CMCOB 7.1 Purpose

CMCOB 7.1.1 G
  1. (1)

    1This chapter builds upon the appropriate resources threshold condition set out in paragraph 2D of Schedule 6 to the Act (see COND 2.4), which requires firms to have appropriate resources including financial resources.

  2. (2)

    This chapter also builds upon Principle 4, which requires a firm to maintain adequate financial resources, by focusing upon the adequacy of that part of a firm’s financial resources that consists of capital resources.

  3. (3)

    The chapter also includes requirements for firms to have professional indemnity insurance if they carry on advice, investigation or representation in relation to a criminal injury claim.

CMCOB 7.1.2 R

1A contravention of the rules in CMCOB 7.2 or CMCOB 7.3 does not give rise to a right of action by a private person under section 138D of the Act (and each of those rules) is specified under section 138D(3) of the Act as a provision giving rise to no such right of action).

CMCOB 7.2 Prudential requirements

General solvency requirement

CMCOB 7.2.1 R

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

General prudential resources requirement

CMCOB 7.2.2 R

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 7.2.3 R

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 7.2.4 R

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 7.2.5 R
  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 7.2.6 R

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 7.2.7 R

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 7.2.8 R
  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’sreadily 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’sannual 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 7.2.9 R

1The client money requirement is £20,000.

Prudential requirement for lead generators

CMCOB 7.2.10 R

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

CMCOB 7.3 Calculation of prudential resources

Eligible prudential resources

CMCOB 7.3.1 R
  1. (1)

    1A firm must calculate its prudential resources only from the items which are eligible to contribute to a firm’s prudential resources as set out in the table in CMCOB 7.3.2R.

  2. (2)

    In arriving at its calculation of its prudential resources, a firm must deduct certain items as set out in the table in CMCOB 7.3.3R.

CMCOB 7.3.2 R

1Table: Items which are eligible to contribute to the prudential resources of a firm

Item

Additional explanation

1

Share capital

This must be fully paid and may include:

(1)

ordinary share capital; or

(2)

preference share capital (excluding preference shares redeemable by shareholders within two years).

2

Capital other than share capital (for example, the capital of a sole trader, partnership or limited liability partnership)

The capital of a sole trader is the net balance on the firm’s capital account and current account. The capital of a partnership is the capital made up of the partners’:

(1)

capital account, that is the account:

(a)

into which capital contributed by the partners is paid; and

(b)

from which, under the terms of the partnership agreement, an amount representing capital may be withdrawn by a partner only if:

(i)

the person ceases to be a partner and an equal amount is transferred to another such account by the person’s former partners or any person replacing that person as their partner; or

(ii)

the person ceases to be a partner and an equal amount is transferred to another such account by the person’s former partners or any person replacing that person as their partner; or

(iii)

the partnership is otherwise dissolved or wound up; and

(2)

current accounts according to the most recent financial statement.

For the purpose of the calculation of capital resources in respect of a defined benefit occupational pension scheme:

(3)

a firm must derecognise any defined benefit asset;

(4)

a firm may substitute for a defined benefit liability the firm’sdeficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

3

Reserves (Note 1)

These are, subject to Note 1, the audited accumulated profits retained by the firm (after deduction of tax, dividends and proprietors’ or partners’ drawings) and other reserves created by appropriations of share premiums and similar realised appropriations. Reserves also include gifts of capital, for example, from a parent undertaking.

For the purposes of calculating capital resources, a firm must make the following adjustments to its reserves, where appropriate:

(1)

a firm must deduct any realised gains or, where applicable, add back in any unrealised losses on debt instruments held, or formerly held, in the available-for-sale financial assets category;

(2)

a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on cash flow hedges of financial instruments measured at cost or amortised cost;

(3)

in respect of a defined benefit occupational scheme:

(a)

a firm must derecognise any defined benefit asset;

(b)

a firm may substitute for a defined benefit liability the firm’sreduction amount, provided that the election is applied consistently in respect of any one financial year.

4

Interim net profits (Note 1)

If a firm seeks to include interim net profits in the calculation of its capital resources, the profits have, subject to Note 1, to be verified by the firm’s external auditor, net of tax, anticipated dividends or proprietors’ drawings and other appropriations.

5

Revaluation reserves

Revaluation reserves such as reserves arising from the revaluation of land and buildings, including any net unrealised gains for the fair valuation of equities held in the available-for-sale financial assets category.

6

Subordinated loans/debt

Subordinated loans/debt must be included in capital on the basis of the provisions in this chapter that apply to subordinated loans/debts.

Note:

1

Reserves must be audited and interim net profits, general and collective provisions must be verified by the firm’s external auditor unless the firm is exempt from the provisions of Part VII of the Companies Act 1985 (section 249A (Exemption from audit) or, where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies; Conditions for exemption from audit)) relating to the audit of accounts.

CMCOB 7.3.3 R

1Table: Items which must be deducted in arriving at prudential resources

1

Investments in own shares

2

Investments in subsidiaries (Note 1)

3

Intangible assets (Note 2)

4

Interim net losses (Note 3)

5

Excess of drawings over profits for a sole trader or a partnership (Note 3)

Notes:

1

Investments in subsidiaries are valued at the full balance sheet value.

2

Intangible assets are the full balance sheet value of goodwill, capitalised development costs, brand names, trademarks and similar rights and licences.

3

The interim net losses in row 4, and the excess of drawings in row 5, are in relation to the period following the date as at which the prudential resources are being computed.

Subordinated loans/debt

CMCOB 7.3.4 R

1A subordinated loan/debt must not form part of the prudential resources of the firm unless it meets the following conditions:

  1. (1)

    it has an original maturity of:

    1. (a)

      at least five years; or

    2. (b)

      it is subject to five years’ notice of repayment;

  2. (2)

    the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;

  3. (3)

    the only events of default must be non-payment of any interest or principal under the debt agreement or the winding-up of the firm;

  4. (4)

    the remedies available to the subordinated creditor in the event of non-payment or other default in respect of the subordinated loan/debt must be limited to petitioning for the winding-up of the firm or proving the debt and claiming in the liquidation of the firm;

  5. (5)

    the subordinated loan/debt must not become due and payable before its stated final maturity date, except on an event of default complying with (3);

  6. (6)

    the agreement and the debt are governed by the law of England and Wales, or of Scotland or of Northern Ireland;

  7. (7)

    to the fullest extent permitted under the rules of the relevant jurisdiction, creditors must waive their right to set off amounts they owe the firm against subordinated amounts owed to them by the firm;

  8. (8)

    the terms of the subordinated loan/debt must be set out in a written agreement that contains terms which provide for the conditions set out in this rule; and

  9. (9)

    the loan/debt must be unsecured and fully paid up.

CMCOB 7.3.5 R

1When calculating its prudential resources, the firm must exclude any amount by which the aggregate amount of its subordinated loans/debts exceeds the amount calculated as follows:

  1. a – b

  2. where:

  3. a = the sum of Items 1-5 in the Table of items, which are eligible to contribute to a firm’s capital resources (see CMCOB 7.3.2R)

  4. b = the sum of Items 1-5 in the Table of items, which must be deducted in arriving at a firm’s capital resources (see CMCOB 7.3.3R)

CMCOB 7.3.6 G

1 CMCOB 7.3.5R can be illustrated by the examples set out below:

(1)

Share capital

£20,000

Reserves

£30,000

Subordinated loans/debts

£10,000

Intangible assets

£10,000

As subordinated loans/debts (£10,000) are less than the total of share capital + reserves - intangible assets (£40,000) the firm need not exclude any of its subordinated loans/debts pursuant to CMCOB 7.3.4R when calculating its prudential resources. Therefore the firm’s total prudential resources will be £50,000.

(2)

Share capital

£20,000

Reserves

£30,000

Subordinated loans/debts

£60,000

Intangible assets

£10,000

As subordinated loans/debts (£60,000) exceed the total of share capital + reserves - intangible assets (£40,000) by £20,000, the firm should exclude £20,000 of its subordinated loans/debts pursuant to CMCOB 7.3.5R when calculating its prudential resources. Therefore the firm’s total prudential resources will be £80,000.

CMCOB 7.4 Professional indemnity insurance: personal injury claims management

Application

CMCOB 7.4.1 R

Requirement to hold

CMCOB 7.4.2 R

1A firm must take out and maintain at all times a professional indemnity insurance contract that provides for a level of cover at least equal to the requirements in this section from an insurer which is authorised to enter into professional indemnity insurance contracts in:

  1. (1)

    a Zone A country; or

  2. (2)

    the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

CMCOB 7.4.3 R

1The professional indemnity insurance contract must make provision for cover in respect of any claim for loss or damage, for which the firm may be liable as a result of a negligent act, error or omission by:

  1. (1)

    the firm; or

  2. (2)

    any person acting on behalf of the firm including employees, or its other agents.

CMCOB 7.4.4 R

1The minimum limit of indemnity per year in the professional indemnity insurance contract must be no lower than:

  1. (1)

    £250,000 for a single claim against the firm;

  2. (2)

    £500,000 in the aggregate.

CMCOB 7.4.5 R
  1. (1)

    1Where the professional indemnity insurance contract includes an excess, the excess must not be greater than £10,000 per claim.

  2. (2)

    The professional indemnity insurance contract must contain cover in respect of legal defence costs.

  3. (3)

    The professional indemnity insurance contract must provide for continuous cover for all claims:

    1. (a)

      first made against the firm during the period of insurance; or

    2. (b)

      made against the firm during or after the period of insurance and arising from claims first notified to the insurer during the period of insurance.