Subordinated loans

A firm can use a subordinated loan to meet its own funds requirement if it is made in line with our requirements. Our specific requirements vary depending on your firm’s prudential category.

When agreeing to a subordinated loan both the borrower and lender should ensure they understand what they are committing themselves to and may wish to seek legal advice.

An example of a subordinated loan is when a director of a company invests money in the form of debt, rather than in the form of stock. If there is a liquidation the director is paid before stockholders – assuming there are assets to distribute after all other liabilities and debt have been paid.

Firms do not need our permission to repay a subordinated loan unless it was taken out before 2004 and the FSA was signatory to it.

What we expect

If a firm is in breach of our capital requirements rules we expect all firms to:

  • tell us if this is the case
  • tell us how the breach is to be resolved and if by issuing a subordinated loan tell us the date of the loan, amount, term of the loan and the name of the lender
  • if there are subsequent changes - seek our approval for any changes made to the original loan; i.e. changes in the term or amount of the loan
  • if the firm wants to repay or reduce a subordinated loan early, they will need to obtain our approval to do this

M&GI (MIPRU)

If you are within the scope of MIPRU (M&GI) you need to comply with the conditions of MIPRU 4.4.7R. Find out more about MIPRU in our Handbook. 

See the information required in an example of a subordinated loan agreement.

Personal investment firms (IPRU Chapter 13)

Under IPRU 13.12.4 (for personal investment firms), you are restricted from repayment, prepayment or termination of a subordinated loan if it would cause your firm's financial resources to fall below 120% of its financial resources requirement.

If you also conduct mortgage and general insurance business you will need to comply with the higher IPRU rule.

Find out more about IPRU in our Handbook.

Investment Management Firms (IPRU Chapter 5)

You have to send in a copy of the agreement ten days before the loan is made and certify that you have used standard wording.

Investment firms need to ensure they have 120% of their capital resource requirements.