Prudential categories and sub-categories

Part

SUP Supervision manual

Chapter

Prudential categories and sub-categories

Printed on: 06/11/2024

Rulebook at: 31/12/2006

SUP App 1

Prudential categories and sub-categories

SUP App 1.1

Application

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SUP App 1.1.1

This appendix applies to every firm.

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SUP App 1.2

Purpose

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SUP App 1.2.1

The purpose of this appendix is to give guidance on the prudential categories and sub-categories of firm used in the Interim Prudential sourcebooks and the Supervision manual. The prudential categories are defined in the Glossary, and some of the sub-categories are defined there and some in the glossaries of the Interim Prudential sourcebooks.

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SUP App 1.2.2

The FSA is developing its approach to prudential standards and some provisions in the Supervision manual in a two-stage approach. Initially the FSA is including in the Handbook interim material as set out in the five Interim Prudential sourcebooks and the Supervision manual, for example SUP 16 (Reporting requirements). The FSA is developing material which will provide an integrated approach to the setting of prudential standards. Each of the Interim Prudential sourcebooks is based on the prudential regime that existed before commencement, changed, mainly where the Act, and other statutory and international developments, have made a change desirable or essential. The Lloyd's sourcebook shows less continuity with the prudential regime previously applied to the Society of Lloyd's, as it introduces requirements similar to those already applied to insurers. Most grandfathered firms have a prudential category and sub-category equivalent to that which they had before commencement.

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SUP App 1.2.3

If there is any doubt about prudential categorisation, a firm should seek individual guidance from its usual supervisory contact at the FSA and an applicant for authorisation should seek guidance from the Corporate Authorisation department.

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SUP App 1.3

Prudential categories and sub-categories

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SUP App 1.4

Relevance of prudential categories

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SUP App 1.4.1

Many, but not all, of the categories are used only in the Interim Prudential sourcebooks and the Supervision manual. The prudential category of a firm will normally determine:

(1) which Interim Prudential sourcebook is applicable to the firm;

(2) if the firm is subject to the IPRU(INV), which chapter of that sourcebook is applicable to the firm;

(3) whether particular chapters of the Supervision manual are applicable to the firm; and

(4) if the firm is subject to SUP 3 (Auditors), SUP 16 (Reporting) or SUP 17 (Transaction reporting), which parts of those chapters apply to the firm.

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SUP App 1.4.2

In some cases, a firm may also fall within a prudential sub-category. This will determine which provisions within a particular sourcebook or chapter apply to the firm.

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SUP App 1.4.3

If a firm is part of a group, each authorised member of the group will have its own prudential category. Firms should refer to the provisions of the relevant Interim Prudential sourcebooks to determine whether and, if so, how consolidated supervision applies.

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SUP App 1.5

Determining the prudential categories of a firm

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SUP App 1.5.1

This appendix includes flow diagrams (Figures 1 and 2) to assist in determining the prudential category of a firm.

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SUP App 1.5.2

For a firm which became an authorised person after commencement, the FSA will have confirmed the applicable prudential category of the firm as part of the authorisation process.

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SUP App 1.5.3

For a firm with automatic authorisation by passporting under the Single Market Directives, exercising rights under the Treaty or as a UCITS qualifier, the FSA will have notified the firm of its prudential category at the same time as the FSA notified it of the applicable provisions to which it is subject (see SUP 13A for further details on inward passporting). If it has a top-up permission, then SUP App 1.5.2 G may also apply.

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SUP App 1.6

Changing prudential category after authorisation

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SUP App 1.6.1

A firm's prudential category may change in the following circumstances:

(1) A variation in the firm's permission may, in some cases, lead to an automatic change in the firm's prudential category or sub-category because of the way those categories are defined. For example, if an investment management firm is granted permission to accept deposits, it may become a bank and cease to be an investment management firm. Figures 1 and 2 may be used, even if a firm's permission is varied after commencement. They should enable a firm to determine whether any variation in its permission will lead to a change in prudential category.

(2) The FSA may vary the firm's permission and thereby require a firm to comply with the rules applicable to a different prudential category, either through using its own-initiative power or on the application of the firm.

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SUP App 1.6.2

A firm should notify the FSA immediately if it believes that its prudential category or sub-category has changed (see SUP 15.3.8 G (1)(g)), or if there has been an expansion or reduction in its business that could be relevant to its prudential categorisation or sub-categorisation (see SUP 15.3.8 G).

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SUP App 1.7

Prudential categories and sub-categories

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SUP Fig App 1.7.1

Figure 1: Determination of a firm's prudential category - general

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SUP Fig App 1.7.2

Figure 2: Determination of a firm's prudential category (cont'd)

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SUP App 1.8

Notes to Figures 1 and 2

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SUP App 1.8.1

Note 1

Chapter of IPRU(INV) that requirement on permission requires the firm to comply with

Firm's prudential category

Chapter 3

Securities and futures firm

Chapter 5

Investment management firm

Chapter 10

Securities and futures firm

Chapter 13

Personal investment firm

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SUP App 1.8.2

Note 2

The table below shows how a firm's main regulated activities determine its prudential category. A firm's 'main regulated activities' in this context are the regulated activities included in the firm's Part IV permission from which the firm derives or is expected to derive the most substantial part of its gross income, including commissions. The aggregate gross income from all of the activities listed against each prudential category should be considered to determine which source is the most substantial.

The gross income is based on the business plan submitted as part of the firm's application for a Part IV permission (for a firm given a Part IV permission after commencement) or on the firm's financial year preceding its authorisation under the Act (for a firm authorised under section 25 of the Financial Services Act 1986 prior to commencement).

If the firm's prudential categorisation is not clear, please consult the FSA for guidance.

Activities from which the most substantial part of the firm's gross income, including commissions, from regulated activitiesis derived

Firm's prudential category

(i) Managing investments other than for private customers or if the assets managed are primarily derivatives;
(ii) OPS activity;
(iii) acting as the manager or trustee of an AUT;
(iv) acting as the ACD or depository of an ICVC;
(v) establishing, operating or winding up a collective investment scheme other than an AUT or ICVC; and
(vi) safeguarding and administering investments.

Investment management firm

(i) Advising on investments, or arranging (bringing about) deals in investments, in relation to packaged products; and
(ii) managing investments for private customers.

Personal investment firm

(i) An activity carried on as a member of an exchange;
(ii) making a market in securities or derivatives;
(iii) corporate finance business;
(iv) dealing, or arranging (bringing about) deals in investments, in securities or derivatives;
(v) the provision of clearing services as a clearing firm;
(vi) managing investments where the assets managed are primarily derivatives; and
(vi) activities relating to spread bets;

Securities and futures firm

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SUP App 1.8.3

Note 3

Single SRO membership

Firm's prudential category

IMRO

Investment management firm

PIA

Personal investment firm

SFA

Securities and futures firm

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SUP App 1.8.4

Note 4

SRO to whose Financial Supervision requirements the firm was subject

Firm's prudential category

IMRO

Investment management firm

PIA

Personal investment firm

SFA

Securities and futures firm

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SUP App 1.8.5

Note 5
Only a small number of firms are expected to be authorised under section 25 of the Financial Services Act 1986 immediately prior to commencement and not be a member of one of the SROs. These firms are directly regulated by the FSA under the Financial Services Act 1986.

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