Subordinated loans and exempt cad
Written by Charlie Palmer on 10/08/2018

Exempt Cad firms banned from using subordinated loans post June 2016 If you have a subordinated loan AND are an exempt CAD firm then you will need to make changes this month of June 2016.

After 30th June 2016 you cannot use subordinated loans to meet the initial capital definition minimum of £10k.

And the ongoing capital requirement is rising from £10k to £15k at the end of this month and next year to £20k minimum.

You will have to convert your subordinated loan into share capital in order to meet the minimums. Subordinated loans will not help you to meet the minimum requirement. For larger firms this is even more pressing, as firms with turnover over £400k will be applying the five per cent of turnover rule.

This means that a firm with turnover of £1m may need £50k of share capital (which includes retained profit of course, if audited) and once again be barred from using subordinated loans to meet this requirement. Read more here about some apparent ambiguity in the rules: FCA ambiguity in the rules No exempt cad firm can use subordinated loans in the definition of initial capital.

But the new rules have been drafted ignoring this fact and referring only to the ongoing capital requirement. Is that for own funds or for initial capital? I asked this to George Robinson at the FCA who wrote the policy statement. You'd think that might be an easy answer! His reply was cryptic "The own funds requirement is as stated in the rules, nothing has changed"! That is not exactly helpful and of course a lot is changing this month, not least the Gabriel submission.

So the question remains: "Does initial capital refer to the firm’s first 10k rising to 20k and 5% of turnover of the capital adequacy Requirement or to the capital a firm has when it first seeks to get a licecnce to trade?"

We just don’t know because the rules are unclear –even though I have brought this to the attention of the FCA who wrote the latest policy statement on the matter.

Charlie.palmer@ifac.eu

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