MIGI 7
Financial resources requirements
MIGI 7.1
Introduction
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MIGI 7.1.1
See Notes
Mortgage and insurance intermediaries
are required by our rules:
(1) to hold a minimum amount of capital (capital resources requirement);
and
(2) to ensure that they are able to meet their liabilities as they
fall due (solvency requirement).
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MIGI 7.1.2
See Notes
This chapter summarises these requirements,
which are in PRU 9.3 (see the Integrated
Prudential Sourcebook (PRU)).
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MIGI 7.1.3
See Notes
By setting minimum financial resources
standards, we aim to reduce the possibility of a shortfall of funds and to
provide a cushion against disruption if the firm ceases to trade. There is
a greater risk to consumers, and a greater adverse impact on market confidence,
if a firm holds client money or client title documents (such as bearer instruments)
and fails. For this reason, the capital resources requirements distinguish
between mortgage and insurance intermediaries holding client money or title
documents and those that do not.
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MIGI 7.1.4
See Notes
The financial resources requirements
are minimum requirements. In line with FSA Principles 3 and 4 (see the table
at Part I, paragraph 3.1.3), your firm's senior management is responsible
for maintaining adequate financial resources at all times. So, the onus is
on senior management to ensure that your firm has such additional financial
resources over and above our requirements as they consider necessary.
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MIGI 7.2
The capital resources requirements
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What are the capital resources requirements?
MIGI 7.2.1
See Notes
The capital resources requirements are
the same for mortgage and insurance intermediaries. They are set out in PRU
9.3.
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MIGI 7.2.2
See Notes
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.
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MIGI 7.2.3
See Notes
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).
- 31/05/2005
MIGI 7.2.4
See Notes
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.
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MIGI 7.2.5
See Notes
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) |
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What counts towards your firm's annual income?
MIGI 7.2.6
See Notes
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.
- 31/05/2005
MIGI 7.2.7
See Notes
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.
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MIGI 7.2.8
See Notes
Any commission income your firm receives
from a third party premium finance firm need not be included in your capital
resources requirement calculation.
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MIGI 7.2.9
See Notes
For full details of what we mean by
annual income, see PRU 9.3.42 R to PRU 9.3.50 R.
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What counts towards your firm's capital resources?
MIGI 7.2.10
See Notes
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.
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MIGI 7.2.11
See Notes
Companies
If your firm is a UK-incorporated company, the items eligible for inclusion in its capital resources are:
If your firm is a UK-incorporated company, the items eligible for inclusion in its capital resources are:
(1)
fully paid up ordinary shares in the company;
(2)
preference shares in the company;
(3)
audited reserves (i.e. retained
earnings, as verified by your firm's auditors);
(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)
revaluation reserves (i.e. reserves
for any reassessment of the value of your firm's capital assets compared to
their original cost);
(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)
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.
- 31/05/2005
MIGI 7.2.12
See Notes
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.
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.
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MIGI 7.2.13
See Notes
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:
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) the partners' capital account (i.e.
the account into which the partners' capital contributions are paid); and
(2) the partners' current accounts;
plus any eligible subordinated loans.- 01/12/2004
MIGI 7.2.14
See Notes
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.
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.
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MIGI 7.2.15
See Notes
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.
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.
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Deductions from capital resources
MIGI 7.2.16
See Notes
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)
intangible assets (e.g. brand
names, trademarks and, from 14 January 2008, goodwill);
(2)
interim net losses (i.e. losses
made after the date of your firm's last annual financial statement);
(3)
investments in your own shares (if
your firm is a company); and
(4)
excess of drawings over profits (if
your firm is a sole trader or partnership).
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What if my firm has a capital resources or solvency shortfall?
MIGI 7.2.17
See Notes
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.
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MIGI 7.2.18
See Notes
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. |
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MIGI 7.2.19
See Notes
The following chapters
of this Guide are also relevant:
| • | The Principles - Part I, Chapter 3.1 |
| • | Client money - Part III, Chapter 2 |
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MIGI 7.3
Summary flowchart and worked examples
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Summary flowchart: does your firm meet its capital resources requirement?
MIGI 7.3.1
See Notes
The flowchart below takes you through
the questions you need to consider to work out whether or not your firm meets
its capital resources requirement. In addition, on the next few pages you
will find some worked examples to help you.
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MIGI 7.3.2
See Notes
Does your
firm meet its capital resources requirement?
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Financial resources requirements: worked examples
MIGI 7.3.3
See Notes
Example 1:
Limited company not holding client money or client title documents
Company A has annual mortgage mediation income of £20,000, according to its last financial statements. Company A does not hold client money.
Company A's capital resources requirement is the higher of £5,000 and 2.5% of its annual mortgage mediation income, i.e. the higher of:
• £5,000; and
• 2.5% of £20,000 = £500
So company A must have capital resources of at least £5,000. Company A's capital resources = share capital + audited reserves + subordinated loan = £1,000 + £10,000 + £5,000 = £16,000.
So Company A meets its capital resources requirement.
Note: from 14 January 2008, Company A must deduct the goodwill on its balance sheet, so from that date, its capital resources will be £14,000, based on this balance sheet and assuming that the subordinated loan has not matured.
Company A has annual mortgage mediation income of £20,000, according to its last financial statements. Company A does not hold client money.
Company A's capital resources requirement is the higher of £5,000 and 2.5% of its annual mortgage mediation income, i.e. the higher of:
• £5,000; and
• 2.5% of £20,000 = £500
So company A must have capital resources of at least £5,000. Company A's capital resources = share capital + audited reserves + subordinated loan = £1,000 + £10,000 + £5,000 = £16,000.
So Company A meets its capital resources requirement.
Note: from 14 January 2008, Company A must deduct the goodwill on its balance sheet, so from that date, its capital resources will be £14,000, based on this balance sheet and assuming that the subordinated loan has not matured.
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MIGI 7.3.4
See Notes
Example 2:
Partnership holding client money
Partnership B, which holds client money in a statutory trust, has annual insurance mediation income of £210,000, according to its last annual financial statement.
Partnership B's capital resources requirement is the higher of £10,000 and 5% of its annual insurance mediation income, i.e. the higher of:
•£10,000; and
• 5% of £210,000 = £10,500.
So Partnership B must have capital resources of at least £10,500.
Partnership B's capital resources = current account + capital account
= £20,000 + £1,000 = £21,000.
So Partnership B meets its capital resources requirement.
Partnership B, which holds client money in a statutory trust, has annual insurance mediation income of £210,000, according to its last annual financial statement.
Partnership B's capital resources requirement is the higher of £10,000 and 5% of its annual insurance mediation income, i.e. the higher of:
•£10,000; and
• 5% of £210,000 = £10,500.
So Partnership B must have capital resources of at least £10,500.
Partnership B's capital resources = current account + capital account
= £20,000 + £1,000 = £21,000.
So Partnership B meets its capital resources requirement.
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MIGI 7.3.5
See Notes
Example 3:
Sole trader not holding client money or other client title documents
Sole trader C has annual mortgage mediation income of £40,000, according to its last financial statements. Sole trader C does not hold client money. In addition, Sole Trader C has personal assets of £30,000 and personal liabilities of £1,000.
Sole trader C's capital resources requirement is the higher of £5,000 and 2.5% of its annual mortgage mediation income, i.e. the higher of:
•£5,000; and
• 2.5% of £40,000 = £1,000.
So Sole Trader C must have capital resources of at least £5,000.
Sole trader C's capital resources = capital account + current account =
£1,000 + £1,000 = £2,000.
So Sole Trader C has a shortfall of £3,000 in meeting its capital resources requirement.
However, Sole Trader C has net personal assets of £29,000, so £3,000 of these may be used to make up this £2,000 shortfall.
Sole trader C has annual mortgage mediation income of £40,000, according to its last financial statements. Sole trader C does not hold client money. In addition, Sole Trader C has personal assets of £30,000 and personal liabilities of £1,000.
Sole trader C's capital resources requirement is the higher of £5,000 and 2.5% of its annual mortgage mediation income, i.e. the higher of:
•£5,000; and
• 2.5% of £40,000 = £1,000.
So Sole Trader C must have capital resources of at least £5,000.
Sole trader C's capital resources = capital account + current account =
£1,000 + £1,000 = £2,000.
So Sole Trader C has a shortfall of £3,000 in meeting its capital resources requirement.
However, Sole Trader C has net personal assets of £29,000, so £3,000 of these may be used to make up this £2,000 shortfall.
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