Mortgage and insurance intermediaries are required by our rules:

1. (1)

   to hold a minimum amount of capital (capital resources requirement); and

2. (2)

   to ensure that they are able to meet their liabilities as they fall due (solvency requirement).

This chapter summarises these requirements, which are in PRU 9.3 (see the Integrated Prudential Sourcebook (PRU)).

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.

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.

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

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.

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).

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.

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.

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.

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

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

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.

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.

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.

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.

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.

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.

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).

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.

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.