SIFA 8
Financial resources and professional indemnity insurance
SIFA 8.1
Summary
- 01/12/2004
SIFA 8.1.1
See Notes
The detailed financial resources standards
that we apply to investment firms are set out in the Interim Prudential sourcebook
for Investment Businesses (IPRU(INV)). The rules and guidance in this sourcebook
help us meet our statutory objectives of protecting consumers and maintaining
market confidence. By setting minimum capital standards, this sourcebook seeks
to reduce the risk that investment firms will be unable to meet their liabilities
and commitments to consumers and counterparties.
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SIFA 8.1.2
See Notes
Chapters 1 and 13 of IPRU(INV) relate
to personal investment firms. Where firms do a mixture of activities that
includes mortgage and general insurance business, they also need to consider
the interaction with the rules in PRU 9.
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SIFA 8.1.3
See Notes
The rules of
Chapter 13 apply differently to firms depending on what category of firm they
are. This section of the Guide only discusses those parts that relate to a
low resource firm i.e. a firm that:
•is a Category
B3 firm (see Appendix 13(1) of IPRU(INV) - Defined terms for Chapter 13);•is not a network;•has fewer than
26 advisers or representatives; and•is not permitted
to carry on discretionary portfolio management.
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SIFA 8.1.4
See Notes
The
relevant sections of Chapter 13 for such firms are IPRU(INV) section 13.1
and sections 13.9 to 13.10. The rules and guidance set out in these sections
relate to four key areas: financial resources, professional indemnity insurance,
record keeping and notification requirements.
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SIFA 8.2
Financial Resources
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SIFA 8.2.1
See Notes
Your firm must have and maintain at all
times financial resources of the kinds and amounts specified by the rules
in Chapter 13 of IPRU(INV). Your firm must also be able to meet its liabilities
as they fall due.
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SIFA 8.2.2
See Notes
In particular, your firm must have financial
resources of at least £10,000 at all times (IPRU(INV) 13.10.1R). The
method of calculating your firm's financial resources is set out in the following
sections of IPRU(INV): 13.10.2R, 13.10.2AR, 13.10.3R and Table 13.10(2). We
have included some worked examples of own funds calculations in Appendix B
of the Guide.
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SIFA 8.2.3
See Notes
Where personal investment firms also
do mortgage or general insurance business, under PRU
9.3.24 R they should work out which is the higher financial resource requirement
under the relevant parts or PRU and IPRU(INV). In the case of a low resource
firm with a £10,000 financial resources requirement, the requirement
is the higher of £10,000 and 2.5% of annual income from mortgage and
general insurance activities (PRU
9.3.30R (1)).
This means that a £10,000 requirement will apply unless a firm earns
more than £400,000 in annual income from mortgage and general insurance
activities. Annual income includes all brokerages, fees and commission earned
by the firm for mortgage and general insurance business.
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SIFA 8.2.4
See Notes
Where a low resource firm holds client
money for general insurance mediation purposes with the money in a statutory
trust account the resources requirement is 5% of annual income from its mortgage
and general insurance activities (PRU
9.3.30R (2)).
Firms that hold client money in a non-statutory trust account must maintain
minimum capital of £50,000 or 5% of annual income which ever is the
greater (CASS
5.4.4 R (4)).
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SIFA 8.3
Professional Indemnity Insurance (PII)
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SIFA 8.3.1
See Notes
Your firm must hold PII. The requirements
are outlined in IPRU(INV) 13.1.3(1)G to 13.1.4(4)G. These are minimum requirements
and we expect senior management to take responsibility for ensuring that the
cover they have in place is appropriate to the needs of their firm. The PII
requirements also apply to networks and firms with 26 or more advisers but
this is not discussed further in the Guide.
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SIFA 8.3.2
See Notes
The terms that your policy must contain
are in IPRU(INV) 13.1.4(2)R and include the limits of indemnity that apply.
Further core requirements are outlined in IPRU(INV) 13.1.4(5)E to 13.1.4(7)G.
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SIFA 8.3.3
See Notes
Your firm has the option of using its
own financial resources in conjunction with its PII cover. Under IPRU(INV)
13.1.4(8)R to 13.1.4(14)G the policy must not be subject to conditions or
exclusions which unreasonably limit the cover provided. However, under IPRU(INV)
13.1.4(10)E a firm is allowed a higher level of excess on a policy where it
can show that it has additional own funds which are held in a readily realisable
form.
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SIFA 8.3.4
See Notes
For firms that do a mixture of activities
IPRU(INV) 13 applies rather than the requirements in PRU provided the mixture
of activities includes personal investment business.
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SIFA 8.3.5
See Notes
IPRU(INV) 13.1.4(15)R allows firms, whether
connected or not, to benefit from a PII policy that provides cover to more
than one firm. So your firm may benefit from reduced administration costs
from this type of arrangement but you must consider how you will deal with
notifications to both your insurer and the FSA.
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SIFA 8.3.6
See Notes
There is further information about buying
PII on the 'Doing business with the FSA' part of our website under 'Information
for small firms'.
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SIFA 8.4
Financial Resources Record Keeping
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SIFA 8.4.1
See Notes
Your firm must take reasonable steps
to ensure that it keeps records that are sufficient to show at any time that
it has complied with the requirements of IPRU(INV) 13. It must also set up
procedures and controls to ensure that those records are made promptly and
accurately and, where appropriate, brought up-to-date at regular and frequent
intervals (IPRU(INV) 13.1.10R).
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SIFA 8.4.2
See Notes
Records may be held in any form, but
they must be in English and up to date, and your firm must be able to produce
them in paper form at its business premises at our request. In other words,
you can store records electronically but you must be able to print them out
efficiently at our request.
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SIFA 8.4.3
See Notes
For the record-keeping requirements in
IPRU(INV) Chapter 13 see sections 13.1.10R to 13.1.17R.
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SIFA 8.5
Reporting and Notification Requirements
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SIFA 8.5.1
See Notes
The Supervision manual sets out provisions
on the periodic reporting and notification of financial information to us.
Personal investment firms must comply with SUP 16.7.76 R to SUP 16.7.81 G. There is further information in Chapter
12 of the Guide.
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SIFA 8.5.2
See Notes
Retail Mediation Activities Return (RMAR)
reporting started on 1 April 2005. The return requires financial information
and also includes a PII section that must be completed and which replaces
the self-certification form. There is more information in Chapter 12.1 of
the Guide.
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SIFA 8.5.3
See Notes
There are also six notifiable events
relating to PII. These include the requirements that your firm must tell us
as soon as it finds out that its professional indemnity insurance is being
cancelled or that it cannot obtain new cover (IPRU(INV) 13.1.9R). This rule
is in addition to the general notification requirements in SUP 15).
| The following sections of the Guide are also relevant: | |
| • | 'Reporting and notifications' - Chapter 12 |
| • | 'Variation and cancellation of permission' - Chapter 15 |
| • | 'Waivers and Rule Modifications' - Chapter 16 |
| If you do mortgage or general insurance business you should also refer to MIGI 7 and MIGI 8. | |
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