5B.2. Block 2: Prudential standards

Question 1

What does the second block of the FCA handbook set out?

Answer 1

The prudential requirements for firms. This covers minimum standards for different types of individual, firm, and market in terms of rules around safety and soundness.

Question 2

What rules does the second block of the FCA handbook include?

Answer 2

Rules around minimum capital reserves, frequency of stress testing and reporting requirements.

Question 3

What is a key point to remember about each sourcebook in block 2?

Answer 3

Each sourcebook description has the letters PRU within it - to reflect the title ‘prudential’.

Question 4

What does the sourcebook or manual GENPRU mean?

Answer 4

Prudential sourcebook for banks, building societies, insurers and investment firms.

Question 5

What does the sourcebook or manual GENPRU include?

Answer 5

It is split into 3 sections:

1. GENPRU1: Rules of adequacy and valuation.
2. GENPRU2.1: Capital Resources Requirement (CRR)
3. GENPRU2.2: Types of eligible capital.

Question 6

What is the sourcebook or manual BIPRU?

Answer 6

Calculation factors

Question 7

What does the sourcebook or manual BIPRU include?

Answer 7

Contains the detailed calculation rules for the GENPRU sections.

Banks, building societies, insurers and investment firms.

Question 8

What is the sourcebook or manual IFPRU?

Answer 8

Prudential sourcebook for larger investment firms.

Question 9

What does the sourcebook or manual IFPRU include?

Answer 9

The capital requirements that investment firms need in place.

Also considers the Capital Requirements Directive (CRD).

Question 10

What is the MIPRU sourcebook or manual?

Answer 10

Prudential sourcebook for mortgage / home finance firms / insurance intermediaries.

Question 11

What does the MIPRU sourcebook or manual include?

Answer 11

Financial safeguard rules, capital requirements and Professional Indemnity Insurance (PII) requirements.

Question 12

What is the IPRU-INV sourcebook or manual?

Answer 12

Interim sourcebook for investment businesses.

Question 13

What does the IPRU-INV sourcebook or manual include?

Answer 13

Prudential and notification requirements for non-BIPRU investment firms.

Question 14

What is the INSPRU sourcebook or manual?

Answer 14

Insurers and UCITS firms

Question 15

What does the INSPRU sourcebook or manual include?

Answer 15

Sourcebooks for insurance companies and UCITS (types of investment) firms.

Question 16

What is the IPRU- FSOC/IPRU - INS sourcebook or manual?

Answer 16

Friendly societies and insurers.

Question 17

What does the IPRU-FSOC/IPRU-INS sourcebook or manual include?

Answer 17

Sourcebooks for friendly societies and insurance companies.

Question 18

What is capital adequacy?

Answer 18

All businesses must meet the general rule that they are: able to meet their financial obligations as and when they fall due. ‘Capital adequacy’ is this requirement.

Question 19

What firms have the most rigorous monitoring in terms of capital adequacy?

Answer 19

Large companies.

Question 20

What are large companies subject to in terms of capital adequacy?

Answer 20

Subject to the Capital Requirement Directive (CRD) which requires them to undertake detailed risk assessments and stress-tests to establish how much resource they need.

Question 21

Why is capital required?

Answer 21

To fund day to day activities, investments in new technology and as an emergency fund.

The FCA is at pains to promote a stable marketplace and to protect consumers.

Question 22

What 4 things must firms have a clear understanding of?

Answer 22

1. The level of capital resources they must have at any time.
2. How much capital they need to support future volumes of business.
3. How much capital they need to meet their regulatory capital resource requirements.
4. What contingencies they have in place.

Question 23

What must all firms report to the FCA/PRA regularly and when?

Answer 23

Must report the calculations re: capital adequacy regularly. This is usually twice a year, depending on the individual, firm, or market, and their size and type of business (could be 4 times in certain instances).

Question 24

What is the GENPRU rule?

Answer 24

Contained within the FCA Principle for Business 4 is the rule that firms need to maintain adequate financial resources. These requirements are set out in greater detail in the GENPRU sourcebook.

This is crucial for systematically-important firms such as banks, building societies, investment firms, and insurance companies, which is why these rules are contained within GENPRU for such firms and markets.

Question 25

What does GENPRU1 deal with?

Answer 25

This sets out the general requirements for adequacy of financial resources and the valuation of those resources. A firm must hold adequate financial resources to be able to meet all liabilities as they fall due.

These resources include both capital and liquidity resources.

Question 26

What does GENPRU2 set out?

Answer 26

The detailed requirements in relation to a firm’s capital resources. It complies with several EU directives, mainly the Capital Requirement Directive (CRD).

Question 27

What does the GENPRU2.1 section contain?

Answer 27

The rules about the minimum amount of capital a firm must hold. It introduced a measure known as a ‘fixed overhead requirement’.

Question 28

What are fixed overheads?

Answer 28

These are costs that a firms incurs to be able to operate on a day-to-day basis. They are categorised as ‘fixed’ as they do not change substantially day to day.

Question 29

Who must fulfil Capital Resource Requirements (CRR) of at least 25% of their fixed overheads, as capital reserves?

Answer 29

BIPRU and IPRU smaller firms.

Question 30

What does the GENPRU2.2 section define?

Answer 30

Defines what assets can be used as acceptable capital, how acceptable capital assets are defined, and how they must be measured by firms. The CRD did not really change the definition of capital.

Question 31

What happened as a consequence of the 2007 credit crisis?

Answer 31

There was the introduction of FSA rules on liquidity.

Question 32

What does BIPRU deal with?

Answer 32

Specific elements of risk relating to the calculation of adequate CRRS; mainly credit risk, operational risk, market risk and liquidity.

Firms must ensure that they have adequate liquid capital built into their business model, and that they will be able to continue to trade if certain external stressers are applied.

Question 33

What 3 things must firms be in relation to BIPRU/liquidity?

Answer 33

1. Self-sufficient and maintain adequate liquid resources,
2. Maintain systems and controls for the management of liquidity risk.
3. Comply with the rules on what assets they can use.

Question 34

Who do IFPRU rules apply to?

Answer 34

Certain sole regulated FCA investment firms who are subject to the full requirements in CRD IV.

Question 35

What do the requirements of CRD IV affect?

Answer 35

Levels of capital

Reducing counterparty credit risk (use of third parties).

Use of buffers (reserves) and rules on liquidity reporting.

Question 36

Who does IFPRU also apply to?

Answer 36

Certain collective portfolio management investment companies, such as UCITS management companies, and alternative investment fund managers.

Question 37

What will firms subject to the requirements in IFPRU be known as?

Answer 37

IFPRU investment firms.

Question 38

What companies is MIPRU for?

Answer 38

Mortgage companies.

Question 39

What does MIPRU set out?

Answer 39

Sets out the capital requirements they must hold and the level of professional indemnity insurance they must have in place.

Question 40

How does IPRU-INV differ from MIPRU?

Answer 40

This is the same as MIPRU, but for simple investment firms.