Part

Integrated Prudential sourcebook

Chapter

Insurance mediation & mortgage mediation, lending and administration

Printed on: 24/11/2024

Rulebook at: 21/04/2005

PRU 9

Insurance
mediation & mortgage mediation, lending and administration

PRU 9.1

Responsibility for insurance mediation activity

  • 01/12/2004

Application

PRU 9.1.1

handbook-rule
This section applies to a firm with Part IV permission to carry on insurance mediation activity.
  • 31/10/2004

Purpose

PRU 9.1.2

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.
  • 31/10/2004

Responsibility for insurance mediation activity

PRU 9.1.3

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.
  • 31/10/2004

PRU 9.1.4

handbook-rule

The firm may allocate the responsibility for its insurance mediation activity under PRU 9.1.3 R to an approved person (or persons) performing:

  1. (1) a governing function (other than the non-executive director function); or
  2. (2) the apportionment and oversight function; or
  3. (3) the significant management (other business operations) function.
  • 14/01/2005

PRU 9.1.5

handbook-guidance
  1. (1) Typically an insurance intermediary will appoint a person performing a governing function (other than the non-executive director 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, whether or not he is himself a person approved to perform the sole trader function.
  • 14/01/2005

PRU 9.1.6

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.
  • 31/10/2004

PRU 9.1.7

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)". In the case of a sole trader, the FSA will specify in the FSA Register the name of the sole trader as the 'contact person' in the firm.
  • 14/01/2005

Knowledge, ability and good repute

PRU 9.1.8

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.
  • 31/10/2004

PRU 9.1.9

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).
  • 31/10/2004

PRU 9.1.10

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.
  • 31/10/2004

PRU 9.1.11

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.
  • 31/10/2004

PRU 9.1.12

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.
  • 31/10/2004

PRU 9.1.13

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.
  • 31/10/2004

PRU 9.2

Professional indemnity insurance requirements for insurance and mortgage mediation activities

  • 01/12/2004

Application

PRU 9.2.1

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.
  • 31/10/2004

PRU 9.2.2

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.
  • 31/10/2004

Purpose

PRU 9.2.3

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.
  • 31/10/2004

PRU 9.2.4

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.
  • 31/10/2004

PRU 9.2.5

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.
  • 31/10/2004

PRU 9.2.6

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.
  • 31/10/2004

Requirement to hold professional indemnity insurance

PRU 9.2.7

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.
  • 31/10/2004

PRU 9.2.8

handbook-guidance
The minimum limits of indemnity for a firm whose Part IV permission covers more than one regulated activity within the scope of this section is the higher of the limits of indemnity as set out in PRU 9.2.13 R and the limits of indemnity as set out in PRU 9.2.15 R. If the firm opts for a single comparable guarantee to finance the claims which might arise as a result of both activities, the provisions set out in PRU 9.2.1 R (3) apply.
  • 14/01/2005

PRU 9.2.9

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.
  • 31/10/2004

Terms to be incorporated in the insurance

PRU 9.2.10

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.
  • 31/10/2004

PRU 9.2.11

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.
  • 31/10/2004

PRU 9.2.12

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.
  • 31/10/2004

Minimum limits of indemnity: insurance intermediary

PRU 9.2.13

handbook-rule

If the firm is an insurance intermediary, then 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.
  • 14/01/2005

PRU 9.2.14

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.
  • 31/10/2004

Minimum limits of indemnity: mortgage intermediary

PRU 9.2.15

handbook-rule

If the firm is a mortgage intermediary, then 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.
  • 14/01/2005

Excess

PRU 9.2.16

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).
  • 31/10/2004

PRU 9.2.17

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).
  • 31/10/2004

PRU 9.2.18

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).
  • 31/10/2004

Policies covering more than one firm

PRU 9.2.19

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.
  • 31/10/2004

Additional capital

PRU 9.2.20

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).
  • 31/10/2004

PRU 9.2.21

handbook-rule
Table: Calculation of additional capital for firm not holding client money or other client assets (?000's)
  • 31/10/2004

PRU 9.2.22

handbook-rule
Table: Calculation of additional capital for firm holding client money or other client assets (?000's)
  • 31/10/2004

PRU 9.2.23

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.
  • 31/10/2004

PRU 9.3

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

  • 01/12/2004

Application

PRU 9.3.1

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).
  • 31/10/2004

PRU 9.3.2

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).
  • 31/10/2004

PRU 9.3.3

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.
  • 31/10/2004

Application: banks, building societies, insurers and friendly societies

PRU 9.3.4

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.
  • 31/10/2004

PRU 9.3.5

handbook-guidance
The capital resources of firms within PRU 9.3.4 R are calculated in accordance with the appropriate IPRU.
  • 31/10/2004

Application: firms carrying on designated investment business only

PRU 9.3.6

handbook-rule
This section does not apply to a firm whose Part IV permission is limited to regulated activities which are designated investment business.
  • 31/10/2004

PRU 9.3.7

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).
  • 31/10/2004

Application: credit unions

PRU 9.3.8

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).
  • 31/10/2004

PRU 9.3.9

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).
  • 01/12/2004

Application: professional firms

PRU 9.3.10

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.
  • 31/10/2004

Application: Lloyd's managing agents

PRU 9.3.11

handbook-rule
This section does not apply to a managing agent.
  • 31/10/2004

PRU 9.3.12

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)).
  • 31/10/2004

Application: social housing firms

PRU 9.3.13

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).
  • 31/10/2004

Purpose

PRU 9.3.14

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.
  • 31/10/2004

PRU 9.3.15

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.
  • 31/10/2004

PRU 9.3.16

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.
  • 31/10/2004

PRU 9.3.17

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.
  • 31/10/2004

Purpose: social housing firms

PRU 9.3.18

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.
  • 31/10/2004

PRU 9.3.19

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.
  • 31/10/2004

Capital resources: general rules

PRU 9.3.20

handbook-rule
A firm must at all times ensure that it is able to meet its liabilities as they fall due.
  • 31/10/2004

PRU 9.3.21

handbook-rule
A firm must at all times maintain capital resources equal to or in excess of its relevant capital resources requirement.
  • 31/10/2004

Capital resources: relevant accounting principles

PRU 9.3.22

handbook-rule
A firm must recognise an asset or liability, and measure its amount, in accordance with the relevant accounting principles applicable to it for the purpose of preparing its annual financial statements unless a rule requires otherwise.
  • 21/04/2005

Capital resources: client assets

PRU 9.3.23

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).
  • 31/10/2004

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

PRU 9.3.24

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).
  • 01/12/2004

Capital resources requirement: credit unions

PRU 9.3.25

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.
  • 01/12/2004

Capital resources requirement: social housing firms

PRU 9.3.26

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.

  • 31/10/2004

PRU 9.3.27

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.
  • 31/10/2004

Capital resources requirement: application according to regulated activities

PRU 9.3.28

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.
  • 31/10/2004

PRU 9.3.29

handbook-rule
Table: Application of capital resources requirements
  • 31/10/2004

Capital resources requirement: mediation activity only

PRU 9.3.30

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).
  • 31/10/2004

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

PRU 9.3.31

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.
  • 31/10/2004

PRU 9.3.32

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.
  • 31/10/2004

PRU 9.3.33

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.
  • 31/10/2004

PRU 9.3.34

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).
  • 31/10/2004

PRU 9.3.35

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).
  • 31/10/2004

PRU 9.3.36

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).
  • 31/10/2004

Capital resources requirement: mortgage administration only

PRU 9.3.37

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.
  • 31/10/2004

PRU 9.3.38

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).
  • 31/10/2004

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

PRU 9.3.39

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.
  • 31/10/2004

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

PRU 9.3.40

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).
  • 31/10/2004

Capital resources requirement: other combinations of activities

PRU 9.3.41

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.
  • 31/10/2004

Annual income

PRU 9.3.42

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).
  • 31/10/2004

PRU 9.3.43

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.
  • 31/10/2004

PRU 9.3.44

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.
  • 31/10/2004

PRU 9.3.45

handbook-guidance
  1. (1) 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.
  2. (2) For the purposes of PRU 9.3.43 R and PRU 9.3.44 R, a firm's annual income includes commissions and other amounts the firm may have agreed to pay to other persons involved in a transaction, such as sub-agents or other intermediaries.
  3. (3) A firm's annual income does not, however, include any amounts due to another person (for example, the product provider) which the firm has collected on behalf of that other person.
  • 14/01/2005

PRU 9.3.46

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.
  • 31/10/2004

PRU 9.3.47

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.
  • 31/10/2004

Annual income for mortgage administration

PRU 9.3.48

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.
  • 31/10/2004

Annual income: periods of less than 12 months

PRU 9.3.49

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.
  • 31/10/2004

Annual income: no financial statement

PRU 9.3.50

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.
  • 31/10/2004

The calculation of a firm's capital resources

PRU 9.3.51

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).
  • 31/10/2004

PRU 9.3.52

handbook-rule
Table: Items which are eligible to contribute to the capital resources of a firm
  • 21/04/2005

PRU 9.3.52A

handbook-guidance
A firm should keep a record of and be ready to explain to its supervisory contacts in the FSA the reasons for any difference between the deficit reduction amount and any commitment the firm has made in any public document to provide funding in respect of a defined benefit occupational pension scheme.
  • 21/04/2005

PRU 9.3.53

handbook-rule
Table: Items which must be deducted from capital resources
  • 31/10/2004

Personal assets

PRU 9.3.54

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.
  • 31/10/2004

PRU 9.3.55

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).
  • 31/10/2004

Subordinated loans

PRU 9.3.56

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.
  • 31/10/2004

PRU 9.3.57

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).

  • 31/10/2004

PRU 9.3.58

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.
  • 31/10/2004

PRU 9.4

Insurance undertakings and mortgage lenders using insurance or mortgage mediation services

  • 01/12/2004

Application

PRU 9.4.1

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.
  • 31/10/2004

Purpose

PRU 9.4.2

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.
  • 31/10/2004

PRU 9.4.3

handbook-guidance
PRU 9.4 supports the more general duties in Principles 2 and 3, and SYSC 3.1.1 R.
  • 31/10/2004

Use of intermediaries

PRU 9.4.4

handbook-rule

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

  1. (1) insurance mediation; or
  2. (2) insurance mediation activity; or
  3. (3) mortgage mediation activity;

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

  • 31/10/2004

PRU 9.4.5

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.
  • 31/10/2004

PRU 9.4.6

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).
  • 31/10/2004

PRU 9.4.7

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 which:

  1. (1) contravene section 19 of the Act (The general prohibition); or
  2. (2) in the case of activities provided from an establishment in an EEA State, contravene the IMD registration requirements.
  • 14/01/2005

PRU 9.4.8

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.
  • 31/10/2004

PRU 9.4.9

handbook-guidance
The FSA Register can be accessed through the FSA website under the link www.fsa.gov.uk/register.
  • 31/10/2004

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

  • 01/12/2004

handbook-guidance
  • 31/10/2004