Guidance

1. This Chapter deals with all aspects of prudential requirements relating to the capital adequacy of Authorised Persons, in terms of both quantity and quality, and, where appropriate, the maintenance of liquid assets. (Chapter 9 covers more generally the related prudential topic of liquidity, the ability of an Authorised Person to meet its financial obligations as they fall due.) The Chapter outlines the minimum capital requirements that an Authorised Person should meet, consistent with Pillar 1 of the Basel Accord, and aims to ensure that an Authorised Person maintains adequate capital resources to support the risks associated with its activities and that it can fully absorb unexpected losses at any time. A summary of the minimum capital requirements is given in App 3.2.
2. This Chapter also includes provisions forming part of the framework for the assessment by the Regulator, under Pillar 2 of the Basel Accord, of the capital adequacy of an Authorised Person, with further detail given in Chapter 10. The disclosure requirements placed upon an Authorised Person under Pillar 3 of the Basel Accord are covered in Chapter 11.
3. Part 1 of this Chapter sets out the application provisions. Part 2 of this Chapter outlines the fundamental capital adequacy obligations and the systems and controls requirements to ensure compliance with this critical regulatory obligation. Part 3 of this Chapter and the related App4 include the Rules and associated guidance for the calculation of minimum Capital Requirement for different Categories of Authorised Persons. Additionally, this Part also includes requirements for the maintenance of liquid assets by firms subject to the Expenditure Based Capital Minimum. Part 4 of this Chapter specifies detailed Rules on the calculation of Capital Resources of an Authorised Person, including detailed Rules on the eligibility criteria for different components of Capital Resources which correspond to varying levels of quality. This part also specifies the requirements in respect of the Capital Conservation Buffer and associated obligations.
4. App3 provides guidance on various aspects of stress and scenario testing which are to be considered by an Authorised Person to assist it in complying effectively with the Rules in this Chapter.