I was disappointed to read the letter (Letters, 31 May) which criticised Biba’s handling of the goodwill issue.
I would like to briefly respond to the points made in that letter.
The Biba regulatory team frequently publishes updates for members. Their output comes from three main sources – FSA publications, member queries and Biba’s working party. It was this working party that decided that a guidance paper on goodwill half-way through the transitional period would be timely and helpful. This was published in July 2006.
Neither the regulatory team nor our London Market Brokers’ Committee had received queries regarding goodwill prior to the FSA writing to affected firms. To date only one letter has been received on the subject, and that was very recently.
The solution referred to in the original article is one that is still under discussion and the article was not prompted by us. The possible use of holding companies to solve the goodwill problem is not new and we have been in discussions with the FSA for some while regarding their use.
The situation is complex and therefore a ‘one size fits all’ approach is not suitable. We have yet to ‘appear over the horizon’ with this solution and would not for a minute suggest it to be a “7th cavalry” answer.
We have spoken to the FSA to gauge the size of the issue among our members. By their reckoning, less than 20% of those firms identified by the FSA are Biba members. These numbers are based on RMAR returns to the FSA and are likely to include a large number of firms that have successfully addressed the problem.
Biba was heavily involved in challenging the FSA on goodwill before the new regulatory regime commenced. Despite our protestations, the FSA would not yield. It stated that neither IBRC regulations nor Lloyd’s broker rules permitted goodwill to be included in any regulatory capital calculation and that goodwill was not a permissible asset for this purpose in other sectors that it regulates. Their decision was announced in September 2003.
That there was a three-year transitional period applied to the rule rather than it being introduced from January 2005 was in part down to Biba’s lobbying. We have no doubt that the rule will become effective as time-tabled on 14 January 2008.
We share the concerns about the potential effects for our sector. Biba chief executive Eric Galbraith asked the FSA whether it would reconsider its stance on goodwill at its 2005 annual meeting to which the following response was published:
“The deduction of goodwill follows our general line for all authorised firms only to count assets on which customers and creditors can rely.
“We continue to believe that goodwill has little, if any, value in the event of a firm's insolvency and that the deduction of goodwill is the appropriate prudential standard for authorised firms. But we recognised that too early an implementation in this sector could have had a disproportionate adverse impact by impeding the ability of those wishing to dispose of a business to find buyers.
“The wish to recognise the potential difficulties faced by firms in the early years of the new regime was why we deferred the requirement to deduct goodwill until 14 January 2008, and gave the general insurance sector over four years’ notice to factor this requirement into its considerations.
“So we do not intend to revisit the subject of goodwill in the particular context of mortgage and general insurance intermediaries. But forthcoming international initiatives to review the appropriate definition of capital for prudential purposes may, in due course, lead us to review the way we define capital for all authorised firms.”
I hope to have spoken to the writer of the letter before this edition is published and will have emphasised that Biba works tirelessly for the benefit of its members and that any criticism is given the appropriate consideration.
Head of compliance and training