MIGI 7.3 Summary flowchart and worked examples

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.

Does your firm meet its capital resources requirement?

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.

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.

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.