In such circumstances, a firm may seek individual guidance on the application of those rules to the capital instrument in question. See SUP 9 for the process to be followed when seeking individual guidance.

PRU 2.2.74

See Notes

handbook-rule

In relation to a tier one instrument, a step-up means any change in the coupon rate on that instrument that results in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments. A step-up:

  1. (1) includes (in the case of a fixed rate) an increase in that coupon rate;
  2. (2) includes (in the case of a floating rate calculated by adding a fixed amount to a fluctuating amount) an increase in that fixed amount;
  3. (3) includes (in the case of a floating rate) a change in the identity of the benchmark by reference to which the fluctuating element of the coupon is calculated that results in an increase in the absolute amount of the coupon;
  4. (4) does not include (in the case of a floating rate) an increase in the absolute amount of the coupon caused by fluctuations in the fluctuating figure by reference to which the absolute amount of the coupon floats.

PRU 2.2.75

See Notes

handbook-rule
Where a rule in PRU 2.2 says that a particular treatment applies to an item of capital that is subject to a step-up of a specified amount, the question of whether that rule is satisfied must be judged by reference to the cumulative amount of all step-ups since the issue of that item of capital rather than just by reference to a particular step-up.

PRU 2.2.76

See Notes

handbook-rule
Negative amounts, including any interim net losses, must be deducted from tier one capital resources.

PRU 2.2.77

See Notes

handbook-rule
Dividends must be deducted from reserves as soon as they are declared.

PRU 2.2.78

See Notes

handbook-rule
Valuation differences are all differences between the valuation of assets and liabilities as valued in PRU and the valuation that the firm uses for its external financial reporting purposes, except valuation differences which are dealt with elsewhere in PRU 2.2.14 R. The sum of these valuation differences must either be added to (if positive) or deducted from (if negative) a firm's capital resources in accordance with PRU 2.2.14 R.

PRU 2.2.79

See Notes

handbook-guidance
Additions to and deductions from capital resources will arise from the application of asset and liability valuation and admissibility rules (see PRU 1.3, PRU 2.2.86 R and PRU 2 Annex 1R). Downward adjustments include discounting of technical provisions for general insurance business (which is optional for financial reporting but not permitted for regulatory valuation - see PRU 2.2.80 R to PRU 2.2.81 R) . Details of valuation differences relating to technical provisions and liability adjustments for long-term insurance business are set out in PRU 7.3. In particular, contingent loans or other arrangements which are not valued as a liability under PRU 7.3.79R (2) result in a positive valuation difference.

PRU 2.2.80

See Notes

handbook-rule
PRU 2.2.81 R applies to a firm that carries on general insurance business, except a pure reinsurer, and which discounts or reduces its technical provisions for claims outstanding to take account of its investment income as permitted by Article 60(1)(g) of the Annual Accounts Directive.

PRU 2.2.81

See Notes

handbook-rule
A firm of a kind referred to in PRU 2.2.80 R must deduct from its capital resources the difference between the undiscounted technical provisions or technical provisions before deductions as disclosed in the notes on the accounts, and the discounted technical provisions or technical provisions after deductions. This adjustment must be made for all general insurance business classes, except for risks listed under classes 1 and 2. For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions.

PRU 2.2.82

See Notes

handbook-rule
Externally verified interim net profits are interim profits verified by a firm's external auditors after deduction of tax, declared dividends and other appropriations.

PRU 2.2.83

See Notes

handbook-guidance
The FSA may request a firm to provide it with a copy of the external auditor's opinion on whether the interim profits are fairly stated.

PRU 2.2.84

See Notes

handbook-rule
A firm must deduct from its tier one capital resources the value of intangible assets.

PRU 2.2.85

See Notes

handbook-guidance
Intangible assets include goodwill, capitalised development costs, brand names, trademarks and similar rights, and licences.

PRU 2.2.86

See Notes

handbook-rule
For the purposes of PRU 2.2.14 R, a firm must deduct from total capital resources the value of any asset which is not an admissible asset as listed in PRU 2 Annex 1 R.

PRU 2.2.87

See Notes

handbook-guidance
PRU 2.2.86 R does not apply to intangible assets which must be deducted from tier one capital resources under PRU 2.2.84 R.

PRU 2.2.88

See Notes

handbook-guidance

The list of admissible assets has been drawn with the aim of excluding assets:

  1. (1) for which a sufficiently objective and verifiable basis of valuation does not exist; or
  2. (2) whose realisability cannot be relied upon with sufficient confidence; or
  3. (3) whose nature presents an unacceptable custody risk; or
  4. (4) the holding of which may give rise to significant liabilities or onerous duties.

PRU 2.2.89

See Notes

handbook-rule
A firm must deduct from its capital resources the value of its investments in each of its related undertakings that is an ancillary services undertaking.

PRU 2.2.90

See Notes

handbook-rule
In relation to each of its related undertakings that is a regulated related undertaking (other than an insurance undertaking) a firm must add to (if positive), at stage J in PRU 2.2.14 R, or deduct from (if negative), at stage L in PRU 2.2.14 R, its capital resources the value of its shares in that undertaking calculated in accordance with PRU 1.3.35 R.

PRU 2.2.91

See Notes

handbook-guidance
For the purposes of PRU 2.2.89 R, investments must be valued at their accounting book value in accordance with PRU 1.3.5 R.

PRU 2.2.92

See Notes

handbook-guidance
Related undertakings which are also insurance undertakings are not included in PRU 2.2.90 R because a firm that is a participating insurance undertaking is subject to the requirements of PRU 8.3.

PRU 2.2.93

See Notes

handbook-rule

A firm carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in PRU 2.2, meet the following conditions before a capital instrument can be included in the firm's capital resources:

  1. (1) the firm must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;
  2. (2) the intention to manage the with-profits fund on the basis set out in PRU 2.2.93 R (1) must be disclosed in the firm's Principles and Practices of Financial Management; and
  3. (3) no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under Principle 6.

PRU 2.2.94

See Notes

handbook-guidance
The purpose of PRU 2.2.93 R is to achieve practical subordination of capital instruments if they are to qualify as capital resources to the liabilities a firm has to with-profits policyholders, including liabilities which arise from the regulatory duty to treat customers fairly in setting discretionary benefits. (Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly.) It is not sufficient for a capital instrument to be subordinated to such liabilities only on winding up of the firm because such liabilities to policyholders may have been reduced by the inappropriate use of management discretion to enable funds to be applied in repaying subordinated capital instruments before winding up proceedings commence.

PRU 2.2.95

See Notes

handbook-guidance
PRU 2.2.93 R is an additional requirement to all other rules in PRU 2.2 concerning the eligibility of a capital instrument to count as a component of a firm's capital resources. Subordinated debt instruments will be the main type of capital instrument to which this rule is relevant, including both upper tier two (undated) and lower tier two (dated) subordinated debt instruments. Subordinated debt instruments which are issued by a related undertaking are not intended to be covered by this rule and may be included in group capital resources as appropriate if the other eligibility criteria are met.

PRU 2.2.96

See Notes

handbook-guidance
PRU 2.2.29 R (8) and PRU 2.2.108 R (10) contain provisions concerning the marketing of a capital instrument. In relation to a firm to which PRU 2.2.93 R applies, in order to comply with PRU 2.2.29 R (8) and PRU 2.2.108 R (10), it should draw to the attention of subscribers the risk that payments may be deferred or cancelled in order to operate the with-profits fund so as to give priority to the payment of discretionary benefits to with-profits policyholders.

PRU 2.2.97

See Notes

handbook-guidance
  1. (1) Upper tier two instruments must meet the requirements of PRU 2.2.101 R (3) which goes beyond the requirement in PRU 2.2.93 R (3) since it requires a firm to have the option to defer payments in all circumstances, not just if necessary to treat customers fairly. However, for lower tier two instruments, PRU 2.2.93 R (3) represents an additional requirement since a failure to pay amounts of interest or principal on a due date must not constitute an event of default under PRU 2.2.108 R (2) for firms carrying on with-profits insurance business.
  2. (2) For firms which are realistic basis life firms compliance with PRU 2.2.93 R (3) would usually be achieved if the capital instrument provides that no amounts will be payable under it unless the firm's capital resources exceed its capital resources requirement. However, such firms should ensure that the terms of the capital instrument refer to FSA capital resources requirements in force from time to time, including the current realistic reserving requirements and are not restricted to former minimum capital requirements based only on the Insurance Directives' required minimum margin of solvency. For firms which are not realistic basis life firms, compliance with PRU 2.2.93 R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.

PRU 2.2.98

See Notes

handbook-guidance
Tier two capital resources is split into upper and lower tiers. The principal distinction between upper and lower tier two capital is that perpetual instruments may be included in upper tier two capital whereas dated instruments, such as fixed term preference shares and dated subordinated debt, are included in lower tier two capital.

PRU 2.2.99

See Notes

handbook-guidance
Tier two capital instruments are capital instruments that combine the features of debt and equity in that they are structured like debt, but exhibit some of the loss absorption and funding flexibility features of equity.

PRU 2.2.100

See Notes

handbook-guidance

Examples of capital instruments which may be eligible to count in upper tier two capital resources include the following:

  1. (1) perpetual cumulative preference shares;
  2. (2) perpetual subordinated debt; and
  3. (3) other instruments that have the same economic characteristics as (1) or (2).

PRU 2.2.101

See Notes

handbook-rule

A capital instrument must meet the following conditions before it can be included in a firm's upper tier two capital resources:

  1. (1) it must meet the general conditions described in PRU 2.2.108 R;
  2. (2) it must have no fixed maturity date;
  3. (3) the contractual terms of the instrument must provide for the firm to have the option to defer any interest payment in cash on the debt; and
  4. (4) the contractual terms of the instrument must provide for the loss-absorption capacity of the debt and unpaid interest, whilst enabling the firm to continue its business.

PRU 2.2.102

See Notes

handbook-rule
A capital instrument does not meet PRU 2.2.101 R (4) unless it meets PRU 2.2.103 R and PRU 2.2.105 R.

PRU 2.2.103

See Notes

handbook-rule

A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:

  1. (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
  2. (2) do constitute such a liability but the terms of the instrument are such that:
    1. (a) any such liability is not relevant for the purposes of deciding whether:
      1. (i) the firm is, or is likely to become, unable to pay its debts; or
      2. (ii) its liabilities exceed its assets;
    2. (b) a creditor (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
    3. (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

PRU 2.2.104

See Notes

handbook-guidance
The effect of PRU 2.2.103 R is that if an upper tier two instrument does constitute a liability, this should only be the case when the firm is able to pay that liability but chooses not to do so. As upper tier two capital resources must be undated, this will generally only be relevant on a solvent winding up of the firm.

PRU 2.2.105

See Notes

handbook-rule
A firm wishing to issue an upper tier two instrument other than a perpetual cumulative preference share must obtain an opinion from Queen's Counsel, or where the opinion relates to the law of a jurisdiction outside the United Kingdom, from a lawyer in that jurisdiction of equivalent status, confirming that the criteria in PRU 2.2.101 R (4) are met.

PRU 2.2.106

See Notes

handbook-guidance
For the purpose of PRU 2.2.103 R (2)(b) above, the holder should agree that the firm has no liability (including any contingent or prospective liability) to pay any amount to the extent to which that liability would cause the firm to become insolvent if it made the payment or to the extent that its liabilities exceed its assets or would do if the payment were made. The terms of the capital instrument should be such that the directors can continue to trade in the best interests of the senior creditors even if this prejudices the interests of the holders of the instrument.

Lower tier two capital

PRU 2.2.107

See Notes

handbook-guidance
Capital instruments that meet the general conditions described in PRU 2.2.108 R may be included in lower tier two capital resources.

General conditions for eligibility as tier two capital

PRU 2.2.108

See Notes

handbook-rule

A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:

  1. (1) the claims of the creditors must rank behind those of all unsubordinated creditors;
  2. (2) the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm;
  3. (3) the remedies available to the subordinated creditor in the event of non-payment or other breach of the written agreement or instrument must be limited to petitioning for the winding-up of the firm or proving for the debt and claiming in the liquidation of the firm;
  4. (4) any events of default and any remedy described in (3) must not prejudice the matters in (1) and (2);
  5. (5) in addition to the requirement about repayment in (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2)
  6. (6) the debt agreement or terms of the capital instrument 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 laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;
  8. (8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);
  9. (9) the debt must be unsecured and fully paid up;
  10. (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9); and
  11. (11) the firm has obtained a properly reasoned external legal opinion stating that the requirements in (1) to (10) have been met.

PRU 2.2.109

See Notes

handbook-guidance
For the purposes of PRU 2.2.108 R (5) the debt agreement or terms of the instrument should not contain any clause which might require early repayment of the debt (e.g. cross default clauses, negative pledges and restrictive covenants). A cross default clause is a clause which says that the loan goes into default if any of the borrower's other loans go into default. It is intended to prevent one creditor being repaid before other creditors, e.g. obtaining full repayment through the courts. A negative pledge is a clause which puts the loan into default if the borrower gives any further charge over its assets. A restrictive covenant is a term of contract that directly, or indirectly, could lead to early repayment of the debt. Some covenants, e.g. relating to the provision of management information or ownership restrictions, are likely to comply with PRU 2.2.108 R (5) as long as monetary redress is ruled out, or any payments are covered by the subordination and limitation of remedies clauses (that is, if damages are unpaid, the only remedy is to petition for a winding up).

PRU 2.2.110

See Notes

handbook-guidance
The purpose of PRU 2.2.108 R (7) is to ensure that all of the firm's assets are available to customers ahead of subordinated creditors. The waiver should apply both before and during liquidation.

PRU 2.2.111

See Notes

handbook-rule
PRU 2.2.108 R (6) does not apply if the firm has obtained a properly reasoned external legal opinion confirming that the same degree of subordination has been achieved under the law that governs the debt and the agreement as that which would have been achieved under the laws of England and Wales, Scotland, or Northern Ireland.

PRU 2.2.112

See Notes

handbook-guidance
An item of capital does not comply with PRU 2.2.108 R (10) if it is marketed as a capital instrument that would only qualify for a lower level of capital or on the basis that investing in it is like investing in a lower tier capital instrument. For example, an undated capital instrument should not be marketed as a dated capital instrument if the terms of the capital instrument include an option by the issuer to redeem the capital instrument at a specified date in the future.

PRU 2.2.113

See Notes

handbook-rule
  1. (1) An item of capital does not comply with PRU 2.2.101 R or PRU 2.2.108 R if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could produce the effect described in (2).
  2. (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.101 R or PRU 2.2.108 R.

PRU 2.2.114

See Notes

handbook-guidance
For the purposes of PRU 2.2.113 R, examples of connected transactions might include guarantees or any other side agreement provided to the holders of the capital instrument by the firm or a connected party or a related transaction designed, for example, to enhance their security or to achieve a tax benefit, but which may compromise the loss absorption capacity or permanence of the original capital item.

PRU 2.2.116

See Notes

handbook-rule

A firm must not amend the terms of the debt and the documents referred to in PRU 2.2.108 R (8) unless:

  1. (1) at least one month before the amendment is due to take effect, the firm has given the FSA notice in writing of the proposed amendment and the FSA has not objected; and
  2. (2) that notice includes confirmation that the legal opinions referred to in PRU 2.2.108 R (11) and, if applicable, PRU 2.2.105 R and PRU 2.2.111 R, continue in full force and effect in relation to the terms of the debt and documents, notwithstanding any proposed amendment.

PRU 2.2.117

See Notes

handbook-rule
A firm must notify the FSA of its intention to repay a tier two instrument at least six months before the date of the proposed repayment (unless the firm intends to repay an instrument on its contractual repayment date) providing details of how it will meet its capital resources requirement after such repayment.

PRU 2.2.118

See Notes

handbook-rule

In relation to a tier two instrument, a step-up in a coupon rate means:

  1. (1) (in the case of a fixed rate) an increase in that rate;
  2. (2) (in any other case) any change in the way that the interest or other payment is calculated that may result in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments.

PRU 2.2.119

See Notes

handbook-rule

Where a tier two instrument is subject to one or more step-ups, the first date that a step-up can take effect must be treated, for the purposes of this section, as the instrument's final maturity date if its actual maturity date occurs after that, unless the effect of the step-up or step-ups is to increase the coupon rate at which payments are to be made by no more than:

  1. (1) 50 basis points in the first ten years of the life of the debt; or
  2. (2) 100 basis points over the whole life of the debt.

PRU 2.2.120

See Notes

handbook-rule
A firm may not include in its tier two capital resources a capital instrument the terms of which provide for a step-up in the first five years after issue.

PRU 2.2.121

See Notes

handbook-rule
Where a step-up arises through a change from paying a coupon on a debt instrument to paying a dividend on a share issued in settlement of the coupon, then any cost to the firm arising from the tax treatment of the dividend may be excluded.

PRU 2.2.122

See Notes

handbook-guidance
Debt instruments containing embedded options, e.g. issues containing options for the interest rate after the step-up to be at a margin over the higher of two (or more) reference rates, or for the interest rate in the previous period to act as a floor, may affect the funding costs of the borrower and imply a step-up. In such circumstances, a firm may wish to seek individual guidance on the application of the rules relating to step-ups to the capital instrument in question. See SUP 9 for the process to be followed when seeking individual guidance.

PRU 2.2.123

See Notes

handbook-rule
A capital instrument may be included in lower tier two capital resources only if it has an original maturity of at least five years or, where it has no fixed maturity date, notice of repayment of not less than five years has been given.

PRU 2.2.124

See Notes

handbook-rule
In its final five years to maturity, for the purposes of calculating the amount of a lower tier two instrument which may be included in a firm's capital resources, the principal amount must be amortised on a straight line basis.

PRU 2.2.125

See Notes

handbook-guidance
PRU 2.2.124 R applies both to a tier two instrument with a fixed maturity and to a tier two instrument with no fixed maturity but where the firm has given five years' notice of repayment.

PRU 2.2.126

See Notes

handbook-guidance
Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions are excluded from the capital resources of a firm except to the extent allowed in a waiver under section 148 of the Act.

PRU 2.2.128

See Notes

handbook-guidance
In the case of a mutual carrying on general insurance business and subject to a waiver, calls for supplementary contributions within the financial year may only be included in a firm's capital resources up to a maximum of 50% of the difference between the maximum contributions and the contributions actually called in, subject to a limit of 50% of total capital resources. In the case of a mutual carrying on long-term insurance business, the Consolidated Life Directive does not permit calls for supplementary contributions to be included in a firm's capital resources.

Export chapter as

PRU 3

PRU 3

Export chapter as

PRU 4

PRU 4

Export chapter as

PRU 5

PRU 5

Export chapter as

PRU 6

PRU 6

Export chapter as

PRU 7

PRU 7

Export chapter as

PRU 8

PRU 8

PRU 8.4

Cross sector groups

Application

PRU 8.4.1

See Notes

handbook-rule
  1. (1) PRU 8.4 applies to every firm that is a member of a financial conglomerate other than:
    1. (a) an incoming EEA firm;
    2. (b) an incoming Treaty firm;
    3. (c) a UCITS qualifier; and
    4. (d) an ICVC.
  2. (2) PRU 8.4 does not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation.
  3. (3) PRU 8.4.25 R (Capital adequacy requirements: high level requirement), PRU 8.4.26 R (Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive), PRU 8.4.29 R (Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive) and PRU 8.4.35 R (Risk concentration and intra group transactions: the main rule) do not apply with respect to a third-country financial conglomerate.

Purpose

PRU 8.4.2

See Notes

handbook-guidance

PRU 8.4 implements the Financial Groups Directive. However, material on the following topics is to be found elsewhere in the Handbook as follows:

  1. (1) further material on third-country financial conglomerates can be found in PRU 8.5;
  2. (2) SUP 15.9 contains notification rules for members of financial conglomerates;
  3. (3) material on reporting obligations can be found in SUP 16.7.73 R and SUP 16.7.74 R; and
  4. (4) material on systems and controls in financial conglomerates can be found in PRU 8.1.

Introduction: identifying a financial conglomerate

PRU 8.4.3

See Notes

handbook-guidance
  1. (1) In general the process in (2) to (8) applies for identifying financial conglomerates.
  2. (2) Competent authorities that have authorised regulated entities should try to identify any consolidation group that is a financial conglomerate. If a competent authority is of the opinion that a regulated entity authorised by that competent authority is a member of a consolidation group which may be a financial conglomerate it should communicate its view to the other competent authorities concerned.
  3. (3) A competent authority may start (as described in (2)) the process of deciding whether a group is a financial conglomerate even if it would not be the coordinator.
  4. (4) A member of a group may also start that process by notifying one of the competent authorities that have authorised group members that its group may be a financial conglomerate, for example by notification under SUP 15.9.
  5. (5) If a group member gives a notification in accordance with (4), that does not automatically mean that the group should be treated as a financial conglomerate. The process described in (6) to (9) still applies.
  6. (6) The competent authority that would be coordinator will take the lead in establishing whether a group is a financial conglomerate once the process has been started as described in (2) and (3).
  7. (7) The process of establishing whether a group is a financial conglomerate will normally involve discussions between the financial conglomerate and the competent authorities concerned.
  8. (8) A financial conglomerate should be notified by its coordinator that it has been identified as a financial conglomerate and of the appointment of the coordinator. The notification should be given to the parent undertaking at the head of the group or, in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector. That notification does not of itself make a group into a financial conglomerate; whether or not a group is a financial conglomerate is governed by the definition of financial conglomerate as set out in PRU 8.4.
  9. (9) PRU 8 Ann 4R is a questionnaire (together with its explanatory notes) that the FSA asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.

Introduction: The role of other competent authorities

PRU 8.4.4

See Notes

handbook-guidance
A lead supervisor (called the coordinator) is appointed for each financial conglomerate. Article 10 of the Financial Groups Directive describes the criteria for deciding which competent authority is appointed as coordinator. Article 11 of the Financial Groups Directive sets out the tasks of the coordinator.

Definition of financial conglomerate: basic definition

Definition of financial conglomerate: sub-groups

PRU 8.4.6

See Notes

handbook-rule

A consolidation group is not prevented from being a financial conglomerate because it is part of a wider:

  1. (1) consolidation group; or
  2. (2) financial conglomerate; or
  3. (3) group of persons linked in some other way.

Definition of financial conglomerate: the financial sectors: general

PRU 8.4.7

See Notes

handbook-rule

For the purpose of the definition of financial conglomerate, there are two financial sectors as follows:

  1. (1) the banking sector and the investment services sector, taken together; and
  2. (2) the insurance sector.

PRU 8.4.8

See Notes

handbook-rule
  1. (1) This rule applies for the purpose of the definition of financial conglomerate and the financial conglomerate definition decision tree.
  2. (2) Any mixed financial holding company is considered to be outside the overall financial sector for the purpose of the tests set out in the boxes titled Threshold Test 1, Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree.
  3. (3) Determining whether the tests set out in the boxes titled Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree are passed is based on considering the consolidated and/or aggregated activities of the members of the consolidation group within the insurance sector and the consolidated and/or aggregated activities of the members of the consolidation group within the banking sector and the investment services sector.

Definition of financial conglomerate: adjustment of the percentages

PRU 8.4.9

See Notes

handbook-rule

Once a financial conglomerate has become a financial conglomerate and subject to supervision in accordance with the Financial Groups Directive, the figures in the financial conglomerate definition decision tree are altered as follows:

  1. (1) the figure of 40% in the box titled Threshold Test 1 is replaced by 35%;
  2. (2) the figure of 10% in the box titled Threshold Test 2 is replaced by 8%; and
  3. (3) the figure of six billion Euro in the box titled Threshold Test 3 is replaced by five billion Euro.

PRU 8.4.10

See Notes

handbook-rule

The alteration in PRU 8.4.9 R only applies to a financial conglomerate during the period that:

  1. (1) begins when the financial conglomerate would otherwise have stopped being a financial conglomerate because it does not meet one of the unaltered thresholds referred to in PRU 8.4.9 R; and
  2. (2) covers the three years following that date.

Definition of financial conglomerate: balance sheet totals

PRU 8.4.11

See Notes

handbook-rule
The calculations referred to in the financial conglomerate definition decision tree regarding the balance sheet must be made on the basis of the aggregated balance sheet total of the members of the consolidation group, according to their annual accounts. For the purposes of this calculation, undertakings in which a participation is held must be taken into account as regards the amount of their balance sheet total corresponding to the aggregated proportional share held by the consolidation group. However, where consolidated accounts are available, they must be used instead of aggregated accounts.

Definition of financial conglomerate: solvency requirement

PRU 8.4.12

See Notes

handbook-rule
The solvency and capital adequacy requirements referred to in the financial conglomerate definition decision tree must be calculated in accordance with the provisions of the relevant sectoral rules.

Definition of financial conglomerate: discretionary changes to the definition

PRU 8.4.13

See Notes

handbook-guidance

Articles 3(3) to 3(6), Article 5(4) and Article 6(5) of the Financial Groups Directive allow competent authorities, on a case by case basis, to:

  1. (1) change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate;
  2. (2) apply the scheme in the Financial Groups Directive to EEA regulated entities in specified kinds of group structures that do not come within the definition of financial conglomerate; and
  3. (3) exclude a particular entity in the scope of capital adequacy requirements that apply with respect to a financial conglomerate.

Capital adequacy requirements: introduction

PRU 8.4.14

See Notes

handbook-guidance
The capital adequacy provisions of PRU 8.4 are designed to be applied to EEA-based financial conglomerates.

PRU 8.4.15

See Notes

handbook-guidance
PRU 8.4.25 R is a high level capital adequacy rule. It applies whether or not the FSA is the coordinator of the financial conglomerate concerned.

PRU 8.4.16

See Notes

handbook-guidance
PRU 8.4.26 R to PRU 8.4.31 R and PRU 8 Ann 1R G implement the detailed capital adequacy requirements of the Financial Groups Directive. They only deal with a financial conglomerate for which the FSA is the coordinator. If another competent authority is coordinator of a financial conglomerate, those rules do not apply with respect to that financial conglomerate and instead that coordinator will be responsible for implementing those detailed requirements.

PRU 8.4.17

See Notes

handbook-guidance

Annex I of the Financial Groups Directive lays down four methods for calculating capital adequacy at the level of a financial conglomerate. Those four methods are implemented as follows:

  1. (1) Method 1 calculates capital adequacy using accounting consolidation. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 1 of PRU 8 Ann 1R G.
  2. (2) Method 2 calculates capital adequacy using a deduction and aggregation approach. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 2 of PRU 8 Ann 1R 1.
  3. (3) Method 3 calculates capital adequacy using book values and the deduction of capital requirements. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 3 of PRU 8 Ann 1R G.
  4. (4) Method 4 consists of a combination of Methods 1, 2 and 3 from Annex I of the Financial Groups Directive, or a combination of two of those Methods. It is implemented by PRU 8.4.26 R to PRU 8.4.28 R, PRU 8.4.30 R and Part 4 of PRU 8 Ann 1R G.

PRU 8.4.18

See Notes

handbook-guidance

Part 4 of PRU 8 Ann 1R G (Use of Method 4 from Annex I of the Financial Conglomerates Directive) applies the FSA's sectoral rules with respect to the financial conglomerate as a whole, with some adjustments. Where Part 4 of PRU 8 Ann 1R G applies the FSA's sectoral rules for:

  1. (1) the insurance sector, that involves a combination of Methods 2 and 3; and
  2. (2) the banking sector and the investment services sector, that involves a combination of Methods 1 and 3.

PRU 8.4.19

See Notes

handbook-guidance
Paragraph 5.5 of PRU 8 Ann 1R G (Capital adequacy calculations for financial conglomerates) deals with a case in which there are no capital ties between entities in a financial conglomerate. In particular, the FSA, after consultation with the other relevant competent authorities and in accordance with Annex I of the Financial Groups Directive, will determine which proportional share of a solvency deficit in such an entity will have to be taken into account, bearing in mind the liability to which the existing relationship gives rise.

PRU 8.4.20

See Notes

handbook-guidance
  1. (1) In the following cases, the FSA (acting as coordinator) may choose which of the four methods for calculating capital adequacy laid down in Annex I of the Financial Groups Directive should apply:
    1. (a) where a financial conglomerate is headed by a regulated entity that has been authorised by the FSA; or
    2. (b) the only relevant competent authority for the financial conglomerate is the FSA.
  2. (2) PRU 8.4.28 R automatically applies Method 4 from Annex I of the Financial Groups Directive in these circumstances except in the cases set out in PRU 8.4.28 R (1)(e) and PRU 8.4.28 R (1)(f). The process in PRU 8.4.22 G does not apply.

PRU 8.4.21

See Notes

handbook-guidance
Where PRU 8.4.20 G does not apply, the Annex I method to be applied is decided by the coordinator after consultation with the relevant competent authorities and the financial conglomerate itself.

PRU 8.4.22

See Notes

handbook-guidance
The method of calculating capital adequacy chosen in respect of a financial conglomerate as described in PRU 8.4.21 G will be applied with respect to that financial conglomerate by varying the Part IV permission of a firm in that financial conglomerate to include a requirement. That requirement will have the effect of obliging the firm to ensure that the financial conglomerate has capital resources of the type and amount needed to comply with whichever of the methods in PRU 8 Ann 1R G is to be applied with respect to that financial conglomerate. The powers in the Act relating to waivers and varying a firm's Part IV permission can be used to implement one of the methods from Annex I of the Financial Groups Directive in a way that is different from that set out in PRU 8.4 and PRU 8 Ann 1R G if that is necessary to reflect the consultations referred to in PRU 8.4.21 G.

PRU 8.4.23

See Notes

handbook-guidance
If there is more than one firm in a financial conglomerate with a Part IV permission, the FSA would not normally expect to apply the requirement described in PRU 8.4.22 G to all of them. Normally it will only be necessary to apply it to one.

PRU 8.4.24

See Notes

handbook-guidance
The FSA expects that in all or most cases falling into PRU 8.4.21 G, the rules in Part 4 of PRU 8 Ann 1R G will be applied.

PRU 8.4.32

See Notes

handbook-guidance
PRU 8.4.35 R implements Article 7(4) and Article 8(4) of the Financial Groups Directive, which provide that where a financial conglomerate is headed by a mixed financial holding company, the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate, if any, shall apply to that sector as a whole, including the mixed financial holding company.

PRU 8.4.33

See Notes

handbook-guidance
Articles 7(3) (Risk concentration) and 8(3) (Intra-group transactions) and Annex II (Technical application of the provisions on intra-group transactions and risk concentration) of the Financial Groups Directive say that Member States may apply at the level of the financial conglomerate the provisions of the sectoral rules on risk concentrations and intra-group transactions. PRU 8.4 does not take up that option, although the FSA may impose such obligations on a case by case basis.

The financial sectors: asset management companies

PRU 8.4.39

See Notes

handbook-rule
  1. (1) In accordance with Article 30 of the Financial Groups Directive (Asset management companies), this rule deals with the inclusion of an asset management company that is a member of a financial conglomerate in the scope of regulation of financial conglomerates. This rule does not apply to the definition of financial conglomerate.
  2. (2) An asset management company is in the overall financial sector and is a regulated entity for the purpose of:
    1. (a) PRU 8.4.26 R to PRU 8.4.36 R;
    2. (b) PRU 8 Ann 1R G (Capital adequacy calculations for financial conglomerates) and PRU 8 Ann 2R (Prudential rules for third country groups); and
    3. (c) any other provision of the Handbook relating to the supervision of financial conglomerates.
  3. (3) In the case of a financial conglomerate for which the FSA is the coordinator, all asset management companies must be allocated to one financial sector for the purposes in (2), being either the investment services sector or the insurance sector. But if that choice has not been made in accordance with (4) and notified to the FSA in accordance with (4)(d), an asset management company must be allocated to the investment services sector.
  4. (4) The choice in (3):
    1. (a) must be made by the undertaking in the financial conglomerate holding the position referred to in Article 4(2) of the Financial Groups Directive (group member to whom notice must be given that the group has been found to be a financial conglomerate);
    2. (b) applies to all asset management companies that are members of the financial conglomerate from time to time;
    3. (c) cannot be changed; and
    4. (d) must be notified to the FSA as soon as reasonably practicable after the notification in (4)(a).

Application

PRU 8.5.1

See Notes

handbook-rule

PRU 8.5 applies to every firm that is a member of a third-country group. But it does not apply to:

  1. (1) an incoming EEA firm; or
  2. (2) an incoming Treaty firm; or
  3. (3) a UCITS qualifier; or
  4. (4) an ICVC.

Purpose

PRU 8.5.2

See Notes

handbook-guidance
PRU 8.5 implements in part Article 18 of the Financial Groups Directive and Article 56a of the Banking Consolidation Directive.

Equivalence

PRU 8.5.3

See Notes

handbook-guidance
The first question that must be asked about a third-country financial group is whether the EEA regulated entities in that third-country group are subject to supervision by a third-country competent authority, which is equivalent to that provided for by the Financial Groups Directive (in the case of a financial conglomerate) or the EEA prudential sectoral legislation for the banking sector or the investment services sector (in the case of a banking and investment group). Article 18(1) of the Financial Groups Directive sets out the process for establishing equivalence with respect to third-country financial conglomerates and the first three paragraphs of Article 56a of the Banking Consolidation Directive does so with respect to third-country banking and investment groups.

Other methods: General

PRU 8.5.4

See Notes

handbook-guidance
If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in PRU 8.5.3 G, competent authorities may apply other methods that ensure appropriate supervision of the EEA regulated entities in that third-country group in accordance with the aims of supplementary supervision under the Financial Groups Directive or consolidated supervision under the applicable EEA prudential sectoral legislation.

Supervision by analogy: introduction

PRU 8.5.5

See Notes

handbook-guidance
If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in PRU 8.5.3 G, a competent authority may, rather than take the measures described in PRU 8.5.4 G, apply, by analogy, the provisions concerning supplementary supervision under the Financial Groups Directive or, as applicable, consolidated supervision under the applicable EEA prudential sectoral legislation, to the EEA regulated entities in the banking sector, investment services sector and (in the case of a financial conglomerate) insurance sector.

PRU 8.5.6

See Notes

handbook-guidance
The FSA believes that it will only be right to adopt the option in PRU 8.5.5 G in response to very unusual group structures.

PRU 8.5.7

See Notes

handbook-guidance
PRU 8.5.8 R and PRU 8.5.9 R and PRU 8 Ann 2R set out rules to deal with the situation covered in PRU 8.5.5 G. Those rules do not apply automatically. Instead, they can only be applied with respect to a particular third-country group through the Part IV permission of a firm in that third-country group. Broadly speaking the procedure described in PRU 8.4.22 G also applies to this process.

PRU 8 Ann 2R

PRU 8 Ann 2R

Prudential rules for third country groups (PRU 8.5.8 R to PRU 8.5.9 R)

PRU 8 Ann 2R 1

Table: PART 1: Third-country financial conglomerates

PRU 8 Ann 2R 2

See Notes

handbook-rule
Table: PART 2: Third-country banking and investment groups

PRU 8 Ann 2R 3

See Notes

handbook-rule
PART 3: Adjustment of scope

PRU 8 Ann 3G

Guidance Notes for Classification of Groups

See Notes

handbook-guidance
This annex consists only of one or more forms or templates. Forms and templates are to be found through the 'Forms' link under Useful Links section at www.fsahandbook.info or on the Handbook CD-ROM.
Purpose and scope

The form is designed to identify groups and sub-groups that are likely to be financial conglomerates under the Financial Groups Directive. A group may be a financial conglomerate if it contains both insurance and banking/investment businesses and meets certain threshold tests. The FSA needs to identify conglomerates with their head offices in the EEA and those with their head offices outside the EEA, although this does not necessarily mean that the latter will be subject to EEA conglomerate supervision.

This form's purpose is to enable the FSA to obtain sufficient information so as to be able to determine how likely a group/sub-group is to be a financial conglomerate. In certain cases this can only be determined after consultation with the other EU relevant competent authorities. A second purpose of the form is therefore to identify any groups and sub-groups that may need such consultation so that this can be made as soon as possible. This should allow firms time to prepare to comply.

The third purpose of the form is to gain information from firms on the most efficient way to implement the threshold calculations in detail (consistently with the directive). We have, therefore, asked for some additional information in part 4 of the form.

A copy of this form can be found on the FSA's Financial Groups Website with current contact details.

Please include workings showing the method employed to determine the percentages in part 2 (for the threshold conditions) and giving details of all important assumptions / approximations made in doing the calculations.

The definition of financial conglomerate includes not only conventional groups made up of parent-subsidiary relationships but groups linked by control and "consolidation Article 12(1) relationships". If this is the case for your group, please submit along with this form a statement that this is the case. Please include in that statement an explanation of how you have included group members not linked by capital ties in the questionnaire calculations.

A consolidation Article 12(1) relationship arises between undertakings in the circumstances set out in Article 12(1) of the Seventh Company Law Directive. These are set out in the Handbook Glossary (in the definition of consolidation Article 12(1) relationship). Broadly speaking, undertakings come within this definition if they do not form a conventional group but:
  1. (a) are managed on a unified basis; or
  2. (b) have common management.

General guidance

We would like this to be completed based on the most senior parent in the group, and, if applicable, for the company heading the most senior conglomerate group in the EEA. If appropriate, please also attach a list of all other likely conglomerate sub-groups.

Please use the most recent accounts for the top level company in the group together with the corresponding accounts for all subsidiaries and participations that are included in the consolidated accounts. Please indicate the names of any significant subsidiaries with a different year-end from the group's year-end.

Please note the following:
  1. (a) Branches should be included as part of the parent entity.
  2. (b) Include in the calculations overseas entities owned by the relevant group or sub-group.
  3. (c) There are only two sectors for this purpose: banking/investment and insurance.
  4. (d) You will need to assign non-regulated financial entities to one of these sectors:
    1. banking/investment activities are listed in - IPRU Banks CS 10 Appendix A
    2. insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2 p 163-168.
    3. • Any operator of a UCITS scheme, insurance intermediary, mortgage broker and mixed financial holding company does not fall into the directive definitions of either financial sector or insurance sector.
  5. They should therefore be ignored for the purposes of these calculations.

Threshold tests

For the purpose of completing section 2 of the form relating to the threshold tests, the following guidance should be used. However, if you consider that for your group there is a more appropriate calculation then you may use this calculation so long as the method of computation is submitted with the form.

Calculating balance sheet totals

Generally, use total (gross) assets for the balance sheet total of a group/entity. However, investments in other entities that are part of the group will need to be deducted from the sector that has made the investment and the balance sheet total of the entity is added to the sector in which it operates.

Our expectation of how this may be achieved efficiently is as follows:
  1. (i) Off-balance-sheet items should be excluded.
  2. (ii) Where off-balance sheet treatment of funds under management and on-balance sheet treatment of policy holders' funds may distort the threshold calculation, groups should consult the FSA on the appropriateness of using other measures under article 3.5 of the Financial Groups Directive.
  3. (iii) If consolidated accounts exist for a sub-group consisting of financial entities from only one of the two sectors, these consolidated accounts should be used to measure the balance-sheet total of the sub-group (i.e. total assets less investments in entities in the other sector). If consolidated accounts do not exist, intra-group balances should be netted out when calculating the balance sheet total of a single sector (but cross-sector intra-group balances should not be netted out).
  4. (iv) Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.
  5. (v) Where accounting standards differ between entities, groups should consult the FSA if they believe this is likely materially to affect the threshold calculation.
  6. (vi) Where there is a subsidiary or participation in the opposite sector from its parent (i.e. insurance sector for a banking/investment firm parent and vice versa), the balance sheet amount of the subsidiary or participation should be allocated to its sector using its individual accounts.
  7. (vii) The balance-sheet total of the parent entity/sub-group is measured as total assets of the parent/sub-group less the book value of its subsidiaries or participations in the other sector (i.e. the value of the subsidiary or participation in the parent's consolidated accounts is deducted from the parent's consolidated assets).
  8. (viii) The cross-sector subsidiaries or participations referred to above, valued according to their own accounts, are allocated pro-rata, according to the aggregated share owned by the parent/sub-group, to their own sector.
  9. (ix) If the cross-sector entities above themselves own group entities in the first sector (i.e. that of the top parent/sub-group) these should (in accordance with the methods above) be excluded from the second sector and added to the first sector using individual accounts.

Solvency (capital adequacy) requirements

Generally, the solvency requirements should be according to sectoral rules (that is EEA prudential sectoral legislation - see Glossary). However, for convenience, you may choose to use either EEA rules, FSA rules or local rules. But if this choice makes a significant difference, either with respect to whether the group is a financial conglomerate or with respect to which sector is the biggest, you should consult with the FSA. Non-regulated financial entities should have proxy requirements calculated on the basis of the most appropriate sector. If sub-groups submit single sector consolidated returns then the solvency requirement may be taken from those returns.

Our expectation of how this may be achieved efficiently is as follows:
  1. (i) If you complete a solvency return for a sub-group consisting of financial entities from only one of the two sectors, the total solvency requirement for the sub-group should be used.
  2. (ii) Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.
  3. (iii) Where there is a regulated subsidiary or participation in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be from its individual regulatory return. If there is an identifiable contribution to the parent's solvency requirement in respect of the cross-sector subsidiary or participation, the parent's solvency requirement may be adjusted to exclude this.
  4. (iv) Where there is an unregulated financial undertaking in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be one of the following:
    1. (a) (a) as if the entity were regulated by the FSA under the appropriate sectoral rules;
    2. (b) (b) using EU minimum requirements for the appropriate sector; or
    3. (c) (c) using non-EU local requirements* for the appropriate sector.
  5. Please note on the form which of these options you have used, according to the country and sector, and whether this is the same treatment as in your latest overall group solvency calculation.
  6. (v) For banking/investment requirements, use the total amount of capital required.
  7. (vi) For insurance requirements, use the Required Minimum Margin:
    1. (a) (a) UK firms, Form 9: for general insurance business = capital resources requirement [line 29]; for long-term insurance business = capital resources requirement (higher of Minimum Capital Requirement and Enhanced Capital Resources Requirement) [line 52].
    2. (b) (b) Overseas firms, either:
• the local requirement*;• the EU minimum; or• the FSA requirement.* N.B. local requirements may only be used if they are at least equivalent to the EU minimum (designated states or territories). However, local requirements of a non-designated state or territory may be used if the resulting ratio in F5 is significantly below the 10% threshold (for this purpose "significantly below" may be taken to mean <5%).

Market share measures

These are not defined by the directive. The aim is to identify any standard industry approaches to measuring market share in individual EU countries by sector, or any data sources which are commonly used as a proxy.

Threshold tests

Test F2

Test F3/F4/F5

The relevant percentage for the insurance sector is:

(A% + C%)/2 = I %

The relevant percentage for the banking/investment sector is:

(B% + D%)/2 = BI %

The smallest sector is the sector with the smallest relevant percentage.

If I% < BI% then F3 is insurance, F4 = A%, and F5 = C%

If BI% < I% then F3 is banking/investment, F4 = B% and F5 = D

PRU 8 Ann 4R

PRU 8 Ann 4 (see PRU 8.4.5 R)

PRU 8 Ann 4.1R

Footnote: The conditions are that the EEA regulated entity at the head of the consolidation group:
(1)is a parent undertaking of a member of the consolidation group in the overall financial sector;(2)has a participation in a member of the consolidation group that is in the overall financial sector; or(3)has a consolidation Article 12(1) relationship with a member of the consolidation group that is in the overall financial sector.

Export chapter as

PRU 9

Insurance
mediation & mortgage mediation, lending and administration

PRU 9.1

Responsibility for insurance mediation activity

Application

PRU 9.1.1

See Notes

handbook-rule
This section applies to a firm with Part IV permission to carry on insurance mediation activity.

Purpose

PRU 9.1.2

See Notes

handbook-guidance
The main purpose of PRU 9.1.3 R, PRU 9.1.8 R and PRU 9.1.10 R is to implement in part the provisions of the Insurance Mediation Directive as these apply to firms regulated by the FSA.

Responsibility for insurance mediation activity

PRU 9.1.3

See Notes

handbook-rule
An insurance intermediary, other than a sole trader, must allocate the responsibility for the firm's insurance mediation activity to a director or senior manager.

PRU 9.1.5

See Notes

handbook-guidance
  1. (1) Typically an insurance intermediary will appoint a person performing a governing function to direct its insurance mediation activity. Where this responsibility is allocated to a person performing another function, the person performing the apportionment and oversight function with responsibility for the apportionment of responsibilities under SYSC 2.1.1 R must ensure that the firm's insurance mediation activity under PRU 9.1.3 R is appropriately allocated.
  2. (2) The descriptions of significant influence functions, other than the required functions, do not extend to activities carried on by an insurance intermediary with permission only to carry on insurance mediation activity and whose principal purpose is to carry on activities other than regulated activities (see SUP 10.1.21 R). In this case, the firm may allocate the responsibility for the firm's insurance mediation activity under PRU 9.1.3 R to one or more of the persons performing the apportionment and oversight function who will be required to be an approved person.
  3. (3) In the case of a sole trader, the sole trader will be responsible for the firm's insurance mediation activity.

PRU 9.1.6

See Notes

handbook-guidance
Where a firm has appointed an appointed representative to carry on insurance mediation activity on its behalf, the person responsible for the firm's insurance mediation activity will also be responsible for the insurance mediation activity carried on by an appointed representative.

PRU 9.1.7

See Notes

handbook-guidance
The FSA will specify in the FSA Register the name of the persons to whom the responsibility for the firm's insurance mediation activity has been allocated under PRU 9.1.3 R by inserting after the relevant controlled function the words "(insurance mediation)".

Knowledge, ability and good repute

PRU 9.1.8

See Notes

handbook-rule

An insurance intermediary must establish on reasonable grounds that:

  1. (1) a reasonable proportion of the persons within its management structure who are responsible for insurance mediation activity; and
  2. (2) all other persons directly involved in its insurance mediation activity;
demonstrate the knowledge and ability necessary for the performance of their duties; and
  1. (3) all the persons in its management structure and any staff directly involved in insurance mediation activity are of good repute.

PRU 9.1.9

See Notes

handbook-guidance

In determining a person's knowledge and ability under PRU 9.1.8 R (1) and PRU 9.1.8 R (2), the firm should have regard to matters including, but not limited to, whether the person:

  1. (1) has demonstrated by experience and training to be able, or that he will be able, to perform his duties related to the firm's insurance mediation activity; and
  2. (2) satisfies the relevant requirements of the FSA's Training and Competence sourcebook (TC).

PRU 9.1.10

See Notes

handbook-rule

In considering a person's repute under PRU 9.1.8 R (3), the firm must ensure that the person:

  1. (1) has not been convicted of any serious criminal offences linked to crimes against property or other crimes related to financial activities (other than spent convictions under the Rehabilitation of Offenders Act 1974 or any other national equivalent); and
  2. (2) has not been adjudged bankrupt (unless the bankruptcy has been discharged);
under the law of any part of the United Kingdom or under the law of a country or territory outside the United Kingdom.

PRU 9.1.11

See Notes

handbook-guidance
For the purposes of PRU 9.1.10 R (1), the firm should give particular consideration to offences of dishonesty, fraud, financial crime or other offences under legislation relating to banking and financial services, companies, insurance and consumer protection.

PRU 9.1.12

See Notes

handbook-guidance
Firms are reminded that Principle 3 requires firms to take reasonable care to organise and control their affairs responsibly and effectively. Principle 3 is amplified in SYSC 3.1.1 R which requires firms to take reasonable care to establish and maintain such systems and controls as are appropriate to its business. A firm's systems and controls should enable it to satisfy itself of the suitability of anyone who acts for it (SYSC 3.2.13 G). This includes the assessment of an individual's honesty and competence. In addition, TC lists some general, high level commitments to training and competence which every firm should make and fulfil.

PRU 9.1.13

See Notes

handbook-guidance
PRU 9 Ann 1 G gives an example of how the FSA would expect firms to comply with the requirements in PRU 9.1.3 R, PRU 9.1.4 R, PRU 9.1.8 R and PRU 9.1.10 R.

PRU 9 Ann 1

See Notes

handbook-guidance

PRU 9.2

Professional indemnity insurance requirements for insurance and mortgage mediation activities

Application

PRU 9.2.1

See Notes

handbook-rule
  1. (1) This section applies to a firm with Part IV permission to carry on any of the activities in (2) unless (3), (4), (5) or (6) applies.
  2. (2) The activities are:
    1. (a) insurance mediation activity;
    2. (b) mortgage mediation activity.
  3. (3)
    1. (a) In relation to insurance mediation activity, this section does not apply to a firm if another authorised person which has net tangible assets of more than ?10 million provides a comparable guarantee.
    2. (b) If the 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 in PRU 9.2.10 R to finance the claims that might arise as a result of a breach by the firm of its duties under the regulatory system or civil law.
  4. (4) In relation to mortgage mediation activity, this section does not apply to a firm if:
    1. (a) it has net tangible assets of more than ?1 million; or
    2. (b) the comparable guarantee provisions of (3) apply (as if the firm was carrying on insurance mediation activity) but substituting ?1 million for ?10 million in (a) and (b).
  5. (5) In relation to all the activities in (2), this section does not apply to:
    1. (a) an insurer; or
    2. (b) a managing agent; or
    3. (c) a firm to which IPRU(INV) 13.1.4(1) (Financial resource requirements for personal investment firms: requirement to hold professional indemnity insurance) applies.
  6. (6) In relation to mortgage mediation activity, this section does not apply to an authorised professional firm:
    1. (a) which is subject to IPRU(INV) 2.3.1 (Professional indemnity insurance requirements for authorised professional firms); and
    2. (b) whose mortgage mediation activity is incidental to its main business.

PRU 9.2.2

See Notes

handbook-guidance
The definition of insurance mediation activity is any of several activities 'in relation to a contract of insurance' which includes a contract of reinsurance. This section, therefore, applies to a reinsurance intermediary in the same way as it applies to any other insurance intermediary.

Purpose

PRU 9.2.3

See Notes

handbook-guidance

The purposes of this section are to:

  1. (1) implement article 4.3 of the Insurance Mediation Directive in so far as it requires insurance intermediaries to hold professional indemnity insurance, or some other comparable guarantee, against any liability that might arise from professional negligence; and
  2. (2) meet the regulatory objectives of consumer protection and maintaining market confidence by ensuring that firms have adequate resources to protect themselves, and their customers, against losses arising from breaches in its duties under the regulatory system or civil law.

PRU 9.2.4

See Notes

handbook-guidance
Any breach in the duty of a firm or of its agents under the regulatory system or civil law can give rise to claims being made against the firm. Professional indemnity insurance has an important role to play in helping to finance such claims. In so doing, this section amplifies threshold condition 4 (Adequate resources). This threshold condition provides that a firm must have, on a continuing basis, resources that are, in the opinion of the FSA, adequate in relation to the regulated activities that the firm carries on.

PRU 9.2.5

See Notes

handbook-guidance
Under Principles 3 and 4 a firm is required to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems and to maintain adequate financial resources. Under Principle 9 a firm is obliged to take reasonable care to ensure the suitability of its advice on investments and discretionary decisions for any customer who is entitled to rely upon its judgement.

PRU 9.2.6

See Notes

handbook-guidance
Although financial resources and appropriate systems and controls can generally mitigate operational risk, professional indemnity insurance has a role in mitigating the risks a firm faces in its day to day operations, including those arising from not meeting the legally required standard of care when advising on investments. The purpose of this section is to ensure that a firm has in place the type, and level, of professional indemnity insurance necessary to mitigate these risks.

Requirement to hold professional indemnity insurance

PRU 9.2.7

See Notes

handbook-rule

A firm must take out and maintain professional indemnity insurance that is at least equal to the requirements of PRU 9.2.10 R from:

  1. (1) an insurance undertaking authorised to transact professional indemnity insurance in the EEA; or
  2. (2) a person of equivalent status in:
    1. (i) a Zone A country; or
    2. (ii) the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

PRU 9.2.8

See Notes

handbook-guidance
A firm whose Part IV permission covers more than one regulated activity within the scope of this sectionwill need to comply with the professional indemnity insurance requirements for each of these activities. However, this does not necessarily mean that the firm should purchase two or more separate contracts of insurance. It could, for example, purchase one contract that covers all of its activities, but which contains separate limits of indemnity and excesses for each individual activity.

PRU 9.2.9

See Notes

handbook-guidance
A non-EEA firm (such as a captive insurance company outside the EEA) will be able to provide professional indemnity insurance only if it is authorised to do so in one of the countries or territories referred to in PRU 9.2.7 R (2). The purpose of this provision is to balance the level of protection required for the policyholder against a reasonable level of flexibility for the firm.

Terms to be incorporated in the insurance

PRU 9.2.10

See Notes

handbook-rule

In relation to the activities referred to in PRU 9.2.1 R (2), the contract of professional indemnity insurance must incorporate terms which make provision for:

  1. (1) cover in respect of claims for which a firm may be liable as a result of the conduct of itself, its employees and its appointed representatives (acting within the scope of their appointment);
  2. (2) the minimum limits of indemnity as set out in PRU 9.2.13 R (in relation to insurance mediation activity) and PRU 9.2.15 R (in relation to mortgage mediation activity);
  3. (3) an excess as set out in PRU 9.2.17 R to PRU 9.2.22 R;
  4. (4) appropriate cover in respect of legal defence costs;
  5. (5) continuous cover in respect of claims arising from work carried out from the date on which the firm was given Part IV permission in relation to any of the activities referred to in (2); and
  6. (6) cover in respect of Ombudsman awards made against the firm.

PRU 9.2.11

See Notes

handbook-guidance
In relation to PRU 9.2.10 R (1), a firm should be aware that it is responsible for the conduct of all of its employees. The firm's employees include, but are not limited to, its partners, directors, individuals that are self-employed or operating under a contract hire agreement and any other individual that is employed in connection with its business.

PRU 9.2.12

See Notes

handbook-guidance
In relation to PRU 9.2.10 R (1), a firm should be aware that it is responsible for the conduct of all of its appointed representatives.

Minimum limits of indemnity: insurance intermediary

PRU 9.2.13

See Notes

handbook-rule

In relation to insurance mediation activity,the minimum limits of indemnity referred to in PRU 9.2.10 R (2) are:

  1. (1) for a single claim, ?1 million; and
  2. (2) in aggregate, ?1.5 million or, if higher, 10% of annual income (see PRU 9.3.42 R) up to ?30 million.

PRU 9.2.14

See Notes

handbook-rule
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 and at renewal, at least equivalent to those required in PRU 9.2.13 R.

Minimum limits of indemnity: mortgage mediation activity

PRU 9.2.15

See Notes

handbook-rule

In relation to mortgage mediation activity, the minimum limit of indemnity referred to in PRU 9.2.10 R (2) is the higher of 10% of annual income (see PRU 9.3.42 R) up to ?1 million, and:

  1. (1) for a single claim, ?100,000; or
  2. (2) in aggregate, ?500,000.

Excess

PRU 9.2.16

See Notes

handbook-rule
In this section, "client assets" includes a document only if it has value, or is capable of having value, in itself (such as a bearer instrument).

PRU 9.2.17

See Notes

handbook-rule

For a firm which does not hold client money or other client assets, the excess referred to in PRU 9.2.10 R (3) is not more than the higher of:

  1. (1) ?2,500; and
  2. (2) 1.5% of annual income (see PRU 9.3.42 R).

PRU 9.2.18

See Notes

handbook-rule

For a firm which holds client money or other client assets, the excess referred to in PRU 9.2.10 R (3) is not more than the higher of:

  1. (1) ?5,000; and
  2. (2) 3% of annual income (see PRU 9.3.42 R).

Policies covering more than one firm

PRU 9.2.19

See Notes

handbook-rule

If a policy provides cover to more than one firm, then in relation to PRU 9.2.13 R, PRU 9.2.14 R and PRU 9.2.15 R:

  1. (1) the limits of indemnity must be calculated on the combined annual income (see PRU 9.3.42 R) of all the firms named in the policy; and
  2. (2) each firm named in the policy must have the benefit of the minimum limits of indemnity as required in PRU 9.2.13 R or PRU 9.2.15 R.

Additional capital

PRU 9.2.20

See Notes

handbook-rule
If a firm seeks to have an excess which is higher than the limits in PRU 9.2.17 R (for a firm not holding client money or other client assets) or PRU 9.2.18 R (for a firm holding client money or other client assets), it must hold additional capital as calculated in PRU 9.2.21 R or PRU 9.2.22 R (as appropriate).

PRU 9.2.21

See Notes

handbook-rule
Table: Calculation of additional capital for firm not holding client money or other client assets (?000's)

PRU 9.2.22

See Notes

handbook-rule
Table: Calculation of additional capital for firm holding client money or other client assets (?000's)

PRU 9.2.23

See Notes

handbook-guidance
PRU 9.3.52 R sets out the items which are eligible to contribute to the capital resources of a firm for the purposes of PRU 9.2.20 R.

PRU 9.3

Capital resources for insurance and mortgage mediation activity and mortgage lending and administration

Application

PRU 9.3.1

See Notes

handbook-rule
  1. (1) This section applies to a firm with Part IV permission to carry on any of the activities in (2) unless any of PRU 9.3.4 R to PRU 9.3.11 R applies.
  2. (2) The activities are:
    1. (a) insurance mediation activity;
    2. (b) mortgage mediation activity;
    3. (c) entering into a regulated mortgage contract (that is, mortgage lending);
    4. (d) administering a regulated mortgage contract (that is, mortgage administration).

PRU 9.3.2

See Notes

handbook-guidance
As this section applies only to a firm with Part IV permission, it does not apply to an incoming EEA firm (unless it has a top-up permission). An incoming EEA firm includes a firm which is passporting into the United Kingdom under the IMD (see AUTH 5.4.2 G, in relation to branches, and AUTH 5.5.3 G, in relation to cross border services).

PRU 9.3.3

See Notes

handbook-guidance
The definition of insurance mediation activity refers to several activities 'in relation to a contract of insurance' which includes a contract of reinsurance. This section, therefore, applies to a reinsurance intermediary in the same way as it applies to any other insurance intermediary.

Application: banks, building societies, insurers and friendly societies

PRU 9.3.4

See Notes

handbook-rule

This section does not apply to:

  1. (1) a bank; or
  2. (2) a building society; or
  3. (3) a solo consolidated subsidiary of a bank or a building society; or
  4. (4) an insurer; or
  5. (5) a friendly society.

PRU 9.3.5

See Notes

handbook-guidance
The capital resources of firms within PRU 9.3.4 R are calculated in accordance with the appropriate IPRU.

Application: firms carrying on designated investment business only

PRU 9.3.6

See Notes

handbook-rule
This section does not apply to a firm whose Part IV permission is limited to regulated activities which are designated investment business.

PRU 9.3.7

See Notes

handbook-guidance
A firm which carries on designated investment business, and no other regulated activity, may disregard this section. For example, a firm with permission limited to dealing in investments as agent in relation to securities is only carrying on designated investment business and IPRU(INV) will apply. However, if its permission is varied to enable it to arrange motor insurance as well, this activity is not designated investment business so the firm will be subject to the higher of the requirements in this section and IPRU(INV) (see PRU 9.3.24 R).

Application: credit unions

PRU 9.3.8

See Notes

handbook-rule

This section does not apply to:

  1. (1) a 'small credit union', that is one with:
    1. (a) assets of ?5 million or less; and
    2. (b) a total number of members of 5,000 or less (see CRED 8.3.14 R); or
  2. (2) a credit union whose Part IV permission includes mortgage lending or mortgage administration (or both) and no other activities in PRU 9.3.1 R (2).

PRU 9.3.9

See Notes

handbook-guidance
  1. (1) For credit unions to which this section applies and which are not CTF providers, the capital requirements will be the higher of the requirements in this section and in CRED (see PRU 9.3.25 R).
  2. (2) For credit unions to which this section applies and which are CTF providers with permission to carry on designated investment business, the capital requirements will be the highest of the requirements in this section, those in CRED and of IPRU(INV) Chapter 8 (see PRU 9.3.25 R).

Application: professional firms

PRU 9.3.10

See Notes

handbook-rule
  1. (1) This section does not apply to an authorised professional firm:
    1. (a) whose main business is the practice of its profession; and
    2. (b) whose regulated activities in PRU 9.3.1 R (2) are incidental to its main business.
  2. (2) A firm's main business is the practice of its profession if the proportion of income it derives from professional fees is, during its annual accounting period, at least 50% of the firm's total income (a temporary variation of not more than 5% may be disregarded for this purpose).
  3. (3) Professional fees are fees, commissions and other receipts receivable in respect of legal, accountancy or actuarial services provided to clients but excluding any items receivable in respect of regulated activities.

Application: Lloyd's managing agents

PRU 9.3.11

See Notes

handbook-rule
This section does not apply to a managing agent.

PRU 9.3.12

See Notes

handbook-guidance
The reason for excluding managing agents from the provisions of this section is twofold: first, a member will have accepted full responsibility for those activities under the Society's managing agent agreement. Secondly, the member is itself subject to capital requirements which are equivalent to those applying to an insurer (to which this section is also disapplied - see PRU 9.3.4 R (4)).

Application: social housing firms

PRU 9.3.13

See Notes

handbook-guidance
There are special provisions for a social housing firm when it is carrying on mortgage lending or mortgage administration (see PRU 9.3.26 R).

Purpose

PRU 9.3.14

See Notes

handbook-guidance
This section amplifies threshold condition 4 (Adequate resources) by providing that a firm must meet, on a continuing basis, a basic solvency requirement (PRU 9.3.20 R) and a minimum capital resources requirement (PRU 9.3.21 R). This section also amplifies Principle 4 which requires a firm to maintain adequate financial resources by setting out capital requirements for a firm according to the regulated activity or activities it carries on.

PRU 9.3.15

See Notes

handbook-guidance
Capital has an important role to play in protecting consumers and complements the roles played by professional indemnity insurance (see PRU 9.2 (Professional indemnity insurance)) and client money protection (see the client money rules including, in particular, those in CASS 5 (Client money and mandates: insurance mediation activity)). Capital provides a form of protection for situations not covered by a firm's professional indemnity insurance and it provides the funds for the firm's PII excess, which it has to pay out of its own finances. The relationship between the firm's capital and its excess is set out in PRU 9.2.17 R.

PRU 9.3.16

See Notes

handbook-guidance
More generally, having adequate capital gives the firm a degree of resilience and some indication to consumers of creditworthiness, substance and the commitment of its owners. It reduces the possibility of a shortfall of funds and provides a cushion against disruption if the firm ceases to trade.

PRU 9.3.17

See Notes

handbook-guidance
There is a greater risk to consumers, and a greater adverse impact on market confidence, if a firm holding client money or other client assets fails. For this reason, the capital resources rules in this section clearly distinguish between firms holding client assets and those that do not.

Purpose: social housing firms

PRU 9.3.18

See Notes

handbook-guidance
Social housing firms undertake small amounts of mortgage business even though their main business consists of activities other than regulated activities. Their mortgage lending is only done as an adjunct to their primary purpose (usually the provision of housing) and is substantially different in character to that done by commercial lenders. Furthermore, they are subsidiaries of local authorities or registered social landlords which are already subject to separate regulation. The FSA does not consider that it would be proportionate to the risks involved with such business to impose significant capital requirements for these firms. PRU 9.3.26 R therefore simply provides that, where their Part IV permission is limited to mortgage lending and mortgage administration, their net tangible assets must be greater than zero.

PRU 9.3.19

See Notes

handbook-guidance
A registered social landlord is a non-profit organisation which provides and manages homes for rent and sale for people who might not otherwise be able to rent or buy on the open market. It can be a housing association, a housing society or a non-profit making housing company. The Housing Corporation, which was set up by Parliament in 1964, funds homes built by registered social landlords from money received from central government.

Capital resources: general rules

PRU 9.3.20

See Notes

handbook-rule
A firm must at all times ensure that it is able to meet its liabilities as they fall due.

PRU 9.3.21

See Notes

handbook-rule
A firm must at all times maintain capital resources equal to or in excess of its relevant capital resources requirement.

Capital resources: UK GAAP

PRU 9.3.22

See Notes

handbook-rule
A firm must recognise an asset or liability, and measure its amount, in accordance with the relevant UK generally accepted accounting principles unless a rule requires otherwise.

Capital resources: client assets

PRU 9.3.23

See Notes

handbook-rule
In this section, "client assets" includes a document only if it has value, or is capable of having value, in itself (such as a bearer instrument).

Capital resources requirement: firms carrying on regulated activities including designated investment business

PRU 9.3.24

See Notes

handbook-rule

The capital resources requirement for a firm (other than a credit union) carrying on regulated activities, including designated investment business, is the higher of:

  1. (1) the requirement which is applied by this section according to the activity or activities of the firm (treating the relevant rules as applying to the firm by disregarding its designated investment business); and
  2. (2) the financial resource requirement which is applied by IPRU(INV).

Capital resources requirement: credit unions

PRU 9.3.25

See Notes

handbook-rule

The capital resources requirement for a credit union to which this section applies (see PRU 9.3.8 R) is the highest of:

  1. (1) the requirement which is applied by PRU 9.3.30 R (Capital resources requirement: mediation activity only) treating that rule as applying to the credit union by disregarding activities which are not insurance mediation activity or mortgage mediation activity;
  2. (2) the amount which is applied by CRED 8 (Capital requirements); and
  3. (3) if the credit union is a CTF provider that has a permission to carry on designated investment business, the amount which is applied by IPRU(INV) Chapter 8.

Capital resources requirement: social housing firms

PRU 9.3.26

See Notes

handbook-rule

The capital resources requirement for a social housing firm whose Part IV permission is limited to carrying on the regulated activities of:

  1. (1) mortgage lender; or
  2. (2) mortgage administration (or both);

is that the firm's net tangible assets must be greater than zero.

PRU 9.3.27

See Notes

handbook-guidance
If a social housing firm is carrying on mortgage lending or mortgage administration (and no other regulated activity), its net tangible assets must be greater than zero. However, if it carries on insurance mediation activity, or mortgage mediation activity, there is no special provision and PRU 9.3.24 R or PRU 9.3.30 R applies to it as appropriate.

Capital resources requirement: application according to regulated activities

PRU 9.3.28

See Notes

handbook-rule
Unless any of PRU 9.3.24 R to PRU 9.3.26 R applies (firms carrying on designated investment business, credit unions and social housing firms), the table in PRU 9.3.29 R specifies the provisions for calculating the capital resources requirement for a firm according to the regulated activity or activities it carries on.

PRU 9.3.29

See Notes

handbook-rule
Table: Application of capital resources requirements

Capital resources requirement: mediation activity only

PRU 9.3.30

See Notes

handbook-rule
  1. (1) If a firm (carrying on the activities in row 1 of the table in PRU 9.3.29 R) does not hold client money or other client assets in relation to its insurance mediation activity or mortgage mediation activity, its capital resources requirement is the higher of:
    1. (a) ?5,000; and
    2. (b) 2.5% of the annual income (see PRU 9.3.42 R) from its insurance mediation activity or mortgage mediation activity (or both).
  2. (2) If a firm (carrying on the activities in row 1 of the table in PRU 9.3.29 R) holds client money or other client assets in relation to its insurance mediation activity or mortgage mediation activity, its capital resources requirement is the higher of:
    1. (a) ?10,000; and
    2. (b) 5% of the annual income (see PRU 9.3.42 R) from its insurance mediation activity or mortgage mediation activity (or both).

Capital resources requirement: mortgage lending and administration (but not mortgage administration only)

PRU 9.3.31

See Notes

handbook-rule
  1. (1) The capital resources requirement of a firm (carrying on the activities in row 2 of the table at PRU 9.3.29 R) is the higher of:
    1. (a) ?100,000; and
    2. (b) 1% of:
      1. (i) its total assets plus total undrawn commitments; less:
      2. (ii) loans excluded by PRU 9.3.33 R plus intangible assets (see Note 1 in the table in PRU 9.3.53 R).
  2. (2) Undrawn commitments in (1)(b)(i) means the total of those amounts which a borrower has the right to draw down from the firm but which have not yet been drawn down, excluding those under an agreement:
    1. (a) which has an original maturity of up to one year; or
    2. (b) which can be unconditionally cancelled at any time by the lender.

PRU 9.3.32

See Notes

handbook-guidance
When considering what is an undrawn commitment, the FSA takes into account an amount which a borrower has the right to draw down, but which has not yet been drawn down, whether the commitment is revocable or irrevocable, conditional or unconditional.

PRU 9.3.33

See Notes

handbook-rule

When calculating total assets for the purposes of PRU 9.3.31 R, the firm may exclude a loan which has been transferred to a third party only if it meets the following conditions:

  1. (1) the loan must have been transferred in a legally effective manner by one of the following means:
    1. (a) novation; or
    2. (b) legal or equitable assignment; or
    3. (c) sub-participation; or
    4. (d) declaration of trust; and
  2. (2) the lender:
    1. (a) retains no material economic interest in the loan; and
    2. (b) has no material exposure to losses arising from it.

PRU 9.3.34

See Notes

handbook-evidential-provisions
  1. (1) When seeking to rely on the condition in PRU 9.3.33 R (2), a firm should ensure that the loan qualifies for the 'linked presentation' accounting treatment under Financial Reporting Standard 5 (Reporting the substance of transactions) issued in April 1994, and amended in December 1994 and September 1998 (if applicable to the firm).
  2. (2) Compliance with (1) may be relied upon as tending to establish compliance with PRU 9.3.33 R (2).

PRU 9.3.35

See Notes

handbook-guidance
PRU 9.3.34 E is aimed at those firms which report according to FRS 5. Other firms which report under other standards, including International Accounting Standards, need not adopt FRS 5 in order to meet the condition in PRU 9.3.33 R (2).

PRU 9.3.36

See Notes

handbook-evidential-provisions
  1. (1) When seeking to rely on the condition in PRU 9.3.33 R (2), a firm should not provide material credit enhancement in respect of the loan unless it deducts the amount of the credit enhancement from its capital resources before meeting its capital resources requirement.
  2. (2) Credit enhancement includes:
    1. (a) any holding of subordinated loans or notes in a transferee that is a special purpose vehicle; or
    2. (b) over collateralisation by transferring loans to a larger aggregate value than the securities to be issued; or
    3. (c) any other arrangement with the transferee to cover a part of any subsequent losses arising from the transferred loan.
  3. (3) Contravention of (1) may be relied upon as tending to establish contravention of PRU 9.3.33 R (2).

Capital resources requirement: mortgage administration only

PRU 9.3.37

See Notes

handbook-rule
The capital resources requirement of a firm (carrying on the activities in row 3 of the table in PRU 9.3.29 R), which has all or part of the regulated mortgage contracts that it administers on its balance sheet, is the amount which is applied to a firm by PRU 9.3.31 R.

PRU 9.3.38

See Notes

handbook-rule

The capital resources requirement of a firm (carrying on the activities in row 3 of the table in PRU 9.3.29 R), which has all the regulated mortgage contracts that it administers off its balance sheet, is the higher of:

  1. (1) £100,000; and
  2. (2) 10% of its annual income (see PRU 9.3.42 R and PRU 9.3.48 R).

Capital resources requirement: insurance mediation activity and mortgage lending or mortgage administration

PRU 9.3.39

See Notes

handbook-rule

The capital resources requirement for a firm (carrying on the activities in row 4 of the table in PRU 9.3.29 R) is the sum of the requirements which are applied to the firm by:

  1. (1) PRU 9.3.30 R; and
  2. (2)
    1. (a) PRU 9.3.31 R; or
    2. (b) if, in addition to its insurance mediation activity, the firm carries on only mortgage administration and has all the assets that it administers off balance sheet, PRU 9.3.38 R.

Capital resources requirement: mortgage mediation activity and mortgage lending or mortgage administration

PRU 9.3.40

See Notes

handbook-rule
  1. (1) If a firm (carrying on the activities in row 5 of the table in PRU 9.3.29 R) does not hold client money or other client assets in relation to its mortgage mediation activity, the capital requirement is the amount applied to a firm, according to the activities carried on by the firm, by:
    1. (a) PRU 9.3.31 R; or
    2. (b) if, in addition to its mortgage mediation activity, the firm carries on only mortgage administration and has all the assets that it administers off balance sheet, PRU 9.3.38 R.
  2. (2) If a firm (carrying on the activities in row 5 of the table in PRU 9.3.29 R) holds client money or other client assets in relation to its mortgage mediation activity, the capital resources requirement is:
    1. (a) the amount calculated under (1); plus
    2. (b) the amount which is applied to a firm by PRU 9.3.30 R (2).

Capital resources requirement: other combinations of activities

PRU 9.3.41

See Notes

handbook-rule
The capital resources requirement for a firm (carrying on the activities in row 6 of the table in PRU 9.3.29 R) is the amount which is applied to a firm by PRU 9.3.39 R.

Annual income

PRU 9.3.42

See Notes

handbook-rule

PRU 9.3.43 R to PRU 9.3.50 R contain provisions relating to the calculation of annual income for the purposes of:

  1. (1) PRU 9.2.13 R (2), PRU 9.2.15 R, PRU 9.2.17 R (2) and PRU 9.2.18 R (2) (all concerning the limits of indemnity for professional indemnity insurance); and
  2. (2) PRU 9.3.30 R (1)(b) and PRU 9.3.30 R (2)(b), and PRU 9.3.38 R (2).

PRU 9.3.43

See Notes

handbook-rule
'Annual income' is the annual income given in the firm's most recent annual financial statement from the relevant regulated activity or activities.

PRU 9.3.44

See Notes

handbook-rule
For a firm which carries on insurance mediation activity or mortgage mediation activity, annual income in PRU 9.3.43 R is the amount of all brokerage, fees, commissions and other related income (for example, administration charges, overriders, profit shares) due to the firm in respect of or in relation to those activities.

PRU 9.3.45

See Notes

handbook-guidance
The purpose of PRU 9.3.44 R is to ensure that the capital resources requirement is calculated on the basis only of brokerage and other amounts earned by a firm which are its own income.

PRU 9.3.46

See Notes

handbook-rule
If a firm is a principal, its annual income includes amounts due to its appointed representative in respect of activities for which the firm has accepted responsibility.

PRU 9.3.47

See Notes

handbook-guidance
If a firm is a network, it should include the relevant income due to all of its appointed representatives in its annual income.

Annual income for mortgage administration

PRU 9.3.48

See Notes

handbook-rule

For the purposes of PRU 9.3.38 R (2) (Mortgage administration only) annual income is the sum of:

  1. (1) revenue (that is, commissions, fees, net interest income, dividends, royalties and rent); and
  2. (2) gains;
  3. (3) arising in the course of the ordinary activities of the firm, less profit:
    1. (a) on the sale or termination of an operation;
    2. (b) arising from a fundamental reorganisation or restructuring having a material effect on the nature and focus of the firm's operation; and
    3. (c) on the disposal of fixed assets, including investments held in a long-term portfolio.

Annual income: periods of less than 12 months

PRU 9.3.49

See Notes

handbook-rule
If the firm's most recent annual financial statement does not cover a 12 month period, the annual income is taken to be the amount in the statement converted, proportionally, to a 12 month period.

Annual income: no financial statement

PRU 9.3.50

See Notes

handbook-rule
If the firm does not have an annual financial statement, the annual income is to be taken from the forecast or other appropriate accounts which the firm has submitted to the FSA.

The calculation of a firm's capital resources

PRU 9.3.51

See Notes

handbook-rule
  1. (1) A firm must calculate its capital resources only from the items in PRU 9.3.52 R from which it must deduct the items in PRU 9.3.53 R.
  2. (2) If the firm is subject to IPRU(INV) or CRED, the capital resources are the higher of:
    1. (a) the amount calculated under (1); and
    2. (b) the financial resources calculated under IPRU(INV) or the capital calculated under CRED 8 (Capital requirements).

PRU 9.3.52

See Notes

handbook-rule
Table: Items which are eligible to contribute to the capital resources of a firm

PRU 9.3.53

See Notes

handbook-rule
Table: Items which must be deducted from capital resources

Personal assets

PRU 9.3.54

See Notes

handbook-rule

In 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 requirements of PRU 9.3.20 R or PRU 9.3.21 R, or both, to the extent necessary to make up any shortfall in meeting those requirements, 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 FSA; or
  2. (2) the firm holds client money or other client assets.

PRU 9.3.55

See Notes

handbook-guidance
The purpose of PRU 9.3.54 R is to enable a sole trader or a partner to use any personal assets, including property, to meet the capital requirements of this section, but only to the extent necessary to make up a shortfall. The requirements are the solvency requirement (PRU 9.3.20 R) and the capital resources requirement (PRU 9.3.21 R).

Subordinated loans

PRU 9.3.56

See Notes

handbook-rule

In row 7 in the table at PRU 9.3.52 R, subordinated debt must not form part of the capital resources of the firm unless it meets the following conditions:

  1. (1) (for a firm which carries on insurance mediation activity or mortgage mediation activity (or both) but not mortgage lending or mortgage administration) it has an original maturity of:
    1. (a) at least two years; or
    2. (b) it is subject to two years' notice of repayment;
  2. (2) (for all other firms) it has an original maturity of:
    1. (a) at least five years; or
    2. (b) it is subject to five years' notice of repayment;
  3. (3) the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;
  4. (4) 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;
  5. (5) the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated 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;
  6. (6) the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with (4);
  7. (7) the agreement and the debt are governed by the law of England and Wales, or of Scotland or of Northern Ireland;
  8. (8) 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;
  9. (9) the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the conditions set out in (1) to (8); and
  10. (10) the debt must be unsecured and fully paid up.

PRU 9.3.57

See Notes

handbook-rule
  1. (1) This rule applies to a firm which:
    1. (a) carries on:
      1. (i) insurance mediation activity; or
      2. (ii) mortgage mediation activity (or both); and
    2. (b) in relation to those activities, holds client money or other client assets;
  2. but is not carrying on mortgage lending or mortgage administration.
  3. (2) In calculating its capital resources under PRU 9.3.51 R (1), the firm must exclude any amount by which the aggregate amount of its subordinated loans and its redeemable preference shares exceeds the amount calculated under (3).
  4. (3) The calculation for (2) is:

four times (a - b - c);
where
a = items 1 to 5 in the Table at PRU 9.3.52 R
b = the firm's redeemable preference shares; and
c = the amount of its intangible assets (but not goodwill until 14 January 2008 - see transitional provision 2).

PRU 9.3.58

See Notes

handbook-guidance
If a firm wishes to see an example of a subordinated loan agreement which would meet the conditions in PRU 9.3.56 R, it should refer to the Forms page.

PRU 9.4

Insurance undertakings and mortgage lenders using insurance or mortgage mediation services

Application

PRU 9.4.1

See Notes

handbook-rule

This section applies to a firm with a Part IV permission to carry on:

  1. (1) insurance business; or
  2. (2) mortgage lending;
  3. (3) and which uses, or proposes to use, the services of another person consisting of:
    1. (a) insurance mediation; or
    2. (b) insurance mediation activity; or
    3. (c) mortgage mediation activity.

Purpose

PRU 9.4.2

See Notes

handbook-guidance
The purpose of PRU 9.4 is to implement article 3.6 of the Insurance Mediation Directive in relation to insurance undertakings. The provisions of this section have been extended to mortgage lenders in relation to insurance mediation activity, and to insurance undertakings and mortgage lenders in relation to mortgage mediation activity, to ensure that firms using these services are treated in the same way and to ensure that clients have the same protection. To avoid the loss of protection where an intermediary itself uses the services of an unauthorised person, PRU 9.4.4 R has the effect of ensuring that each person in the chain of those providing services is authorised.

PRU 9.4.3

See Notes

handbook-guidance
PRU 9.4 supports the more general duties in Principles 2 and 3, and SYSC 3.1.1 R.

Use of intermediaries

PRU 9.4.4

See Notes

handbook-rule

A firm must not use, or propose to use, the services of another person consisting of:

unless the conditions in PRU 9.4.5 R and PRU 9.4.7 R are satisfied.

PRU 9.4.5

See Notes

handbook-rule

The first condition in PRU 9.4.4 R is that the person, in relation to the activity:

  1. (1) has permission; or
  2. (2) is an exempt person; or
  3. (3) is an exempt professional firm; or
  4. (4) is registered in another EEA State for the purposes of the IMD; or
  5. (5) in relation to insurance mediation activity, is not carrying this activity on in the EEA; or
  6. (6) in relation to mortgage mediation activity, is not carrying this activity on in the United Kingdom.

PRU 9.4.6

See Notes

handbook-evidential-provisions
  1. (1) A firm should:
    1. (a) before using the services of the intermediary, check:
      1. (i) the FSA Register; or
      2. (ii) in relation to insurance mediation carried on by an EEA firm, the register of its Home State regulator;
    2. for the status of the person; and
    3. (b) use the services of that person only if the relevant register indicates that the person is registered for that purpose.
  2. (2)
    1. (a) Compliance with (1)(a)(i) and (b) may be relied on as tending to establish compliance with:
      1. (i) PRU 9.4.5 R (1); or
      2. (ii) in relation to insurance mediation activity, also PRU 9.4.5 R (2) and PRU 9.4.5R (3).
    2. (b) Compliance with (1)(a)(ii) and (b) may be relied on as tending to establish compliance with PRU 9.4.5 R (4).

PRU 9.4.7

See Notes

handbook-rule
The second condition in PRU 9.4.4 R is that the firm takes all reasonable steps to ensure that the person in PRU 9.4.5 R in relation to the activity, is not, directly or indirectly, carrying out the activity as a consequence of the activities of another person whichcontravene section 19 of the Act (The general prohibition).

PRU 9.4.8

See Notes

handbook-rule

In order to comply with PRU 9.4.7 R, a firm may rely on a confirmation provided by the other person in writing if:

  1. (1) the confirmation is provided by a person within PRU 9.4.5 R;
  2. (2) the firm checked that this is the case; and
  3. (3) the firm is not aware that the confirmation is inaccurate and has no grounds for reasonably being aware that the confirmation is inaccurate.

PRU 9.4.9

See Notes

handbook-guidance
The FSA Register can be accessed through the FSA website under the link www.fsa.gov.uk/register.

PRU 9 Annex 1

Example of the application of PRU 9.1.3 R, PRU 9.1.4 R, PRU 9.1.8 R and PRU 9.1.10 R

See Notes

handbook-guidance

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Transitional Provisions and Schedules

PRU TP 1

Transitional Provisions

PRU TP 1.1

Transitional Provisions

PRU Sch 2

Notification requirements

PRU Sch 2.1

See Notes

handbook-guidance
There are no notification requirements in PRU 1 or PRU 8. This Schedule does not cover any other chapter of PRU.1 The aim of the guidance in the following table is to give the reader a quick overall view of the relevant notification requirements.

See Notes

handbook-guidance
2 It is not a complete statement of those requirements and should not be relied on as if it were.

See Notes

handbook-guidance
3 Table

See Notes

handbook-guidance

PRU Sch 5

Rights of action for damages

Rights of action for damages

PRU Sch 5.1

See Notes

handbook-guidance

PRU Sch 5.2

See Notes

handbook-guidance

PRU Sch 5.3

See Notes

handbook-guidance

PRU Sch 5.4

See Notes

handbook-guidance

Export chapter as