Bank loss restriction: definition of banking company: introduction
The loss restriction rules are relevant to banking companies; these are companies which carry out retail or investment bank activities or both. There is no simple way to define a bank as banking activity is extremely wide and can involve many different types of activity, this is especially true of investment banks. To overcome these difficulties a bank is defined by pointing to certain key factors such as regulator permissions, the type of regulated entity and the activities that are undertaken.
In the UK regulatory permissions are given by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The PRA supervises banks, building societies and the largest investment firms and the FCA supervises all other investment firms.
A number of the definitions used in the legislation are taken from the handbooks that are maintained from time to time by the FCA and the PRA under the Financial Services and Management Act (FSMA) 2000. They are listed in the glossary to the FCA handbook.
These include the following terms:
- authorised corporate director
- contracts for differences
- discretionary investment manager
- exempt IFPRU commodities firm
- pension scheme
- retail client
These terms, as defined in the handbooks, are also used throughout this guidance.
Two other terms taken from the FCA handbook are full scope IFPRU investment firm and IFPRU 730k firm. These terms describe the type of regulated entity and the activities that it can undertake.
- A Full Scope IFPRU investment firm which is also an IFPRU 730K firm has regulatory permissions that allow it to undertake the core activities of investment banking, namely dealing as principal, holding client money, making markets and placing/underwriting financial instruments.
The firms with lower levels of permission are either:
- an IFPRU Limited Licence firm (these firms are specifically not permitted to deal on own account or underwrite/place financial instruments), or
- an IFPRU Limited Activity firm (these firms can only deal on own account in very limited scenarios such as fulfilling client orders or where they don’t hold client money and have a clearing institution guaranteeing the trade)