How not to be a goodwill fatality

The Financial Services Authority's requirement that goodwill will no longer be an eligible asset for capital adequacy purposes from 14 January 2008 has left a number of insurance intermediaries pondering their next steps to ensure compliance with the rules in MIPRU 4.

This is no FSA-led conspiracy to drive the smaller intermediary out of business as some market participants would have you believe. The IBRC and Lloyd's rules did not recognise goodwill as a regulatory asset and nor does the FSA permit it in any other sector that it regulates.

A transitional rule allowed intermediaries three years to prepare. Those labouring under the misconception that the FSA will alter its course on this issue are sadly mistaken. The FSA takes the view that authorised firms should only take into account assets on which customers and creditors can rely in the event of insolvency. Goodwill is an intangible asset and cannot be readily converted into cash. Therefore, it has little value, should such an event occur, the regulator argues.

This stance means that many firms have gaps to plug in order to maintain adequate capital resources after the deduction of goodwill. The British Insurance Brokers' Association has encouraged those of its members affected by goodwill to explore a number of options to address the issue. These include: a capital injection through the issue of further ordinary or preference shares to existing/new shareholders; an injection of capital from another group member; restructuring the balance sheet to boost tangible resources; amendment of dividend policy to boost profit and loss reserves and offset the goodwill deduction; use of a sub-ordinated loan; and changing from operating a non-statutory to a statutory trust account to reduce capital requirement to the higher of £10,000 or 5% of annual income, or indeed stop handling client money altogether and take advantage of a £5000 minimum requirement.

Professional advice is vital to help firms pick through the various options and decide which is the most suitable. Intermediaries should not underestimate the time required to structure a financial transaction of this nature; such a miscalculation could be fatal to their business. BIBA strongly recommends that those brokers who have yet to address how this issue will affect them do so immediately.