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FCA Firms Capital Adequacy – Subordinated Loans

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Mike Ayres

Mike Ayres – Senior Manager

Many FCA firms are required to maintain a level of capital set out by the FCA Handbook.  

What is included in the ‘capital’ required to be held? 

Different authorisations require different rules to be followed and these should be looked into individually, however very generally the equity section of the statutory accounts balance sheet provides a good basis. 

This would typically include the capital invested by the owners of the business and the cumulative profits of the business that have not been withdrawn by the owners.  

In some cases the owners of the business may not wish to invest further equity in the business (due to it being more difficult to extract). A subordinated loan is an alternative way to pay funds into the company. 


So what is a subordinated loan? 

When made following the FCA’s guidelines these loans can be repaid to the creditor at any time after their issue as long as the capital adequacy requirements continue to be met, though they do rank lower than all other creditors in the event of a winding up. 

Who can use a subordinated loan? 

Mortgage & General Insurance Firms  

Mortgage & General Insurance Firms within the scope of MIPRU. MIPRU 4.4.7 has more details, but the conditions include: 

  • Limitations on maturity of the loan 
  • Specified default conditions 
  • Restrictions on subordinated loan creditors reclaiming the funds 
  • Waiver of rights to offset against amounts owed by the subordinated loan creditors to the firm 
  • Financial restrictions where client money is held per MIPRU 4.4.8 (the link below is an FCA example of how this may be calculated) 

Personal Investment Firms  

Additionally, these are restricted from repayment, prepayment or termination of a subordinated loan if it would cause the firm’s financial resources to fall below 120% of its financial resources requirement. 

Investment Management Firms

Investment Management Firms are also required to send in a copy of the agreement ten days before the loan is made and certify that they have used standard wording. 

Accounting Treatment and FCA returns 

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For the purposes of statutory accounts a subordinated loan would be shown as a liability. When submitting returns to the FCA this amount is separately disclosed so it is clear how the capital adequacy requirement is being met. 

Please note that the above information is a summary of selected chapters of the FCA Handbook and should not be solely relied upon when making decisions. Please always ensure the appropriate professional advice is obtained to ensure compliance. The FCA Handbook contains the detailed rules and can be accessed  here.  

 This information is correct as at 22 November 2019.  

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Mike Ayres - ACA

Senior Manager

Mike Ayres is a Senior Manager at Menzies in Farnborough specialising in advisory services, audit and compliance for SME and medium sized businesses.