Meridian Asset Management: Capital Deductions, Distributions and Buffer Breach
Meridian Asset Management holds a licence with a minimum total capital ratio of 8% plus a 2.5% buffer. Its regulatory capital is 2.40m and risk-weighted assets are 18.0m. A fee receivable of 0.60m from a client has been overdue for 95 days; the rules require overdue receivables above 90 days to be deducted from capital. A settlement error is expected to cost 0.25m and is probable and measurable. The board wants to pay a 0.30m dividend and execute a 0.20m buyback before year-end. The finance director argues that because the ratio before adjustments is 13.3%, there is ample headroom. The Authority has not been notified of the receivable or the settlement error.
1. Calculate the pro forma capital ratio after required deductions and after the proposed distributions. State whether each step breaches the rules.
Read the worked answer
Start with capital of 2.40m and risk-weighted assets of 18.0m, giving 13.3% before adjustments.
Apply the rules:
- Deduct the 0.60m receivable overdue beyond 90 days: capital falls to 1.80m.
- Provision for the probable 0.25m settlement error: capital falls to 1.55m.
- Ratio: 1.55m / 18.0m = 8.6%.
This is above the 8% minimum but below the 10.5% combined requirement, so the firm is in buffer breach and must not make distributions that worsen it.
If the 0.30m dividend were paid: capital 1.25m, ratio 6.9% - below the minimum. If the 0.20m buyback followed: capital 1.05m, ratio 5.8% - a serious breach. Both distributions are prohibited on these facts.
The finance director's 13.3% is misleading because it ignores mandatory deductions and the effect of the distributions.
2. What notifications and remedial actions are required, and what should the board do about the proposed distributions?
Read the worked answer
The board should cancel the dividend and buyback immediately. The buffer breach already restricts distributions, and either payment would cause a minimum capital breach. The board must document the decision and inform the finance director in writing.
Notifications and actions:
- Notify the Authority promptly of the buffer breach, the receivable, the settlement error and the cancelled distributions. Most regimes require notification of a breach or likely breach; waiting for the year-end return is not acceptable.
- Submit a capital restoration plan with dates, responsible officers and evidence.
- Escalate recovery of the 0.60m receivable and assess whether it is impaired; do not treat a promise to pay as capital.
- Record the 0.25m provision in the management accounts and verify whether the error triggers a client-money or conduct notification.
- Recalculate the ratio monthly and impose a temporary prohibition on new commitments that consume capital.
The finance director's view cannot be relied on because it is inconsistent with the deduction rules. The board should also review why the breach was not identified earlier.