Capital Adequacy Requirements

We have received some queries from clients following the clarification by the FCA of the New Capital Adequacy requirement for PIFs coming into force on 30 June 2016. The FCA’s Policy Statement can be accessed here.

The following should help clarify what the changes mean to you. Since the majority of investment firms affected by the changes are classed as ‘B3’ that don’t hold client money under the MIPRU rules, the short example below is focussed on them.

Initially you need to calculate 5% of annual income* generated from your investment business.

(* Annual Income from investment business is income derived from designated investment business. See the definitions here).

For firms also subject to the MIPRU (Mortgage and Insurance Intermediary Prudential) rules, you then need to add 2.5% to your home finance and non-investment insurance income.

Remember however, that from 30/06/2016, the minimum requirement is £15,000 (rising to £20,000 from 30/06/2017). Therefore, if the total calculated is less than £15,000, then your base capital adequacy figure is £15,000 (£20,000 from 30/06/2017).

The FCA has provided a useful calculator to give you an idea what your base requirement is likely to be. However please remember to add any additional requirements you may need to hold because of a non-compliant PI policy excess, or for exclusions written into your PI policy. The calculator can be located here.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Firms need to have a clear understanding of the new prudential requirements and ensure that they can be demonstrated at all times.

Action Required By You

  • It is absolutely vital that you understand the requirements;
  • The example quoted is for B3 firms not holding client money so you will need to tailor the calculation to your firm’s profile;
  • Key your figures into the calculator; and
  • Add any additional figures for PI exclusions and excesses to the output;
  • Ensure you meet, or have plans to meet the new requirements at all times.

About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

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