BKM207100 - Bank compensation restriction: definition of banking company: introduction

The restriction applies where the compensation is in respect of the conduct of a company which was a banking company at the time of that conduct. This conduct is referred to as the relevant conduct throughout the legislation. Banking companies are companies which carry out retail or investment banking activities or both and for the purpose of these rules include non-resident banks. This, taken together with the rule on qualifying companies (BKM201800), means the restriction may apply where a UK company incurs compensation expenditure in respect of misconduct by an overseas banking company associated with the UK company.

There is no simple way to define a bank as banking activity is extremely diverse and can involve many different types of activity, which is especially true of investment banks. To overcome these difficulties a banking company is defined by pointing to certain key factors such as regulatory permissions, the type of regulated entity and the activities that are undertaken. The compensation restriction rules will also apply where the relevant conduct is that of an overseas company whose activities, if carried on in the UK, would require it to have the relevant regulatory permissions and be the relevant type of regulated entity.

From 1 April 2013 UK regulatory permissions are given by the Prudential Regulation 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. The rules on expenses relating to compensation require one to determine if a company was a banking company at the time of the relevant conduct which could be any time on or after 29 April 1988. The PRA and FCA have been in place since 1 April 2013. Different regulators were in place in earlier periods and the legislation and this guidance set out what regulations or legislation to use when considering if a company was a banking company at the time the conduct occurred.

The PRA and the FCA produce handbooks and rulebooks detailing the regulations that apply to the entities they regulate. A number of the definitions used in the legislation are taken from these handbooks

On 1 January 2014 the EU introduced a new regulatory code for credit institutions and investment firms, which is known as the Capital Requirements Regulations (“CRR”). Both the PRA and the FCA used the CRR as its regulatory code. The FCA implemented the CRR by introducing a new Prudential Sourcebook for investment firms called “IFPRU” which was included in the FCA handbook until 31 December 2021. Following the UK’s exit from the EU, the UK introduced its Capital Requirements Regulation (“UK CRR”). On 1 January 2022, the FCA replaced IFPRU with the new Investment Firm Prudential Regime (“IFPR”).

An overseas bank may not be regulated by the PRA or the FCA, but the rules ensure that an overseas company may meet the definition of a banking company if it is carrying on activities that would require it to be regulated by the PRA or FCA if it were operating in the UK. In particular the rules ensure that if the overseas company is carrying on the same activities as a UK company and that UK company, or a partnership of which it is a member, meets the financial sector condition and the investment banking condition, the overseas company will also meet the financial sector condition and the investment banking condition.

IFPRU

IFPRU replaced the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”) and for periods prior to 1 January 2014 the rules on the definition of a bank refer to a full scope BIPRU investment firm and a BIPRU 730K firm.

Full scope IFPRU investment firm and IFPRU 730K firm were two of the regulatory definitions taken from the FCA handbook and used in defining a banking company. These terms described the type of regulated entity and the activities that it can undertake.

A Full Scope IFPRU investment firm which was also an IFPRU 730K firm had regulatory permissions that allowed 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 were either:

  • an IFPRU Limited Licence firm. These firms were specifically not permitted to deal on own account or underwrite/place financial instruments.
  • an IFPRU Limited Activity firm. These firms could only deal on own account in very limited scenarios such as fulfilling client orders or where they didn’t hold client money and have a clearing institution guaranteeing the trade.