Content Options

View Options

Status: You are viewing the version of the handbook as on 2019-09-14.

CMCOB 7.2 Prudential requirements

General solvency requirement

CMCOB 7.2.1R

1A firm must ensure that it is able at all times to meet its liabilities as they fall due.

General prudential resources requirement

CMCOB 7.2.2R

1A firm must ensure at all times that its prudential resources, calculated in accordance with CMCOB 7.3, are not less than its prudential resources requirement.

Prudential resources: general accounting principles

CMCOB 7.2.3R

1A firm must recognise an asset or liability, and measure its amount, in accordance with the relevant accounting principles applicable to it for the purpose of preparing its annual financial statements unless a rule requires otherwise.

Prudential resources requirement: firms carrying on other regulated activities

CMCOB 7.2.4R

1The prudential resources requirement for a firm carrying on a regulated activity in addition to those covered by this chapter, is the higher of:

  1. (1)

    the requirement which is applied by this chapter; and

  2. (2)

    the prudential resources requirement or capital resources requirement which is applied by another rule or requirement to the firm.

Classification of firms for prudential resources purposes

CMCOB 7.2.5R
  1. (1)

    1For the purposes of this chapter, a firm which carries on any regulated claims management activities other than seeking out, referrals and identification of claims or potential claims is:

    1. (a)

      a “Class 1 firm” if its total income in the year ending on its most recent accounting reference date is not less than £1million; and

    2. (b)

      a “Class 2 firm” if its total income in the year ending on its most recent accounting reference date is less than £1million.

  2. (2)

    A firm which carries on no regulated claims management activities other than seeking out, referrals and identification of claims or potential claims is neither a Class 1 firm nor a Class 2 firm, and its prudential resources requirement is specified in CMCOB 7.2.10R.

  3. (3)

    For the purposes of this chapter, total income only includes income relating to the part of the business which is involved in carrying on regulated claims management activities and ancillary activities.

  4. (4)

    Where the firm has not yet started to trade, total income is to be calculated based on forecast income included in the budget for the first twelve months’ trading, as submitted with the firm’s application for authorisation.

Prudential resources requirement for a Class 1 firm

CMCOB 7.2.6R

1Subject to CMCOB 7.2.10R, the prudential resources requirement for a Class 1 firm is:

  1. (1)

    the higher of:

    1. (a)

      £10,000; and

    2. (b)

      the firm’s overheads requirement (see CMCOB 7.2.8R); plus

  2. (2)

    if the firm has held client money at any time in the last 12 months, the client money requirement (see CMCOB 7.2.9R).

Prudential resources requirement for a Class 2 firm

CMCOB 7.2.7R

1Subject to CMCOB 7.2.10R, the prudential resources requirement for a Class 2 firm is:

  1. (1)

    the higher of:

    1. (a)

      £5,000; and

    2. (b)

      the firm’s overheads requirement (see CMCOB 7.2.8R); plus

  2. (2)

    if the firm has held client money at any time in the last 12 months, the client money requirement (see CMCOB 7.2.9R).

The overheads requirement

CMCOB 7.2.8R
  1. (1)

    1A firm’s overheads requirement is an amount that is equal to one sixth of its overheads expenditure.

  2. (2)

    For the purposes of (1), a firm’s overheads expenditure is to be calculated as follows:

    1. (a)

      the firm’s total expenditure in the period of 12 months ending on its most recent accounting reference date; less

    2. (b)

      the total of the following items (if they are included in such expenditure) in that period:

      1. (i)

        staff bonuses, except to the extent that they are guaranteed;

      2. (ii)

        employees’ and directors’ shares in profits, except to the extent that they are guaranteed;

      3. (iii)

        other appropriations of profits and other variable remuneration, except to the extent that they are guaranteed;

      4. (iv)

        shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue;

      5. (v)

        interest charges in respect of borrowings made to finance the acquisition of the firm’s readily realisable investments;

      6. (vi)

        interest paid to customers on client money;

      7. (vii)

        20% of total marketing expenditure; and

      8. (viii)

        other variable expenditure.

  3. (3)

    Where the firm’s total expenditure in the year ending on its accounting reference date was incurred in a period of less than twelve months, the items in (2)(a) and (2)(b) are to be calculated on a pro-rated basis to produce an equivalent annual amount.

  4. (4)

    Where the firm has not yet started to trade, the items in (2)(a) and (2)(b) are to be calculated based on forecast expenditure included in the budget for the first twelve months’ trading, as submitted with the firm’s application for authorisation.

  5. (5)

    In (2)(b)(vii) total marketing expenditure means spending in the twelve months ending on the firm’s most recent accounting reference date on, or relating to:

    1. (a)

      advertising across different media channels;

    2. (b)

      digital marketing;

    3. (c)

      publicity expenses;

    4. (d)

      advertising agency fees;

    5. (e)

      public relations consultancy fees;

    6. (f)

      expenses for promotions offered in connection with services provided by the firm;

    7. (g)

      market research and customer surveys;

    8. (h)

      publications including printed promotional material such as brochures and leaflets, and the firm’s annual report;

    9. (i)

      sponsorships; and

    10. (j)

      gifts to customers.

  6. (6)

    Where, during a period of six months, a firm’s overheads expenditure, calculated according to (2), decreases by 20% or more relative to the overheads expenditure calculated at the last accounting reference date, the firm may recalculate its overheads requirement and therefore its prudential resources requirement accordingly.

  7. (7)

    For the purpose of the recalculation in (6), the firm’s overheads requirement shall be equal to one third of:

    1. (a)

      the firm’s total expenditure in the period of 6 months ending on the date it changes its prudential resources requirement; less

    2. (b)

      the total of the items in (2)(b) (if they are included in such expenditure) in that six month period.

  8. (8)

    A firm must notify the FCA of any change in its prudential resources requirement within 14 days of that change.

The client money requirement

CMCOB 7.2.9R

1The client money requirement is £20,000.

Prudential requirement for lead generators

CMCOB 7.2.10R

1If a lead generator holds client money, the prudential requirement for the firm is the client money requirement (see CMCOB 7.2.9R).