MIPRU – Mortgage and Insurance Intermediary Prudential Sourcebook | FCA Handbook Guidance | Business and Prudential Standards

Business/Prudential Standards

1. Prudential Sourcebook (MIPRU)

1.1 Responsibility for Insurance Distribution activity (MIPRU 2.2)

A firm, other than a sole trader, must allocate the responsibility for the firm’s insurance Distribution activity to a director or senior manager.
This may be allocated to an approved person performing:

• A governing function other than non executive director;
• The apportionment and oversight function;
• The significant management function

In the case of a sole trader, the sole trader will be responsible for insurance Distribution activities.

Where a firm has appointed an appointed representative to carry on insurance Distribution activity on its behalf, then the person responsible for the firm’s insurance Distribution activity will also be responsible for the insurance Distribution activity undertaken by the appointed representative.

1.1.1 Knowledge, ability and good repute

This section was deleted from MIPRU as part of the IDD (Insurance Distribution Directive) changes and moved to the SYSC Sourcebook in a new section SYSC 28 – Knowledge, Ability and Good Repute. See the SYSC section of this manual for further details of the requirements.

1.2 Financial safeguards

By setting minimum financial resource standards, the FCA aims to reduce the possibility of a shortfall of funds and to provide a cushion against disruption if the firm ceases to trade.

The financial resources requirements are minimum requirements. In line with FCA Principles 3 and 4, your firm’s senior management is responsible for maintaining adequate financial resources at all times and to ensure that the firm can meet Threshold Conditions relating to appropriate resources. The FCA require firms to undertake regular assessments of both financial and non-financial resources and further information on this assessment and points to consider when meeting this can be found in Section 2 High Level Standards, chapter 3, Threshold Conditions. Therefore, the onus is on senior management to ensure that the firm has such additional financial resources over and above the FCA requirements as they consider necessary.

1.2.1 Capital Resources/Solvency margins: (MIPRU 4.2)

Insurance intermediaries are required by FCA 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).

There is a greater risk to consumers and a greater adverse impact on market confidence, if a firm holds client money and fails. For this reason, the capital resources requirements distinguish between insurance intermediaries holding client money and those that do not. Firms that hold client money 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 consumers in a non-statutory trust.

Therefore, to determine your required solvency margin in respect of your Distribution activities, you will need to decide whether:

• to manage client money; and
• if you do manage client money and this is consumer’s client money, whether it will be held in a statutory or non-statutory trust.

The table below summaries the capital resources requirements:

What counts towards your firm’s annual income?

When calculating your firm’s capital resources requirement, the only income that counts towards its annual income is that from its general insurance and other regulated activities, according to your most recent annual financial statement. You should not include income from any other sources in the calculation. So, for example, if your firm owns the premises that business is conducted from and there is a flat above the office that is let out, then income from renting the flat would not need to be included in the annual income calculation.

Annual income includes all brokerages, fees, commissions and other related income earned by your firm. It includes any monies you pay out to other intermediaries involved in the transaction; however it will not include monies you pay to product providers. If your firm has appointed representatives you should include in your income calculation, income due to them for the regulated activities for which you have accepted responsibility as principal.

Any commission or other income your firm receives from third party premium finance or other regulated consumer credit should also be included in your capital resources requirement calculation.

If the firm’s annual financial statement does not cover twelve months, the annual income is taken to be the amount in the statement converted proportionally to a twelve-month period.

If the firm does not have an annual financial statement, then the annual income is taken from the forecast or other appropriate accounts that the firm has submitted to the FCA.

For full details of what is meant by annual income, see MIPRU 4.3.1R to MIPRU 4.3.9R.

What counts towards your firm’s capital resources?

MIPRU 4.4.1R to MIPRU 4.4.9R 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. fully paid up ordinary shares in the company;
2. preference shares (excluding preference shares redeemable
   by shareholders within two years) in the company;
3. audited reserves (i.e. retained earnings as verified by your firm’s auditors – auditor verification not required if the company is exempt from a statutory audit);
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 – auditor verification not required if the company is exempt from a statutory audit);
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 MIPRU 4.4.7R

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. 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.

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 – for details of this restriction, see MIPRU 4.4.7R.

Deductions from capital resources

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 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).

1.2.2 Compulsory professional indemnity cover (MIPRU 3.2)

To provide protection for the customer, the FCA have concluded that all authorised insurance intermediaries will be required to carry compulsory PI cover or a comparable guarantee from an FCA authorised firm with net tangible assets of more than £10m.

A comparable guarantee is a written agreement by the guarantor to cover any claims that would be covered by a PII policy that satisfies FCA rules. If you are a member of a group of companies that contains an FCA authorised company any comparable guarantee must come from that company.
Intermediaries must take out and maintain professional indemnity cover from either:

1. an insurance undertaking authorised to transact professional indemnity insurance in the EEA; or
2. a person of equivalent status in:
   (i) a Zone A country; or
   (ii) the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

A ‘Zone A country’ is defined in the glossary of the FCA’s Handbook of rules and guidance as all EEA States and all other countries which are full members of the Organisation for Economic Co-operation and Development and those countries which have concluded special lending arrangements with the International Monetary Fund associated with the Fund’s General Arrangements to Borrow.

Such PI cover should meet the following minimum requirements.

Limits of cover

While the limits set are not affected by a firm’s decision whether to manage client monies, the excess that is required will be. We have set out in the table below the minimum limits required.

If a policy provides cover to more than one firm, then:

• The limits of indemnity must be calculated on the combined annual income of all the firms named in the policy; and
• Each firm named in the policy must have the benefit of the relevant minimum limits of indemnity.

What counts towards your firm’s annual income?

When calculating your firm’s PI requirement, the only income that counts towards its annual income is that from its general insurance and other regulated activity, according to your most recent annual financial statement. You should not include income from any other sources in the calculation. So, for example, if your firm owns the premises that business is conducted from and there is a flat above the office which is let out, then income from renting the flat would not need to be included in the annual income calculation.
Annual income includes all brokerages, fees, commissions and other related income earned by your firm. It includes any monies you pay out to other intermediaries involved in the transaction, however it will not include monies you pay to product providers. If your firm has appointed representatives, you should include in your income calculation income due to them for the activities for which you have accepted responsibility as principal.
Any commission or other income your firm receives from third party premium finance or other regulated consumer credit should also be included in your income calculation.

Contract terms

The contract of professional indemnity insurance must incorporate terms which make provision for:

a) cover in respect of claims that relate to the firm’s general insurance for which a firm may be liable as a result either of its own conduct or that of its employees and appointed representatives (acting within the scope of their appointment);

Employees include (but is not limited to) partners, directors, individuals that are self employed or operating under a contract hire agreement and any other individual employed in connection with the business.

b) the required minimum limits of indemnity are as set out above;

c) cover in respect of legal defence costs;

d) continuous cover in respect of claims arising from work carried out from the date on which the firm was given Part IV permission;

e) an excess (that is to say, the first amount of each claim which is payable by the firm) not exceeding either:

A firm may hold an excess that is higher provided it holds more capital than the minimum required by the FCA rules (details of additional capital requirements are in MIPRU 3.2.14R). You can negotiate how much risk to transfer to an insurance company and how much to retain but you will need to hold additional own funds; and

f) cover in respect of Ombudsman awards made against the firm. The maximum award that can be made is £150,000.00.

The required cover need not all be covered under the same PI policy. So legal defence costs, for example, could be covered under a separate policy.

1.3 Use of Intermediaries (MIPRU 5.2)

This new rule resulting from the IDD extends a rule which previously only applied to Insurers to all firms including Insurance Intermediaries. It requires them not to deal with other intermediaries for Insurance Distribution activities unless they are authorised or exempt.

Before using the services of other intermediaries firms should check the Financial Services Register or, for an EEA firm, its Home State regulator, to confirm their regulatory status.

1.4 Statutory audit

FCA regulations require that all regulated firms should file statutory (audited) accounts (where they are incorporated firms). However, firms that are currently not required to do this under Company Law are exempt from this requirement.

A company may qualify for an audit exemption if it has at least 2 of the following:

• an annual turnover (brokerage) of no more than £10.2 million
• assets worth no more than £5.1 million
• 50 or fewer employees on average

and is not a subsidiary company.

Such firms will not usually be required to file statutory (audited) accounts under FCA rules – SUP 3.1. Further advice can be sought from your accountant.