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2Table 2
The following table sets out guidance on how a firm should calculate tariffs for fee blocks CC.1 and CC.2
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Calculating and apportioning annual income - FEES 4 Annex 11BR
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Calculating annual income
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Defining relevant income streams
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(1)
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Firms should report the total income from the credit-related regulated activities for which they have permission.
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(2)
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Firms should only include revenue streams that relate to regulated activities which are carried on 'in the United Kingdom'. In many cases, it will be quite straightforward to identify where an activity is carried on. But when there is a cross-border element, for example because a client is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may arise as to where the activity is carried on. PERG 2.4 describes the legislation that is relevant to this question.
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Reporting period
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(3)
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The “reporting year” is the firm's financial year end during the calendar year prior to the FCAfee year. This fee year starts on 1 April. This is specified in part 5 of FEES 4 Annex 1A.
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(4)
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The income that should be included is the income that was recognised in the accounts of the relevant reporting year. This means that some income due may not be reported until the following year because it has not yet been recognised in the accounts, while other income may be carried forward from previous years.
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Fair value
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(5)
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The firm should report a “fair value” price for any services for which it has made a business decision not to charge to clients. We consider fair value to refer to the amount at which goods or services could be exchanged in an arm’s length transaction between informed and willing parties, other than in a forced or liquidation sale.
Some examples where fair value may be relevant in the context of consumer credit are:
(a) “Imputed interest”: where a loan has been provided interest-free or at a discounted rate, the charge should be rounded up to the prevailing rate normally chargeable to a client with a similar credit rating;
(b) “Commission-equivalent” or “fee-equivalent”: where a firm has foregone or discounted the commission or fee it would actually have charged but for the business decision to grant a discount in a particular case or on a temporary basis, it should report the amount it would otherwise have charged for providing equivalent credit-related regulated activity.
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(6)
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Firms should not estimate a fair value where:
(a) there is a statutory prohibition on charging interest (such as bankruptcy debts); or
(b) they have reduced or suspended their normal charging structure because the debtor is unable to meet contractual repayments and an alternative repayment arrangement has been agreed with the creditor; or
(c) they have made a “borrower-lender-supplier” agreement to allow a customer to pay the cash price of goods or services in instalments - any penalties or interest charged where the customer is in default should be declared as income.
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Inclusions
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(7)
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Annual income should include:
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(a)
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all amounts due to the firm arising out of credit-related regulated activities for which the firm holds permission, including regular charges and instalments due to the firm during the reporting year;
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(b)
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income received in relation to the provision of current account overdrafts interest charges, arrangement fees and credit cards charges;
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(c)
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any payment from a parent to facilitate the discounting or forgoing of any amounts that would otherwise be charged in full to a client, to the extent that the payment exceeds the “fair value” price reported in accordance with paragraph (5) above;
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(d)
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earnings from those who will become its appointed representatives immediately after authorisation; and
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(e)
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administrative charges and any interest from income related to its credit-related regulated activity.
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Prohibited deductions
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(8)
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Deductions should not be made for:
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(a)
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bad debts;
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(b)
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customer benefits such as cash rewards, complimentary travel insurance, air miles vouchers etc;
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(c)
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items such as general business expenses (eg, employees’ salaries and overheads);
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(d)
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fines or penalties levied against the firm;
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(e)
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commission a firm pays to another party to arrange a transaction with a client unless it receives a fee in respect of the same transaction;
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(f)
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the difference (if positive) between the fee payable by a firm to another party for arranging a transaction and the amount payable to the firm by the end client in respect of that transaction (here, the firm must net any excess payable by the end client to zero); and
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(g)
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payments to clients made by way of redress.
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Exclusions
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(9)
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The following should be excluded from the calculation of annual income:
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(a)
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Any income arising from business which is not a credit-related regulated activity.
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(b)
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(i) Repayments of principal lent by the firm in the course of it carrying on a credit-related regulated activity and (ii) sums received by the firm in exchange for the rights to principal owed to the firm where the principal was lent by the firm in the course of carrying on a credit-related regulated activity and where the rights are not sold at a premium to the value of the principal outstanding, should not be included. By the same token, the money a firm has received for the purpose of lending on to consumers as principal (e.g. money raised through wholesale borrowing, grant-aid, intra-group transfers, etc) should not be treated as income.
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(c)
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On the same principle, the income on debt purchase is the difference between the price paid for the purchased book and the amount collected.
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(d)
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To avoid double-counting, amounts which have been passed on to other firms carrying on credit-related regulated activity may be excluded from the calculation of annual income, for example where there is a commission chain. Transfers of income to other firms may be particularly common within groups where, to present a single interface to clients, all amounts due to the group may be collected by one firm for subsequent redistribution to other firms within the group. It is for groups themselves to decide the most convenient way to report such annual income, ie whether the firm which receives the full amount should declare that full amount or whether each firm in the group should report its separate distribution.
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(e)
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Any payment from a parent to facilitate the discounting or forgoing of any amount that would otherwise be charged in full to a client should be excluded to the extent that the payment does not exceed or equal the “fair value” price reported in accordance with paragraph (6) above.
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(f)
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Rebates to customers and fees or commissions passed onto other firms should be excluded.
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(g)
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The costs of wholesale funding should be excluded from the calculation - ie interest payments on money borrowed in order to lend on to customers.
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(h)
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If the total income a firm reports to us in one year includes an estimate for potential income which had been recognised in the accounts but not in practice received, and which has subsequently been written off as a bad debt, the amount may be deducted from the following year’s reported income.
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(i)
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Any debit backs deducted from an intermediary by a lender where a customer settles the loan early or defaults.
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(j)
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Authorised professional firms should exclude the income from non-mainstream regulated activities. They may estimate the proportion of their business that is derived from those activities and split the income from individual invoices accordingly.
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(k)
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For the avoidance of doubt, income relating to operating current accounts and debit card transactions should be excluded except where the income relates to the provision of overdrafts (see paragraph (6)(c) above).
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(l)
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For the avoidance of doubt, income relating to or in respect of an activity is not part of annual income to the extent that the activity benefits from the exclusion in article 69 of the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 (Groups and joint enterprises). Firms should refer to the guidance on the application of this exclusion is contained in PERG 2.9.
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Apportioning annual income
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Where a firm cannot separate its income on the basis of credit-related regulated activities, it may apportion the income on the basis of the proportionate split of business that the firm otherwise undertakes. Examples are outlined below.
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(1)
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If a firm receives annual income from a platform-based business it may report this in line with a wider breakdown of its activities.
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(2)
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A firm may allocate ongoing commission from previous business on the basis of the type of firm it receives the commission from. This avoids tracking back legacy business which may no longer match the provider's current business model.
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(3)
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If a firm has invested income from credit-related regulated activities, then any interest received should be reported as income, in proportion to the volume of business relating to credit-related regulated activities it undertakes to avoid tracking back old payments.
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(4)
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Firms' systems ought to be able to distinguish UK from non-UK business to establish which conduct of business regime it was conducted under. However, if, a firm has a mix of business and its systems do not relate the figures back to the income streams from credit-related regulated activities, then it may make a proportionate split as described above, calculating its regulated UK income on the basis of the overall split between UK and non-UKincome.
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(5)
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An authorised professional firm may estimate the proportion of its business that is derived from regulated activity and split its income for individual invoices accordingly.
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(6)
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It is for individual firms to determine how they should calculate the appropriate split of income. The FCA is not prescriptive about the methodology. It requires only that:
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(a)
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the approach should be proportionate - the FCA is looking for firms to make their best efforts to estimate the split;
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(b)
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the firm must be able on request to provide a sound and clearly expressed rationale for its approach - for example, if all invoices were analysed over a particular period, the firm should be able to justify the period as representative of its business across the year;
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(c)
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the methodology should be objective - for example, based on random sampling of invoices or random stratified sampling; and
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(d)
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the firm must on request be able to provide an audit trail which demonstrates that the choice of methodology was properly considered at an appropriate level or in the appropriate forums within the firm, and the decision periodically reviewed at the same level or in an equivalent forum.
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