Bank loss restriction: definition of banking company: the investment banking condition
CTA10/S269B(5)(b), (6), (6A)
The investment banking condition is intended to ensure that investment banks are also classified as banking companies. As investment banking can consist of a wide variety of different activities, some of these activities are carried on by firms that are not normally considered as investment banks.
The investment banking condition is therefore designed to exclude those companies or partnerships that have permissions to carry out a wide range of regulated activities but where those activities are either narrow in range or are a relatively small part of its business.
The investment banking condition has three tests, all of which need to be met.
The first test is met if the company or partnership is an investment bank. The definition of an investment bank for the purpose of the bank loss restriction measure is provided at CTA10/s269B(6A). A company or partnership will be an investment bank if:
- it is both an IFPRU 730K firm and a full scope IFPRU investment firm as defined in the FCA Handbook or
- a company or partnership designated by the PRA as an investment firm (the PRA regularly publishes a list of investment firms)
UK branches of foreign investment banks are usually regulated by the regulatory authority in their home state and are unlikely to hold the regulatory permissions that would cause them to be classified as IFPRU 730K firm and a full scope IFPRU investment firm. This means without a special rule they would not be regarded as an investment bank.
CTA10/S269BC (10) says that the entity, to which the branch belongs, will be regarded as an investment bank if it is or was carrying on the same type of activities as a UK investment bank. This is achieved by asking whether the entity would need to be regulated as an IFPRU 730K firm and a full scope IFPRU investment firm if it was resident in the UK.
See the activity test below for the kind of activities that would bring the foreign investment bank into this definition.
The second part of the investment banking condition looks at the nature and extent of the activities the entity carries out.
The activity test is satisfied when the entity’s activities consist wholly or mainly of any of the regulated activities described in the following articles of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI2001/544):
- article 14 (dealing in investments as principal)
- article 21 (dealing in investments as agent)
- article 25 (arranging deals in investments)
- article 40 (safeguarding and administering investments), and
- article 61 (entering into regulated mortgage contracts)
The third part of the investment banking condition is that the entity carries on those regulated activities wholly or mainly in the course of trade.