Source: https://www.handbook.fca.org.uk/handbook/BIPRU/6/3.html?date=2012-01-07
Timestamp: 2020-01-18 21:25:34
Document Index: 43884196

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BIPRU 6.3 Operational risk: Basic indicator approach - FCA Handbook
BIPRU 6.3 Operational risk: Basic indicator approa...
BIPRU 6.3.1R 01/01/2007
The ORCR under the basic indicator approach is equal to 15% of the relevant indicator defined in this section.
[Note: BCD Article 103 and Annex X, Part 1 point 1]
Relevant indicator: General
BIPRU 6.3.2R 01/01/2007
The relevant indicator is the three-year average of the sum of:
a firm's net interest income; and
a firm's net non-interest income.
The three-year average must be calculated on the basis of the last three yearly observations at the end of the financial year. When audited figures are not available, business estimates may be used.
If for any given observation, the sum of a firm's net interest income and net non-interest income1 is negative or equal to zero, this figure must be excluded from both the numerator and denominator when calculating the three year average. The relevant indicator must be calculated as the sum of the positive figures divided by the number of positive figures.
[Note: BCD Annex X, Part 1 points 2 to 4]
Relevant indicator: An example calculation
BIPRU 6.3.3G 01/01/2007
If a firm has:
two positive yearly relevant indicators of £20 each; and
the final yearly observation shows a negative figure of £5; then
the relevant indicator is calculated as £20, being £40 (sum of positive figures) divided by 2 (number of positive figures).
Relevant indicator: Insufficient income data
BIPRU 6.3.4G 01/01/2007
A firm that does not have sufficient income data to meet the three-year requirement (e.g. a start-up) may use its forecasted gross income projections for all or part of the three year time period when calculating its relevant indicator.
Relevant indicator: Application of accounting categories
BIPRU 6.3.5R 01/01/2007
This rule applies to a firm that is subject to the Bank Accounts Directive.
Based on accounting categories for the profit and loss account of credit institutions under Article 27 of the Bank Accounts Directive, the relevant indicator in BIPRU 6.3.2 R must be expressed as the sum of the elements listed in the table in BIPRU 6.3.6 R.
Each element in the table in BIPRU 6.3.6 R must be included in the sum with its positive or negative sign.
[Note: BCD Annex X, Part 1 point 5]
BIPRU 6.3.6R 01/01/2007
Table: Relevant indicatorsThis table belongs to BIPRU 6.3.5 R
Income from shares and other variable/fixed-yield securities.
Commissions/fees receivable
Commission/fees payable
Net profit or net loss on financial operations
BIPRU 6.3.7G 01/01/2007
Income from a participation held in an undertaking by the firm or a subsidiary undertaking of the firm should not be included in the relevant indicator calculations, to ensure that intra-group dividends and other intra-group income flows are not double counted.
BIPRU 6.3.8G 01/01/2007
Income received under an operating lease should be included as gross income less depreciation, not as gross rental income.
BIPRU 6.3.9G 01/01/2007
If a firm considers that, due to exceptional circumstances, using a three year average to calculate the relevant indicator would lead to a major overestimation of its ORCR, the firm may apply for a waiver from BIPRU 6.3.2 R.
Exceptional circumstances might include stopping or selling a major business line.
BIPRU 6.3.10R 01/01/2007
The relevant indicator for the basic indicator approach must be calculated before the deduction of any provisions and operating expenses.
Operating expenses must include fees paid for outsourcing services rendered by third parties which are not a parent undertaking or subsidiary undertaking of the firm or a subsidiary undertaking of a parent undertaking which is also the parent undertaking of the firm. Expenditure on the outsourcing of services rendered by third parties may reduce the relevant indicator if the expenditure is incurred by an undertaking subject to supervision under, or equivalent to, the Banking Consolidation Directive.
[Note: BCD Annex X, Part 1 point 7]
BIPRU 6.3.11G 01/01/2007
The definition of 'outsourcing' for the purposes of BIPRU 6.3.10 R (2) is set out in detail in a Joint Forum paper of the Basel Committee on Banking Supervision entitled "Outsourcing in Financial Services" dated February 2005 and can be summarised as meaning a firm's use of a third party to perform activities on a continuing basis that would normally be undertaken by the firm, now or in the future and can be the initial transfer of an activity (or part of that activity) from the firm to a third party or a further transfer of an activity (or part thereof) from one third party service provider to another.
BIPRU 6.3.12R 01/01/2007
The following elements must not be used in the calculation of the relevant indicator:
realised profits/losses from the sale of non-trading book items;
income from extraordinary or irregular items; and
income derived from insurance.
[Note: BCD Annex X, Part 1 point 8 (part)]
BIPRU 6.3.13R 01/01/2007
When revaluation of trading items is part of the profit and loss statement, revaluation may be included in the calculation of the relevant indicator.
BIPRU 6.3.14R 01/01/2007
When Article 36(2) of the Bank Accounts Directive is applied, revaluation booked in the profit and loss account must be included in the calculation of the relevant indicator.
BIPRU 6.3.15R 01/01/2007
When a firm is subject to an accounting framework different from the one established by the Bank Accounts Directive, it must calculate the relevant income indicator on the basis of internal data that best reflect the definition in this section.
[Note: BCD Annex X, Part 1 points 6 and 9]
General risk management standards
BIPRU 6.3.16G 01/08/2011
In common with all BIPRU firms, a firm calculating its ORCR using the basic indicator approach is required to meet the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R.3
In meeting those general risk management standards, a firm that undertakes market-related activities should be able to demonstrate to the FSA that it has considered the Committee of European Banking Supervisors' Guidelines on the management of operational risk in market-related activities, published in October 2010. These can be found at http://www.eba.europa.eu/documents/Publications/Standards---Guidelines/2010/Management-of-op-risk/CEBS-2010-216-(Guidelines-on-the-management-of-op-.aspx3