How to verify and maintain regulatory capital requirements

To comply with Financial Conduct Authority (FCA) rules, you must calculate the specific 'Base Capital' required for your business model and ensure this exact amount remains in your business bank account at all times. This is not money you can spend on marketing or salaries; it is a permanent safety net that proves your firm is financially stable enough to handle its regulatory responsibilities.

Understanding your capital requirement

The amount of money you need to 'ringfence' depends entirely on the specific permissions you hold. The FCA sets these thresholds to ensure that if your business faces a sudden shock, you have enough liquidity to wind down or recover without harming your customers. Common base capital requirements include:

Note: These figures are base requirements. Depending on your transaction volume, the FCA may require a higher amount based on a 'Method' calculation (Method A, B, or C).

Steps to verify and ringfence capital

1. Identify your specific threshold: Review your Regulatory Business Plan to confirm which permissions you are applying for. Use the FCA's Payment Services Regulations or Electronic Money Regulations guidance to find your exact base capital figure.
2. Source the funds: This capital must be 'own funds' and free from any liens or charges. It cannot be a loan that is repayable on demand in a way that threatens the capital's stability. It usually comes from founder investment or equity funding.
3. Deposit into a dedicated account: While it can sit in your primary business account, many founders prefer to keep it in a separate, dedicated business savings account to prevent accidental spending.
4. Document the 'Source of Funds': The FCA will ask for proof of where this money came from during your application. Have your bank statements and investment agreements ready to show a clear paper trail.

Ongoing maintenance and monitoring

Maintaining regulatory capital is an 'at-all-times' requirement. This means if your balance drops by even £1 below the threshold for a single day, you are technically in breach of your threshold conditions.

Warning: If you drop below your required capital level, you must notify the FCA immediately. Failing to do so can lead to the withdrawal of your authorisation or heavy fines.

To avoid this, implement a 'buffer' policy. If your requirement is £50,000, aim to keep £60,000 in the account. This prevents small bank fees or unexpected costs from pushing you into a regulatory breach.

Tips for success

• Automate alerts: Set up your banking app to send a notification if the balance falls below a certain 'warning' level.
• Quarterly reviews: As your business grows and your transaction volume increases, your capital requirement may rise. Review your 'Method' calculation every three months to ensure your base capital is still sufficient.
• Keep it liquid: This money must be 'liquid,' meaning you can access it quickly. Do not lock it into long-term fixed assets or illiquid investments.