Capitalisation

Capital requirements are designed to provide a financial safety net for customers and ensure firms have sufficient resources to operate responsibly. They complement Professional Indemnity Insurance (PII) and help firms manage risks that may not be covered by insurance.

The amount of capital required will depend on the nature of your business, particularly whether you intend to hold client money and how those funds will be managed.

Rather than simply stating that you meet the minimum requirement, explain:

How much capital is available.
Where the capital comes from.
Whether funding has been introduced by directors, shareholders or investors.
How capital adequacy will be monitored going forward.

As part of the application process, firms are required to submit financial information and forecasts. These should align closely with the information contained within your Regulatory Business Plan.

The FCA will typically expect to see:

Historical financial information (where applicable).
Three years of financial forecasts.
Profit and loss projections.
Balance sheet forecasts.
Cashflow forecasts.
Supporting assumptions and commentary.

When preparing this section, ensure the assumptions used throughout your business plan are consistent. For example, projected growth, recruitment plans, marketing activity and insurer relationships should all support the financial forecasts being submitted.

Many new brokerages underestimate the impact of cashflow during the early stages of trading. Revenue may take time to build while costs such as salaries, technology, professional services and regulatory fees are incurred from day one.

The FCA will want confidence that you have considered:

Start-up costs.
Ongoing operating expenses.
Expected income streams.
Working capital requirements.
Contingency planning.

The FCA's prudential requirements vary depending on the firm's activities and client money arrangements. Capital requirements are particularly important where firms hold client money, as higher thresholds may apply.

You do not need to reproduce the FCA rules within your business plan, but you should demonstrate that:

You understand which prudential requirements apply to your business.
You have assessed the firm's capital requirement.
Sufficient funds are available.
Capital levels will be reviewed and maintained on an ongoing basis.

Applications are often weaker where firms:

Focus solely on the minimum capital requirement.
Provide forecasts that are inconsistent with the business plan.
Do not explain the source of funding.
Rely on optimistic growth assumptions without evidence.
Fail to demonstrate how capital will be monitored.
Give little consideration to cashflow requirements or contingency planning.