COND Threshold Conditions

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COND 1

Introduction

COND 1.1

Application

  • 01/12/2004

Who?

COND 1.1.1

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COND applies to every firm, except that:

  1. (1) for an incoming EEA firm or an incoming Treaty firm only threshold conditions 1, 3, 4 and 5 apply and only in so far as relevant to:
    1. (a) an application for a top-up permission under Part IV of the Act (that is, permission to carry on regulated activities in addition to those permitted through the incoming firm's authorisation under Schedule 3 (EEA Passport Rights) or 4 (Treaty Rights) to the Act); and
    2. (b) the exercise of the FSA's own-initiative power under section 45 of the Act (Variation etc on the FSA's own initiative) in relation to the top-up permission;
  2. (2) COND also applies to an applicant for Part IV permission;
  3. (3) threshold conditions 3, 4 and 5 do not apply to a Swiss General Insurance Company;
  4. (4) COND 2.6 (Additional conditions) is only relevant to non-EEA insurers; and
  5. (5) COND 3.1 is only relevant to firms falling within the scope of the Banking Act 2009 (see COND 3.1.1 G).

COND 1.1.2

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In COND, 'firm' includes an applicant for Part IV permission unless the context otherwise requires.
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What?

COND 1.1.3

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COND applies in relation to all of the regulated activities for which a firm has, or will have, permission, except as stated in COND 1.1.1 G (1).
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Where?

COND 1.1.4

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COND applies in relation to all of the regulated activities wherever they are carried on, except as stated in COND 1.1.1 G (1).
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COND 1.2

Purpose

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COND 1.2.1

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COND gives guidance on the threshold conditions set out in or under Schedule 6 to the Act (Threshold conditions). The threshold conditions represent the minimum conditions which a firm is required to satisfy, and continue to satisfy, in order to be given and to retain Part IV permission.

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Applications for Part IV permission or variation of Part IV permission

COND 1.2.2

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  1. (1) Under section 41(2) of the Act (The threshold conditions), in giving or varying a Part IV permission or imposing or varying any requirement, the FSA must ensure that the firm concerned will satisfy, and continue to satisfy, the threshold conditions in relation to all of the regulated activities for which it has or will have permission.
  2. (2) If, however, the applicant for permission is an incoming firm seeking top-up permission, or variation of top-up permission, under Part IV of the Act (Permission to carry on regulated activities), then under paragraphs 6 and 7 of Schedule 6 to the Act, the FSA will have regard only to satisfaction of threshold conditions 1, 3, 4 and 5, as relevant to the regulated activities for which the applicant has, or will have, Part IV permission.
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Exercise of the FSA's own-initiative power

COND 1.2.3

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  1. (1) If, among other things, a firm is failing to satisfy any of the threshold conditions, or is likely to fail to do so, section 45 of the Act (Variation etc. on the FSA's own initiative) states that the FSA may exercise its own-initiative power . Use of the FSA's own-initiative power is explained in SUP 7 (Individual requirements), and EG 8 (Variation and cancellation of permission on the FSA's own initiative and intervention against incoming firms).
  2. (2) If, when exercising its own-initiative power under section 45(1) of the Act, the FSA varies a firm's permission, or imposes or varies a requirement, then, under section 41(2) of the Act, the FSA must ensure that the firm concerned will satisfy, and continue to satisfy, the threshold conditions in relation to all of the regulated activities for which it has or will have permission. However, section 41(3) of the Act states that the duty imposed by section 41(2) of the Act does not prevent the FSA taking such steps as it considers necessary in relation to a particular firm in order to secure its regulatory objective of consumer protection.
  3. (3) The FSA can also exercise its own-initiative power under section 45 of the Act in relation to the top-up permission of an incoming firm. But this is only on the grounds that the incoming firm is failing, or likely to fail, to satisfy threshold conditions 1, 3, 4 or 5 in relation to that permission.

Approval of acquisitions or increases of control

COND 1.2.4

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  1. (1) Under section 186(3) of the Act (Objection to acquisition of control), in deciding whether the approval requirements for a proposed acquisition or increase of control are satisfied, the FSA must have regard, in relation to the control that the acquirer:
    1. (a) has over the firm; or
    2. (b) will have over the firm if the proposal which has been notified to the FSA is carried out;
  2. to its general duty to ensure that the firm will continue to satisfy the threshold conditions.
  3. (2) The FSA must also have regard to the threshold conditions in imposing any conditions on its approval of an acquisition or increase of control (section 185(2) of the Act (Conditions attached to approval)). See SUP 11.7.3 G (Acquisition or increase of control: procedures).
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COND 1.3

General

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An overview of the threshold conditions is given in COND 1 Annex 1 G.

COND 1.3.1

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The guidance in COND 2 explains each threshold condition in Part I of Schedule 6 (threshold conditions) to the Act and how the FSA will interpret it in practice. An overview of the threshold conditions is given in COND 1 Annex 1 G. This guidance is not, however, exhaustive and is written in very general terms. A firm will need to have regard to the obligation placed upon the FSA under section 41 (the threshold conditions) of the Act; that is, the FSA must ensure that the firm will satisfy, and continue to satisfy, the threshold conditions in relation to each regulated activity for which it has, or will have, permission.
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COND 1.3.2

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  1. (1) The FSA will consider whether a firm satisfies, and will continue to satisfy, the threshold conditions in the context of the size, nature, scale and complexity of the business which the firm carries on or will carry on if the relevant application is granted.
  2. (2) In relation to threshold conditions 4 and 5, the FSA will consider whether a firm is ready, willing and organised to comply, on a continuing basis, with the requirements and standards under the regulatory system which apply to the firm, or will apply to the firm, if it is granted Part IV permission , or a variation of its permission. These matters will also be considered if the FSA is exercising its own-initiative power (see COND 1.2.3 G). Guidance to firms on the implications of this is given under each of those threshold conditions.
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COND 1.3.3

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Although the FSA may consider that a matter is relevant to its assessment of a firm, the fact that a matter is disclosed to the FSA , for example in an application, does not necessarily mean that the firm will fail to satisfy the threshold conditions. The FSA will consider each matter in relation to the regulated activities for which the firm has, or will have, permission, having regard to the regulatory objectives set out in section 2 of the Act (The FSA's general duties). A firm should disclose each relevant matter but, if it is appropriate to do so, it is encouraged to discuss it with the FSA . This will enable the FSA to consider fully how material or significant the matter is and how it affects the ability of the firm to satisfy, and continue to satisfy, the threshold conditions (see also COND 2.3.5 G, COND 2.4.4 G (3) and COND 2.5.4 G (3)).
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Statutory quotations

COND 1.3.4

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  1. (1) For ease of reference, the threshold conditions in or under Schedule 6 to the Act have been quoted in full in COND 2.
  2. (2) As these provisions impose obligations, they are printed in bold type. The use of bold type is not intended to indicate that these quotations are rules made by the FSA .
  3. (3) Where words have been substituted for the text of these provisions the substitutions are enclosed in square brackets ([ ]). However, none of the changes made by the FSA in these quotations for the purpose of the text in COND can supersede or alter the meaning of the statutory provision concerned.
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COND 1 Annex 1

Introduction

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COND 1 Annex 2

Overview of the threshold conditions (COND 1.3.1 G) applicable to Non-EEA Insurers

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Export chapter as

COND 2

The threshold conditions

COND 2.1

Threshold condition 1: Legal status

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COND 2.1.1

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Paragraph 1, Schedule 6 to the Act

COND 2.1.2

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Section 40(1) of the Act (Application for permission) allows an application to be made to the FSA for Part IV permission by an individual, a body corporate, a partnership or an unincorporated association. However, in the case of the regulated activities of accepting deposits and effecting or carrying out contracts of insurance, the Banking Consolidation Directive, the First Non-Life Directive and the Consolidated Life Directive place further limits on the legal forms a firm may take. The Act implements the provisions of the directives and extends some of these limits to firms that are outside the scope of the directives.

COND 2.1.3

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The words "or issuing electronic money" in paragraph 1(2) of Schedule 6 to the Act were added by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 with effect from 27 April 2002.
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COND 2.2

Threshold condition 2: Location of offices

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COND 2.2.1

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Paragraph 2, Schedule 6 to the Act.

COND 2.2.2

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Threshold condition 2(1) and (2) (Location of offices), implement the requirements of article 6 of the Post BCCI Directive and article 5(4) of MiFID and threshold condition 2(3) and (4) implements article 2.9 of the Insurance Mediation Directive, although the Act extends threshold condition 2 to firms which are outside the scope of the Single Market Directives and the UCITS Directive.

COND 2.2.3

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Neither the Post BCCI Directive , MiFID, the Insurance Mediation Directive nor the Act define what is meant by a firm's 'head office'. This is not necessarily the firm's place of incorporation or the place where its business is wholly or mainly carried on. Although the FSA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of:

  1. (1) the directors and other senior management, who make decisions relating to the firm's central direction, and the material management decisions of the firm on a day-to-day basis; and
  2. (2) the central administrative functions of the firm (for example, central compliance, internal audit).

COND 2.2A

Threshold condition 2A: Appointment of claims representatives

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COND 2.2A.1

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Paragraph 2A, Schedule 6 to the Act

COND 2.2A.2

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Threshold condition 2A (Appointment of claims representatives), provides that if it appears to the FSA that any person is seeking to carry on, or carrying on, motor vehicle liability insurance business, that person must have a claims representative in each EEA State other than the United Kingdom.

COND 2.2A.3

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Rules and guidance concerning a motor vehicle liability insurer's obligations in relation to the appointment of its claims representatives, and the responsibilities and duties that the motor vehicle liability insurer must give to, or impose on, its claims representatives are set out in ICOBS 8.4.

COND 2.3

Threshold condition 3: Close links

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COND 2.3.1

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Paragraph 3, Schedule 6 to the Act.

COND 2.3.2

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Threshold condition 3 (Close links) implements requirements of the Post BCCI Directive, but the Act extends this condition to firms from outside the EEA and other firms which are outside the scope of the Single Market Directives and the UCITS Directive.
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COND 2.3.3

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In assessing this threshold condition, factors which the FSA will take into consideration include, among other things, whether:

  1. (1) it is likely that the FSA will receive adequate information from the firm, and those persons with whom the firm has close links, to enable it to determine whether the firm is complying with the requirements and standards under the regulatory system and to identify and assess the impact on the regulatory objectives in section 2 of the Act (The FSA's general duties); this will include consideration of whether the firm is ready, willing and organised to comply with Principle 11 (Relations with regulators and the rules in SUP on the provision of information to the FSA;
  2. (2) the structure and geographical spread of the firm, the group to which it belongs and other persons with whom the firm has close links, might hinder the provision of adequate and reliable flows of information to the FSA; factors which may hinder these flows include the fact there may be branches or connected companies in territories which supervise companies to a different standard or territories with laws which restrict the free flow of information, although the FSA will consider the totality of information available from all sources;
  3. (3) the firm and the group to which it belongs are, or will be, subject to supervision on a consolidated basis (consolidated supervision) (for example, if a financial resources requirement is determined for the group as a whole); and
  4. (4) it is possible to assess with confidence the overall financial position of the group at any particular time; factors which may make this difficult include lack of audited consolidated accounts for a group, if companies in the same group as the firm have different financial years and accounting dates and if they do not share common auditors.

COND 2.3.4

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When assessing whether the firm will satisfy and continue to satisfy this threshold condition, the FSA will have regard to all relevant matters, whether arising in the United Kingdom or elsewhere.
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COND 2.3.5

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The FSA will take into account relevant matters only in so far as they are significant (see COND 1.3.3 G). In determining the weight to be given to any relevant matter, the FSA will consider its significance in the context of its ability to supervise the firm adequately, having regard to the regulatory objectives in section 2 of the Act. In this context, a series of matters may be significant when taken together, even though each of them in isolation might not give serious cause for concern.
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Meaning of "parent undertaking" and "subsidiary undertaking"

COND 2.3.6

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  1. (1) Section 420(1) of the Act (Parent and subsidiary undertaking) states that, except in relation to an incorporated friendly society, 'parent undertaking' and 'subsidiary undertaking' have the same meaning as in the Companies Acts (see section 1162 of, and schedule 7 to, the Companies Act 2006). These are the cases referred to in COND 2.3.7 G (1)(a) to (f).
  2. (2) Section 420(2) of the Act supplements these definitions in two ways; these are the cases referred to in COND 2.3.7 G (1)(g) and (h).
  3. (3) Paragraph 3(3)of Schedule 6 to the Act extends the meaning of 'subsidiary undertaking' for the purposes of threshold condition 3 (Close links) to all the cases in articles 1(1) and (2) of the Seventh Company Law Directive in which one undertaking may be a subsidiary of another undertaking (see COND 2.3.11 G).

COND 2.3.7

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  1. (1) For the purposes of threshold condition 3 (Close links) and except in relation to an incorporated friendly society, an undertaking is a parent undertaking of another undertaking (a subsidiary undertaking) if any of the following apply to it:
    1. (a) it holds a majority of the voting rights in the subsidiary undertaking; or
    2. (b) it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of its board of directors; or
    3. (c) it has the right to exercise a dominant influence over the subsidiary undertaking through:
      1. (i) provisions contained in the subsidiary undertaking's memorandum or articles; or
      2. (ii) a control contract; or
    4. (d) it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in the subsidiary undertaking; or
    5. (e) it has the power to exercise, or actually exercises, dominant influence or control over it, or it and the subsidiary undertaking are managed on a unified basis; or
    6. (f) it is a parent undertaking of a parent undertaking of the subsidiary undertaking; or
    7. (g) it is an individual and would be a parent undertaking if it were an undertaking; or
    8. (h) it is incorporated in or formed under the law of another EEA State and is a parent undertaking within the meaning of any rule of law in that State for purposes connected with implementation of the Seventh Company Law Directive.
  2. (2) A flowchart of COND 2.3.7 G (1) is set out in COND 2 Annex 1.

COND 2.3.8

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  1. (1) In relation to COND 2.3.7 G (1)(b) and (d), an undertaking is treated as a member of another undertaking if any of its subsidiary undertaking is a member of that undertaking, or if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings.
  2. (2) [deleted]
  3. (3) [deleted]

COND 2.3.9

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The provisions of Schedule 7 to the Companies Act 2006 (Parent and subsidiary undertakings: supplementary provisions) explain and supplement the provisions of section 1162 of the Companies Act 2006 (outlined in COND 2.3.7 G (1)(a) to (f)).

COND 2.3.10

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Section 420(3) of the Act (Parent and subsidiary undertaking) (supplemented by paragraph 3(3) of Schedule 6 to the Act) states that an incorporated friendly society is a parent undertaking of another body corporate (a subsidiary undertaking) if it has the following relationship to it:

  1. (1) it holds a majority of the voting rights in the subsidiary undertaking; or
  2. (2) it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of the subsidiary undertaking's board of directors; or
  3. (3) it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in it.
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COND 2.3.11

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For the purposes of this threshold condition 3 (Close links), an undertaking is a subsidiary undertaking of another undertaking if:

  1. (1) the other undertaking (its parent) is a member of the undertaking;
  2. (2) a majority of the undertaking's board of directors who have held office during the financial year and during the preceding financial year have been appointed solely as a result of the exercise of the parent's voting rights; and
  3. (3) no one else is the parent undertaking of the undertaking under COND 2.3.7 G (1)(a) or COND 2.3.10 G (1).
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COND 2.3.11A

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Paragraphs 3(2)(e) to (f)of Schedule 6 to the Act reflect legislation initially introduced in the Post-BCCI Directive, which defines close links, in part, by reference to participation. Recital 5 of the Post-BCCI Directive gives further guidance on what is meant by 'participation' for the purposes of the directive. It states that the sole fact of having acquired a significant proportion of a company's capital does not constitute participation for the purposes of the directive if that holding has been acquired solely as a temporary investment which does not make it possible to exercise influence over the structure or financial policy of the undertaking.
  • 01/06/2010

COND 2.3.12

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The guidance in COND 2.3 is not comprehensive and is not a substitute for consulting the relevant legislation, for example the Companies Act 2006, the Friendly Societies Act 1992 and the Seventh Company Law Directive, or obtaining appropriate professional advice.

COND 2.4

Threshold condition 4: Adequate resources

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COND 2.4.1

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Paragraph 4, Schedule 6 to the Act

COND 2.4.2

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  1. (1) Threshold condition 4 (Adequate resources), requires the FSA to ensure that a firm has adequate resources in relation to the specific regulated activity or regulated activities which it seeks to carry on, or carries on.
  2. (2) In this context, the FSA will interpret the term 'adequate' as meaning sufficient in terms of quantity, quality and availability, and 'resources' as including all financial resources, non-financial resources and means of managing its resources; for example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.
  3. (3) High level systems and control requirements are in SYSC. Detailed financial resources and systems requirements are in the relevant section of the Prudential Standards part of the Handbook , including specific provisions for particular types of regulated activity. The FSA will consider whether the firm is ready, willing and organised to comply with these requirements when assessing if it has adequate resources for the purposes of this threshold condition.

COND 2.4.3

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  1. (1) When assessing this threshold condition, the FSA may have regard to any person appearing to it to be, or likely to be, in a relevant relationship with the firm, in accordance with section 49 of the Act (Persons connected with an applicant); for example, a firm's controllers, its directors or partners, other persons with close links to the firm (see COND 2.3), and other persons that exert influence on the firm which might pose a risk to the firm's satisfaction of the threshold conditions and would, therefore, be in a relevant relationship with the firm.
  2. (2) In particular, although it is the firm that is being assessed, the FSA may take into consideration the impact of other members of the firm's group on the adequacy of its resources. For example, the FSA may assess the consolidated solvency of the group. The FSA's approach to the consolidated supervision of a firm and its group, is in the relevant part of the Prudential Standards part of the Handbook.

COND 2.4.4

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  1. (1) When assessing whether a firm will satisfy and continue to satisfy threshold condition 4, the FSA will have regard to all relevant matters, whether arising in the United Kingdom or elsewhere.
  2. (2) Relevant matters may include but are not limited to:
    1. (a) whether there are any indications that the firm may have difficulties if the application is granted (see COND 2.4.6 G), at the time of the grant or in the future, in complying with any of the FSA's prudential rules (see the relevant part of the Prudential Standards part of the Handbook );
    2. (b) whether there are any indications that the firm will not be able to meet its debts as they fall due;
    3. (c) whether there are any implications for the adequacy of the firm's resources arising from the history of the firm; for example, whether the firm has:
      1. (i) been adjudged bankrupt; or
      2. (ii) entered into liquidation; or
      3. (iii) been the subject of a receiving or administration order; or
      4. (iv) had a bankruptcy or winding-up petition served on it; or
      5. (v) had its estate sequestrated; or
      6. (vi) entered into a deed of arrangement or an individual voluntary agreement (or in Scotland, a trust deed) or other composition in favour of its creditors, or is doing so; or
      7. (vii) within the last ten years, failed to satisfy a judgment debt under a court order, whether in the United Kingdom or elsewhere;
    4. (d) whether the firm has taken reasonable steps to identify and measure any risks of regulatory concern that it may encounter in conducting its business (see COND 2.4.6 G) and has installed appropriate systems and controls and appointed appropriate human resources to measure them prudently at all times.; see SYSC 3.1 (Systems and Controls), SYSC 3.2 (Areas covered by systems and controls) and SYSC 4.1.1 R (Organisational requirements); and
    5. (e) whether the firm has conducted enquiries into the financial services sector in which it intends to conduct business (see COND 2.4.6 G) that are sufficient to satisfy itself that:
      1. (i) it has access to adequate capital, by reference to the FSA's prudential requirements, to support the business including any losses which may be expected during its start-up period; and
      2. (ii) Client money, deposits, custody assets and policyholders' rights will not be placed at risk if the business fails.
  3. (3) In the context of threshold condition 4 (Adequate resources), the FSA will only take into account relevant matters which are material (see COND 1.3.3 G). The FSA will consider the materiality of each relevant matter in relation to the regulated activities for which the firm has, or will have, permission, having regard to the regulatory objectives in section 2 of the Act (The FSA's general duties). It should be noted that a series of matters may be significant when taken together, even if each of them in isolation might not be significant.
  4. (4) In making its assessment, the FSA will consider the individual circumstances of each firm on a case-by-case basis.

COND 2.4.5

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In complying with SYSC (Systems and controls), a firm should plan its business appropriately so that it is able to identify, measure and manage the likely risks of regulatory concern it will face (SYSC 3.2.17 G (Business strategy) and SYSC 7 (Risk Control)).

COND 2.4.6

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  1. (1) Any newly-formed firm can be susceptible to early difficulties. These difficulties could arise from a lack of relevant expertise and judgment, or from ill-constructed and insufficiently tested business strategies. A firm may also be susceptible to difficulties where it substantially changes its business activities.
  2. (2) As a result, the FSA would expect a firm which is applying for Part IV permission, or a substantial variation of that permission, to take adequate steps to satisfy itself and, if relevant, the FSA that:
    1. (a) it has a well constructed business plan or strategy plan for its product or service which demonstrates that it is ready, willing and organised to comply with the relevant requirements in the Prudential Standards part of the Handbook and SYSC that apply to the regulated activity it is seeking to carry on;
    2. (b) its business plan or strategy plan has been sufficiently tested; and
    3. (c) the financial and other resources of the firm are commensurate with the likely risks it will face.
  3. (3) The FSA would expect the level of detail in a firm's business plan or strategy plan in (2) to be appropriate to the complexity of the firm's proposed regulated activities and unregulated activities and the risks of regulatory concern it is likely to face (see SYSC 3.2.11 G (Management information) and SYSC 7 (Risk control). Notes on the contents of a business plan are given in the business plan section of the application pack for Part IV permission. A firm requiring specific guidance on the contents and level of detail of its business plan should contact the Firm Contact Centre (020 7066 3954), or, if relevant, its usual supervisory contact at the FSA, or seek professional assistance.

COND 2.5

Threshold condition 5: Suitability

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COND 2.5.1

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Paragraph 5, Schedule 6 to the Act

COND 2.5.2

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  1. (1) Threshold condition 5 (Suitability), requires the firm to satisfy the FSA that it is 'fit and proper' to have Part IV permission having regard to all the circumstances, including its connections with other persons, the range and nature of its proposed (or current) regulated activities and the overall need to be satisfied that its affairs are and will be conducted soundly and prudently (see also PRIN and SYSC).
  2. (2) The FSA will also take into consideration anything that could influence a firm's continuing ability to satisfy this threshold condition. Examples include the firm's position within a UK or international group, information provided by overseas regulators about the firm, and the firm's plans to seek to vary its Part IV permission to carry on additional regulated activities once it has been granted that permission by the FSA.
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COND 2.5.3

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  1. (1) The emphasis of this threshold condition is on the suitability of the firm itself. The suitability of each person who performs a controlled function will be assessed by the FSA under the approved persons regime (see SUP 10 (Approved persons) and FIT). In certain circumstances, however, the FSA may consider that the firm is not suitable because of doubts over the individual or collective suitability of persons connected with the firm.
  2. (2) When assessing this threshold condition in relation to a firm, the FSA may have regard to any person appearing to it to be, or likely to be, in a relevant relationship with the firm, as permitted by section 49 of the Act (Persons connected with an applicant) (see COND 2.4.3 G).
  3. (3) In relation to a firm which is an EEA regulated entity, the Financial Groups Directive provides that the FSA should consult other competent authorities when assessing the suitability of the shareholders and the reputation and experience of directors involved in the management of another entity in the same group.

COND 2.5.4

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  1. (1) When determining whether the firm will satisfy and continue to satisfy threshold condition 5, the FSA will have regard to all relevant matters, whether arising in the United Kingdom or elsewhere.
  2. (2) Relevant matters include, but are not limited to, whether a firm:
    1. (a) conducts, or will conduct, its business with integrity and in compliance with proper standards;
    2. (b) has, or will have, a competent and prudent management; and
    3. (c) can demonstrate that it conducts, or will conduct, its affairs with the exercise of due skill, care and diligence.
  3. (3) The FSA will take into account relevant matters only to the extent that they are significant (see COND 1.3.3 G). In determining whether relevant matters are significant to the firm, the FSA will consider significance in the context of the suitability of the firm, having regard to the regulatory objectives in section 2 of the Act (The FSA's general duties); a series of matters may be significant when taken together, even if each of them in isolation may not be significant.
  4. (4) In making its assessment, the FSA will, therefore, consider the individual circumstances of each firm on a case-by-case basis.
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COND 2.5.5

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Where a firm is applying for Part IV permission or a substantial variation of that permission, the guidance in COND 2.4.6 G is relevant. For the purpose of threshold condition 5, however, the FSA would expect the firm's business plan or strategy plan to take into account the interests of consumers and demonstrate that it is ready, willing and organised to comply with the relevant requirements in the Handbook that apply to the regulated activity it is seeking to carry on.
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Conducting business with integrity and in compliance with proper standards

COND 2.5.6

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In determining whether a firm will satisfy, and continue to satisfy, threshold condition 5 in respect of conducting its business with integrity and in compliance with proper standards, the relevant matters, as referred to in COND 2.5.4 G (2), may include but are not limited to whether:

  1. (1) the firm has been open and co-operative in all its dealings with the FSA and any other regulatory body (see Principle 11 (Relations with regulators)) and is ready, willing and organised to comply with the requirements and standards under the regulatory system and other legal, regulatory and professional obligations; the relevant requirements and standards will depend on the circumstances of each case, including the regulated activities which the firm has permission, or is seeking permission, to carry on;
  2. (2) the firm has been convicted, or is connected with a person who has been convicted, of any criminal offence; this must include, where provided for by the Exceptions Order to the Rehabilitation of Offenders Act 1974 , any spent convictions; particular consideration will be given to offences of dishonesty, fraud, financial crime or an offence whether or not in the United Kingdom or other offences under legislation relating to companies, building societies, industrial and provident societies, credit unions, friendly societies, banking and or other financial services, insolvency, consumer credit companies, insurance, and consumer protection, money laundering, market manipulation or insider dealing ;
  3. (3) the firm has been the subject of, or connected to the subject of, any existing or previous investigation or enforcement proceedings by the FSA, the Society of Lloyd's or by other regulatory authorities (including the FSA's predecessors), clearing houses or exchanges, professional bodies or government bodies or agencies; the FSA will, however, take both the nature of the firm's involvement in, and the outcome of, any investigation or enforcement proceedings into account in determining whether it is a relevant matter;
  4. (4) the firm has contravened, or is connected with a person who has contravened, any provisions of the Act or any preceding financial services legislation, the regulatory system or the rules, regulations, statements of principles or codes of practice (for example the Society of Lloyd's Codes) of other regulatory authorities (including the FSA's predecessors), clearing houses or exchanges, professional bodies, or government bodies or agencies or relevant industry standards (such as the Non-Investment Products Code); the FSA will, however, take into account both the status of codes of practice or relevant industry standards and the nature of the contravention (for example, whether a firm has flouted or ignored a particular code);
  5. (5) the firm, or a person connected with the firm, has been refused registration, authorisation, membership or licence to carry out a trade, business or profession or has had that registration, authorisation, membership or licence revoked, withdrawn or terminated, or has been expelled by a regulatory or government body; whether the FSA considers such a refusal relevant will depend on the circumstances;
  6. (6) the firm has taken reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system that apply to the firm and the regulated activities for which it has, or will have, permission (see SYSC 3.2.6 R to SYSC 3.2.8 R (Compliance) and SYSC 6.1.1 R to SYSC 6.1.5 R);
  7. (7) the firm has put in place procedures which are reasonably designed to:
    1. (a) ensure that it has made its employees aware of, and compliant with, those requirements and standards under the regulatory system that apply to the firm and the regulated activities for which it has, or will have permission;
    2. (b) ensure that its approved persons (whether or not employed by the firm) are aware of those requirements and standards under the regulatory system applicable to them;
    3. (c) determine that its employees are acting in a way compatible with the firm adhering to those requirements and standards; and
    4. (d) determine that its approved persons are adhering to those requirements and standards;
  8. (8) the firm or a person connected with the firm has been dismissed from employment or a position of trust, fiduciary relationship or similar or has ever been asked to resign from employment in such a position; whether the FSA considers a resignation to be relevant will depend on the circumstances, for example if a firm is asked to resign in circumstance that cast doubt over its honesty or integrity; and
  9. (9) the firm or a person connected with the firm has ever been disqualified from acting as a director.

Competent and prudent management and exercise of due skill, care and diligence

COND 2.5.7

handbook-guidance

In determining whether a firm will satisfy and continue to satisfy threshold condition 5 in respect of having competent and prudent management and exercising due skill, care and diligence, relevant matters, as referred to in COND 2.5.4 G (2), may include, but are not limited to whether:

  1. (1) the governing body of the firm is made up of individuals with an appropriate range of skills and experience to understand, operate and manage the firm's regulated activities;
  2. (2) if appropriate, the governing body of the firm includes non-executive representation, at a level which is appropriate for the control of the regulated activities proposed, for example, as members of an audit committee (see COND 3.2.15G (Audit Committee));
  3. (3) the governing body of the firm is organised in a way that enables it to address and control the regulated activities of the firm, including those carried on by managers to whom particular functions have been delegated (see SYSC 2.1 (Apportionment of responsibilities) and SYSC 3.2 (Areas covered by systems and controls) and SYSC 4.1.1 R (General organisational requirements));
  4. (4) those persons who perform controlled functions under certain arrangements entered into by the firm or its contractors (including appointed representatives or, where applicable, tied agents) act with due skill, care and diligence in carrying our their controlled function (see APER 4.2 (Statement of Principle 2) or managing the business for which they are responsible (see APER 4.7 (Statement of Principle 7));
  5. (5) the firm has made arrangements to put in place an adequate system of internal control to comply with the requirements and standards under the regulatory system (see SYSC 3.1 (Systems and Controls) and SYSC 4.1 (General organisational requirements));
  6. (6) the firm has approached the control of financial and other risk in a prudent manner (for example, by not assuming risks without taking due account of the possible consequences) and has taken reasonable care to ensure that robust information and reporting systems have been developed, tested and properly installed (see SYSC 3.2.10 G (Risk assessment) and SYSC 7.1 (Risk control));
  7. (7) the firm, or a person connected with the firm, has been a director, partner or otherwise concerned in the management of a company, partnership or other organisation or business that has gone into insolvency, liquidation or administration while having been connected with that organisation or within one year of such a connection;
  8. (8) the firm has developed human resources policies and procedures that are reasonably designed to ensure that it employs only individuals who are honest and committed to high standards of integrity in the conduct of their activities (see, for example, SYSC 3.2.13 G (Employees and agents) and SYSC 5.1 (Employees, agents and other relevant persons));
  9. (9) the firm has conducted enquiries (for example, through market research or the previous activities of the firm) that are sufficient to give it reasonable assurance that it will not be posing unacceptable risks to consumers or the financial system;
  10. (10) the firm has in place systems and controls against money laundering of the sort described in SYSC 3.2.6 R to SYSC 3.2.6J G and SYSC 6.3 (Financial crime);
  11. (11) where appropriate, the firm has appointed auditors and actuaries, who have sufficient experience in the areas of business to be conducted (see SUP 3.4 (Auditors' qualifications) and SUP 4.3.8 G to SUP 4.3.10 G (Actuary's qualifications)); and
  12. (12) in the case of a firm that carries on insurance mediation activity:
    1. (a) a reasonable proportion of the persons within its management structure who are responsible for the insurance mediation activity; and
    2. (b) all other persons directly involved in its insurance mediation activity;
  13. demonstrate the knowledge and ability necessary for the performance of their duties; and
    1. (c) all the persons in its management structure and any staff directly involved in insurance mediation activity are of good repute (see MIPRU 2.3.1 R (Knowledge, ability and good repute)).

COND 2.6

Additional conditions

  • 01/12/2004

COND 2.6.1

handbook-uk-text

COND 2.6.2

handbook-guidance
The Financial Services and Markets Act 2000 (Variation of Threshold Conditions) Order 2001 (SI 2001/2507) imposes certain additional conditions on non-EEA insurers, as set out above.
  • 03/09/2001

COND 2.6.3

handbook-guidance
This order implements requirements under the Insurance Directives, and the Act extends these requirements to firms outside of the EEA.
  • 03/09/2001

COND 2.6.4

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The effect of article 3(a) of the order is that a non-EEA insurer (including a Swiss General insurance company) must appoint an authorised UK representative.
  • 03/09/2001

COND 2.6.5

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  1. (1) A non-EEA insurer must be a body corporate formed under the law of the country where its head office is situated.
  2. (2) A person seeking to carry on insurance business in the United Kingdom must have assets in the United Kingdom to a value specified in GENPRU. Where the applicant wants to carry on insurance business in other EEA States, the applicant must have assets in those other EEA States as are agreed between the FSA and the supervisory authorities in the other states.
  3. (3) Unless the regulated activity to be carried on by the applicant relates solely to reinsurance business, the applicant must make a deposit of an amount, and type and on terms with a person and agreed between the FSA and the supervisory authorities in other EEA States where the applicant wishes to carry on insurance business. This deposit will be subject to provisions in INSPRU 1.5.

COND 2.6.6

handbook-guidance
(1) The additional conditions set out in COND 2.5.6 G (1), (2) and (3) do not apply to Swiss general insurance companies.
  • 31/12/2004

COND 2 Annex 1

The threshold conditions

  • 01/12/2004

COND 2 Annex 1

handbook-guidance
Close Links: is an undertaking the parent undertaking of another undertaking (COND 2.3.7G(2))
  • 03/09/2001

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COND 3

Banking Act 2009

COND 3.1

Assessing Condition 2 under section 7(3) of the Banking Act 2009

  • 06/09/2009

Introduction

COND 3.1.1

handbook-guidance
The Banking Act 2009 (the Banking Act) introduces new powers for HM Treasury, the Bank of England and the FSA to deal with failing banks. The powers, which are set out in Parts 1 to 3 of that Act, can be used to deal with UK incorporated firms with a Part IV permission to carry on the regulated activity of accepting deposits, other than credit unions and any other class of institution specified in secondary legislation. In relation to building societies, the main tools in the Act are applied with modifications. In this section the term "bank" is used to refer to those firms that are potentially subject to the powers in Parts 1 to 3 of the Banking Act. The powers are defined in the Banking Act, and referred to in this section as the "stabilisation powers". The Banking Act contains powers to enable HM Treasury to extend the application of the stabilisation powers to credit unions by secondary legislation.
  • 06/09/2009

COND 3.1.2

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Section 7 of the Banking Act sets out the two conditions that must be met before a stabilisation power can be exercised in respect of a bank:

  1. (1) Condition 1 is that the bank is failing, or is likely to fail, to satisfy the threshold conditions.
  2. (2) Condition 2 is that, having regard to timing and other relevant circumstances, it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable it to satisfy the threshold conditions.
  • 06/09/2009

COND 3.1.3

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The Banking Act provides that the FSA is to treat Conditions 1 and 2 as met if satisfied that they would be met but for financial assistance provided by either HM Treasury or the Bank of England (disregarding ordinary market assistance offered by the Bank on its usual terms).
  • 06/09/2009

Assessing Condition 1

COND 3.1.4

handbook-guidance
The matters the FSA will take into account in assessing whether a bank is failing or is likely to fail to satisfy the threshold conditions are described in COND 2.1 to COND 2.5. The options available to the FSA in the case of a breach of the threshold conditions are outlined in Chapter 8 of the Enforcement Guide and SUP 7.2. These tools are available to the FSA at any time, and so may be used before or in conjunction with the stabilisation tools provided by the Banking Act.
  • 06/09/2009

Assessing Condition 2

COND 3.1.5

handbook-guidance
The Banking Act provides that in considering the test in Condition 2, the FSA should ignore the stabilisation powers. The purpose of this limitation is to make clear that in making its assessment, the FSA is not considering whether the stabilisation powers could successfully resolve the situation, but is considering whether alternative measures might provide for this instead.
  • 06/09/2009

Timing

COND 3.1.6

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In assessing Condition 2, the FSA will consider the timeframe during which any actions taken by or in relation to the bank are likely to be available and to have effect. In the view of the FSA, the purpose of the reference to timing in Condition 2 is to require the FSA to consider whether a return to full compliance is likely to occur within a reasonable period of time. The following is a non-exhaustive list of factors the FSA may consider:

  1. (1) the extent of any loss, or risk of loss, or other adverse effect on consumers. The more serious the loss or potential loss or other adverse effect, the more likely it is that the FSA will consider that remedial action will be needed urgently;
  2. (2) the seriousness of any suspected breach of the requirements of the Act or the rules and the steps that need to be taken to correct that breach;
  3. (3) the risk that the bank's conduct or business presents to the financial system and to confidence in that system;
  4. (4) the likelihood that remedial action that could be taken by or in relation to the bank will take effect before consumers or market confidence suffers significant detriment.
  • 06/09/2009

COND 3.1.7

handbook-guidance
If the FSA is satisfied that the breach of threshold conditions is likely to be temporary and to be rectified within a reasonable time, the FSA is unlikely to conclude that Condition 2 has been met.
  • 06/09/2009

Other relevant circumstances

COND 3.1.8

handbook-guidance

In general the FSA will be concerned to determine whether any remedial action that could be taken by or in relation to the bank will be effective. This will include an assessment of both how likely it is that the action will be taken, and if it is, the impact it will have on the bank's compliance with the threshold conditions. Circumstances that the FSA may take into account include but are not limited to:

  1. (1) where the FSA's concerns relate to adequacy of liquidity:
    1. (a) the availability of market funding to banks generally and any specific circumstances of the bank that may impact on its ability to access the market on terms which are generally available;
    2. (b) whether the bank's current funding structure is adequate and viable; whether the primary sources of funding continue to be available, given current market sentiment, and whether they would still be viable if market sentiment was to change;
    3. (c) the maturity profile of the bank's existing funding and the availability of funding from the market to replace maturing funding as the need arises;
    4. (d) whether liquidity problems call into question adequacy of capital;
    5. (e) the bank's credit rating and the likelihood and impact of any potential downgrade;
    6. (f) the availability and terms of liquidity support from group companies, existing funders and central banks;
  2. (2) where the FSA's concerns relate to capital:
    1. (a) the availability of capital from the market for banks in general and any specific circumstances of the bank that may impact on its ability to access the market on terms which are generally available;
    2. (b) potential sources of capital and the nature of and terms on which capital may be obtained;
    3. (c) the success of any recent attempts by the bank to raise capital on the open market;
    4. (d) the willingness of existing significant institutional investors to provide or assist in a strategic solution to the bank;
  3. (3) where the FSA's concerns relate to the adequacy of non-financial resources or suitability, the FSA will take into account the factors identified in COND 2.4 and COND 2.5, and other Handbook provisions referred to in those chapters. In assessing Condition 2, the circumstances of each case are likely to be different, but the FSA will be concerned to establish the likelihood of achieving a return to full compliance with the threshold conditions, and the timescale in which a return to compliance will be effected;
  4. (4) the prospects of the bank securing a material and relevant transaction with a third party, for example a sale of the bank itself or of all or part of its business. In relation to any transaction, the FSA will have regard to factors including but not limited to:
    1. (a) the status of any ongoing negotiations;
    2. (b) the level of interest expressed and the credibility of potential counterparties;
    3. (c) practical constraints related to the bank itself, for example, management engagement, availability of relevant information and severability of infrastructure;
    4. (d) the sources, availability and firmness of financing for any transaction;
    5. (e) the need for shareholder approval, merger clearances or other consents;
    6. (f) the suitability of the counterparty and the stability of the relevant parties following completion of any transaction.
  • 06/09/2009

COND 3.1.9

handbook-guidance
When assessing whether the bank will return to compliance with threshold condition 4 (adequate resources) the FSA will also assess the reasons behind the likely or actual failure of compliance. Serious failures of management, systems or internal controls may in themselves call into question the adequacy of the bank's non-financial resources (threshold condition 4) or suitability (threshold condition 5). Therefore, in assessing whether a bank is reasonably likely to satisfy the threshold conditions in the future, the FSA will be concerned to ensure that any such failures have been adequately addressed.
  • 06/09/2009

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Transitional Provisions and Schedules

COND TP 1

Transitional Provisions

COND TP 1.1

Table:

  • 01/12/2004

COND Sch 1

Record keeping requirements

  • 01/12/2004

COND Sch 1.1

handbook-guidance
  • 01/12/2004

COND Sch 2

Notification requirements

  • 01/12/2004

COND Sch 2.1

handbook-guidance
  • 01/12/2004

COND Sch 3

Fees and other required payments

  • 01/12/2004

COND Sch 3.1

handbook-guidance
  • 01/12/2004

COND Sch 4

Powers exercised

  • 01/12/2004

COND Sch 4.1

handbook-guidance
  • 01/12/2004

COND Sch 5

Rights of action for damages

  • 01/12/2004

COND Sch 5.1

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  • 01/12/2004

COND Sch 6

Rules that can be waived

  • 01/12/2004

COND Sch 6.1

handbook-guidance
  • 01/12/2004

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