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MIGI 7.2 The capital resources requirements

What are the capital resources requirements?

MIGI 7.2.1G

The capital resources requirements are the same for mortgage and insurance intermediaries. They are set out in PRU 9.3.

MIGI 7.2.2G

The table below summarises the capital resources requirements. Generally, the larger your annual income from regulated activities (i.e. insurance mediation activities, mortgage mediation activities, or both) the more capital you have to hold.

MIGI 7.2.3G

Firms that hold client money or client title documents are required to hold more capital than those that do not. In addition, higher minimum resources requirements apply to insurance intermediaries that hold client money relating to retail customers in a non-statutory trust. There is more information on the rules that apply to insurance intermediaries when handling client money in Part III, Chapter 2 (statutory and non-statutory trusts are explained at paragraphs 2.3.2 to 2.3.9).

MIGI 7.2.4G

There are no specific rules governing how mortgage intermediaries must handle client money but they must comply with the FSA's overarching Principles (see Part I, Chapter 3) and other generally applicable rules.

MIGI 7.2.5G

Summary of the capital resources requirements (in PRU 9.3.30 R) for a firm carrying on mortgage mediation activities, insurance mediation activities, or both:

Type of firm

Capital resources requirement

Mortgage intermediary, insurance intermediary, or both, that does not hold client money.

£5,000 or, if higher, 2.5% of the firm's annual income from regulated activity.

Mortgage intermediary that holds client money

£10,000 or, if higher, 5% of the firm's annual income from regulated activity.

Insurance intermediary that holds client money in a statutory trust account

Insurance intermediary that holds client money relating to transactions with commercial customers in a non-statutory trust account

£10,000 or, if higher, 5% of the firm's annual income from regulated activity.

Insurance intermediary that holds client money relating to transactions with retail customers in a non-statutory trust account

£50,000 or, if higher, 5% of the firm's annual income from regulated activity (CASS 5.4.4 R)

What counts towards your firm's annual income?

MIGI 7.2.6G

When calculating your firm's capital resources requirement (see the table at paragraph 7.2.5 above), the only income that counts towards its annual income is that from its insurance mediation activities, mortgage mediation activities, or both, according to your most recent annual financial statement. You should not include income from any other sources in the calculation. So, for example, a motor dealer that is authorised to carry on insurance mediation activities would not need to include its income from selling cars, only its income from selling insurance.

MIGI 7.2.7G

Annual income includes all brokerages, fees, commissions or other related income earned by your firm. It includes commissions and other earnings which your firm pays out of its own income to other persons involved in a transaction (e.g. commission shared with a sub-agent or another intermediary). Your firm's income does not, however, include any amounts due to another person (e.g. the product provider), which you have collected on its behalf. If your firm has appointed representatives you should include in your income calculation the share of your income that you have paid out to them or that they have retained for their activities for which you have accepted responsibility as principal.

MIGI 7.2.8G

Any commission income your firm receives from a third party premium finance firm need not be included in your capital resources requirement calculation.

MIGI 7.2.9G

For full details of what we mean by annual income, see PRU 9.3.42 R to PRU 9.3.50 R.

What counts towards your firm's capital resources?

MIGI 7.2.10G

PRU 9.3.51 R to PRU 9.3.57 R sets out what you can include when calculating your firm's capital resources. This differs depending on whether your firm is a company, a sole trader, a partnership or a limited liability partnership.

MIGI 7.2.11G

Companies

If your firm is a UK-incorporated company, the items eligible for inclusion in its capital resources are:

  1. (1)

    fully paid up ordinary shares in the company;

  2. (2)

    preference shares in the company;

  3. (3)

    audited reserves (i.e. retained earnings, as verified by your firm's auditors);

  4. (4)

    interim net profits (i.e. profits made after the date of your firm's last annual financial statement, as verified by your firm's auditors);

  5. (5)

    revaluation reserves (i.e. reserves for any reassessment of the value of your firm's capital assets compared to their original cost);

  6. (6)

    general provisions (i.e. provisions held against unidentified potential losses - though we would not normally expect a mortgage or insurance intermediary to have any); and

  7. (7)

    subordinated loans (i.e. loans that rank below other, unsubordinated, debt in the queue for repayment if the borrower has to be wound up. Subordinated loans can only be counted as part of your firm's capital if they satisfy the conditions in PRU 9.3.56 R-57.

MIGI 7.2.12G

Sole traders

If your firm is a sole trader, your capital resources are the net balances (according to the sole trader's most recent annual financial statement) on your capital account and current account, plus any eligible subordinated loans.

MIGI 7.2.13G

Partnerships

If your firm is a partnership, your capital resources will normally consist of the net balances, (according to the partnership's most recent annual financial statement), on:

  1. (1)

    the partners' capital account (i.e. the account into which the partners' capital contributions are paid); and

  2. (2)

    the partners' current accounts;

plus any eligible subordinated loans.

MIGI 7.2.14G

Limited liability partnerships

If your firm is a limited liability partnership (LLP), your capital resources will normally consist of the net balances (according to the LLP's most recent annual financial statement) on the members' capital account and the members' reserves, plus any eligible subordinated loans.

MIGI 7.2.15G

Subordinated loans and redeemable preference shares

There is a limit on the amount of subordinated loans and redeemable preference shares that your firm may include in its capital resources if it holds client money or client title documents. For details of this restriction, see PRU 9.3.57 R.

Deductions from capital resources

MIGI 7.2.16G

To work out how much capital your firm has you must deduct the following items from the total of the above capital resources items:

  1. (1)

    intangible assets (e.g. brand names, trademarks and, from 14 January 2008, goodwill);

  2. (2)

    interim net losses (i.e. losses made after the date of your firm's last annual financial statement);

  3. (3)

    investments in your own shares (if your firm is a company); and

  4. (4)

    excess of drawings over profits (if your firm is a sole trader or partnership).

What if my firm has a capital resources or solvency shortfall?

MIGI 7.2.17G

If, after making the deductions set out above, your firm has a shortfall in meeting either its solvency or its capital resources requirement, there may be other options open to it to make good the shortfall (PRU 9.3.54 R) as shown in the table at paragraph 7.2.18.

MIGI 7.2.18G

Options available to your firm if it has a shortfall:

Type of firm

Options in the case of a shortfall

A sole trader or a partnership that does not hold client money or client title documents

Personal assets of the sole trader or of a partner may be used to make up the shortfall. This is provided that the personal assets in question are not needed to meet other liabilities arising from the sole trader or partner's personal activities or other business activities not regulated by us. Personal assets may include, for example, a car or a house.

A sole trader or a partnership that does hold client money or client title documents

Personal assets may not be used to make up a shortfall. Your firm will need to increase its capital resources.

A company, whether or not it holds client money or client title documents

Your firm will need to increase its capital resources.

MIGI 7.2.19G

The following chapters of this Guide are also relevant:

The Principles - Part I, Chapter 3.1

Client money - Part III, Chapter 2