How should we deal with subordinated loans?

What is a subordinated loan?

A typical example of this would be 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.

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; and
if the firm wants to repay or reduce a subordinated loan early, they will need to obtain our approval to do this.

Own funds

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

Both borrower and lender should ensure they understand what they are committing themselves to and may wish to seek legal advice.

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.

Please see our Handbook for more detail

View an example of the information required

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.

Please see out Handbook for more detail. (PDF opens in a new window)

Below is a link to the required forms:

The required forms