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Application provision

1.1 Unless otherwise stated, this Part applies to a non-directive insurer other than a non-directive friendly society.

1

Application and Definitions

1.1

01/01/2016

Unless otherwise stated, this Part applies to a non-directive insurer other than a non-directive friendly society.

1.2

01/01/2016

In this Part, the following definitions shall apply:

called-up share capital

has the meaning in section 547 of the Companies Act 2006.

capital contribution

means an item of capital that is a gift of capital and where no coupon is payable on it.

capital instrument

means any security issued by or loan made to that firm or any other investment in, or external contribution to the capital of, that firm.

company

has the meaning in section 1(1) of the Companies Act 2006.

coupon

means a dividend, interest payment or any similar payment.

discounts

means discounting or deductions to take account of investment income as set out in paragraph 48 of the insurance accounts rules.

fund for future appropriations

means the fund of the same name required by the insurance accounts rules, comprising all funds the allocation of which either to policyholders or to shareholders has not been determined by the end of the financial year, or the balance sheet items under international accounting standards which in aggregate represent as nearly as possible that fund.

initial fund

means the items of capital that were available to a mutual on the date it received a Part 4A permission to effect contracts of insurance or carry out contracts of insurance.

member contribution

means any paid-up contribution by a member of a mutual where the members' accounts meet the following criteria:

    1. (1) the memorandum and articles of association or other constitutional documents must stipulate that payments may be made from these accounts to members only in so far as this does not cause the  capital resources to fall below the required level, or, if after dissolution of the mutual, all the firm's other debts have been settled;
    2. (2) the memorandum and articles of association or other constitutional documents must stipulate, with respect to the payments referred to in (1) made for reasons other than the individual termination of membership, that the PRA must be notified at least one month in advance of the intended date of such payments; and
    3. (3) the PRA must be notified of any amendment to the relevant provisions of the memorandum and articles of association or other constitutional documents.

step-up

means (in relation to any item of capital) any change in the coupon rate on that item that results in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments:

    1. (1) including (in the case of a fixed rate) an increase in that coupon rate;
    2. (2) including (in the case of a floating rate calculated by adding a fixed amount to a fluctuating amount) an increase in that fixed amount;
    3. (3) including (in the case of a floating rate) a change to the benchmark by reference to which the fluctuating element of the coupon is calculated; and
    4. (4) not including (in the case of a floating rate) an increase in the absolute amount of the coupon caused by fluctuations in the benchmark by reference to which the absolute amount of the coupon floats.

tier one capital resources

means the sum calculated at stage F (Total tier one capital after deductions) of the calculation in the capital resources table.

valuation differences

means all differences between the valuation of assets and liabilities as valued in accordance with Insurance Company – Overall Resources and Valuation and the valuation that the firm uses for its external financial reporting purposes, except valuation differences which are dealt with elsewhere in the capital resources table.

1.3

01/01/2016

Undefined references in this Part to types, tiers or stages of capital or capital instruments must be interpreted in accordance with the capital resources table.

1.4

01/01/2016

A tier one instrument or tier two instrument is treated as not having been redeemed or repaid for the purposes of this Part if:

  1. (1) under its terms the instrument is exchanged for or converted into a new instrument or is subject to a similar process, or it is redeemed out of the proceeds of the issue of new securities;
  2. (2) any new instrument is included in the same stage of capital or a higher stage of capital as the original instrument; and
  3. (3) it would be reasonable (taking into account the economic substance) to treat the original instruments as continuing in issue on the same or a more favourable basis where the question of whether that basis is more or less favourable must be judged from the point of view of the adequacy of the firm's capital resources.

1.5

01/01/2016

A share is not redeemable for the purposes of this Part merely because the Companies Act 1985, the Companies (Northern Ireland) Order 1986 or the Companies Act 2006 allows the firm that issued it to purchase it.

1.6

01/01/2016

A capital instrument is not redeemable for the purposes of this Part merely because the firm that issued it has a right to purchase it similar to the right in 1.5.

2

Calculation and Limits of Resources

2.1

01/01/2016

Subject to 2.5, a firm must calculate its capital resources in accordance with the capital resources table.

2.2

01/01/2016

A firm must only include in a lower stage of capital, capital resources which are eligible for inclusion in a higher stage of capital if:

  1. (1) 2.5 would prevent the use of that capital in that higher stage of capital;
  2. (1) the firm complies with 2.5 following the inclusion of that higher stage of capital included in the lower stage of capital; and
  3. (2) the firm complies with other rules in this Part governing the eligibility of capital in that lower stage of capital.

2.3

01/01/2016

A firm must have at least 50% of its tier one capital resources accounted for by core tier one capital.

2.4

01/01/2016

A firm must have no more than 15% of its tier one capital resources accounted for by innovative tier one capital.

2.5

01/01/2016

A firm must exclude from the calculation of its capital resources the following:

  1. (1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F (Total tier one capital after deductions) of the calculation in the capital resources table; and
  2. (2) the amount (if any) by which lower tier two capital resources exceed 50% of the amount calculated at stage F of the calculation in the capital resources table.

2.6

01/01/2016

A firm (other than a pure reinsurer) that carries on both long-term insurance business and general insurance business must apply the relevant limits in 2.5 separately for each type of business.

3

Notification of Issuance of Capital Instruments

3.1

01/03/2016

Subject to 3.4, a firm must notify the PRA in writing of its intention to issue a capital instrument which it intends to include within its capital resources at least one month before the intended date of issue unless there are exceptional circumstances which make it impracticable to give such a period of notice. In such circumstances, the firm must give as much notice as is practicable and explain to the PRA why the circumstances are considered exceptional.

3.2

01/03/2016

When giving notice, a firm must:

  1. (1) provide details of the amount of capital the firm is seeking to raise through the intended issue and whether the capital instrument is intended to be issued to external investors or within its group;
  2. (2) identify the stage of the capital resources table the capital instrument is intended to fall within;
  3. (3) provide a copy of the draft terms and conditions;
  4. (4) provide a draft of a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the capital instrument complies with the rules applicable to instruments included in the stage of the capital resources table identified in (2);
  5. (5) include confirmation from the governing body of the firm that the capital instrument complies with the rules applicable to instruments included in the stage of the capital resources table identified in (2); and
  6. (6) state whether the capital instrument will be encumbered or whether there are any connected transactions in respect of the item and, if so, provide details.

3.3

01/03/2016

If after an initial notification under 3.1, but prior to a capital instrument’s issuance, a firm proposes to change the information previously submitted, it must provide a further written notification of that change without delay.

3.4

01/03/2016

3.1 does not apply to:

  1. (1) ordinary shares which:
    1. (a) are the most deeply subordinated capital instrument issued by the firm; and
    2. (b) are the same as ordinary shares previously issued by the firm; and
  2. (2) capital instruments which are to be issued on identical terms to capital instruments issued by the firm within the previous twelve months and notified to the PRA in accordance with 3.2, excluding (1) the issue date; (2) the maturity date; (3) the amount of the issuance; (4) the currency of the issuance; and (5) the rate of interest payable by the issuer.

3.5

01/03/2016

A firm must notify the PRA in writing, no later than the date of issue, of its intention to issue a capital instrument listed in 3.4 which it intends to include within its capital resources. When giving notice, a firm must:

  1. (1) provide the information set out in 3.2 other than 3.2(3) (draft terms and conditions) and 3.2(4) (draft legal opinion); and
  2. (2) confirm that the terms of the capital instrument have not changed since the previous issue by the firm of that type of capital instrument.

3.6

01/03/2016

A firm must notify the PRA in writing of its intention to amend or otherwise vary the terms of any capital instrument included within its capital resources at least one month before the intended date of such amendment or other variation.

3.7

01/03/2017

A firm must provide to the PRA as soon as practicable after the issuance of a capital instrument to which 3.2 or 3.4(2) applies:

  1. (1) a finalised copy of the draft legal opinion referred to in 3.2(4); and
  2. (2) a copy of the instrument’s final terms and conditions.

4

Tier One Capital

4.1

01/01/2016

A firm must not include a capital instrument in its tier one capital resources unless it complies with the following conditions:

  1. (1) it is included in one of the categories in 4.2;
  2. (2) it complies with the conditions set out in 4.3; and
  3. (3) it is not excluded under 4.4 or 4.5.

4.2

01/01/2016

The categories referred to in 4.1(1) are:

  1. (1) permanent share capital;
  2. (2) a perpetual non-cumulative preference share that meets the requirements set out in 6.1; and
  3. (3) an innovative tier one instrument that meets the requirements set out in 6.3 to 6.7.

4.3

01/01/2016

The conditions that an item of capital of a firm must comply with under 4.1(2) are as follows:

  1. (1) it is issued by the firm;
  2. (2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;
  3. (3) it:
    1. (a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or
    2. (b) complies with the conditions in 4.5 and, if applicable, 4.11;
  4. (4) the item of capital meets the following conditions in relation to any coupon:
    1. (a) the firm is under no obligation to pay a coupon; or
    2. (b) if the firm is obliged to pay the coupon, the coupon is payable in the form of an item of capital that is included in a higher stage of capital or the same stage of capital as that first item of capital;
  5. (5) any coupon is either:
    1. (a) non-cumulative; or
    2. (b) (if it is cumulative) it must, if deferred, be paid by the firm in the form of tier one capital complying with (4)(b);
  6. (6) it is able to absorb losses to allow the firm to continue trading and in particular it complies with 4.12 and 4.13 and, in the case of an innovative tier one instrument, 6.7;
  7. (7) the amount of the item included must be net of any foreseeable tax charge at the moment of its calculation or must be suitably adjusted in so far as such tax charges reduce the amount up to which that item may be applied to cover risks or losses;
  8. (8) it is available to the firm for unrestricted and immediate use to cover risks and losses as soon as these occur;
  9. (9) it ranks for repayment upon winding up, administration or any other similar process no higher than a share of a company incorporated under the Companies Act 2006 (whether or not it is such a share); and
  10. (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9).

4.4

01/01/2016

An item of capital does not qualify for inclusion as tier one capital if the issue of that item of capital by the firm is connected with one or more other transactions or arrangements which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in 4.3(1)to (9).

4.5

01/01/2016

A firm must not include a capital instrument as tier one capital, unless its contractual terms are such that:

  1. (1) if it is redeemable other than in circumstances set out in 4.3(3)(a), it is redeemable only at the option of the firm;
  2. (2) the firm cannot exercise any redemption right:
    1. (a) before the fifth anniversary of its date of issue, unless the conditions in 4.6 are met;
    2. (b) unless it has given notice to the PRA in accordance with 4.8; and
    3. (c) unless at the time of exercise of that right it complies with Insurance Company - Capital Resources Requirements 3.1 and will continue to do so after redemption.

4.6

01/01/2016

The conditions in 4.5(2)(a) are that:

  1. (1) the circumstance that entitles the firm to exercise that right is a change in law or regulation in any relevant jurisdiction or in the interpretation of such law or regulation by any court or authority entitled to do so;
  2. (2) it would be reasonable for the firm to conclude that it is unlikely that that circumstance will occur, judged at the time of issue or, if later, at the time that the term is first included in the terms of the capital instrument; and
  3. (3) the firm's right is conditional on it obtaining a waiver of 4.7.

4.7

01/01/2016

A firm must not redeem a tier one instrument in accordance with a term that meets the conditions set out in 4.6(1) and (2).

4.8

01/01/2016

A firm must not redeem any tier one instrument that it has included in its tier one capital resources unless it has notified the PRA in accordance with Notifications 7 of its intention at least one month before it becomes committed to do so.

4.9

01/01/2016

When giving notice under 4.8, the firm must provide details of its position after such redemption in order to show how it will:

  1. (1) comply with Insurance Company – Capital Resources Requirements 3.1; and
  2. (2) have sufficient financial resources to meet Insurance Company – Overall Resources and Valuation 2.3.

4.10

01/01/2016

If a firm gives notice to the PRA of the redemption or repayment of any tier one instrument, the firm must no longer include that instrument in its tier one capital resources from the time the notice is given.

4.11

01/01/2016

If an innovative tier one instrument is redeemable and satisfies the following conditions:

  1. (1) it is or may become subject to a step-up; and
  2. (2) a reasonable person would think that:
    1. (a) the firm is likely to redeem it before the tenth anniversary of its date of issue; or
    2. (b) the firm is likely to have an economic incentive to redeem it before the tenth anniversary of its date of issue,

the redemption date in 4.5(2)(a) is amended by replacing “fifth anniversary” with “tenth anniversary”.

4.12

01/01/2016

A firm must not include a share in its tier one capital resources unless:

  1. (1) in the case of a firm that is a company, it is called-up share capital; or
  2. (2) in the case of any other firm, it is:
    1. (a) in economic terms; and
    2. (b) in its characteristics as capital (including loss absorbency, permanency, ranking for repayment and fixed costs);
  3. substantially the same as called-up share capital falling into (1).

4.13

01/01/2016

A firm must not include a capital instrument other than a share in its tier one capital resources unless it complies with 4.12(2).

4.14

01/01/2016

Where the redemption proceeds or any coupon on a potential tier one instrument can be satisfied by the issue of another capital instrument, a firm must not include an item of capital in its tier one capital resources unless the firm has unissued capital instruments of the kind in question (and the authority to issue them):

  1. (1) that are sufficient to satisfy all such payments then due; and
  2. (2) are of such amount as is prudent in respect of such payments that could become due in the future.

5

Core Tier One Capital

5.1

01/01/2016

Permanent share capital means an item of capital which (in addition to satisfying the conditions in 4.3) meets the following conditions:

  1. (1) it is:
    1. (a) an ordinary share;
    2. (b) a member contribution; or
    3. (c) part of the initial fund of a mutual;
  2. (2) any coupon on it is not cumulative, the firm is under no obligation to pay a coupon in any circumstances and the firm has the right to choose the amount of any coupon that it pays; and
  3. (3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the same degree as an ordinary share issued by a company incorporated under the Companies Act 2006 (whether or not it is such a share).

5.2

01/01/2016

A firm must deduct from its capital resources negative amounts, including any interim net losses, from its profit and loss account and other reserves.

5.3

01/01/2016

A firm must deduct dividends from reserves as soon as they are foreseeable.

5.4

01/01/2016

A firm must account for a capital contribution as an increase in reserves and may count that increase in reserves as core tier one capital.

5.5

01/01/2016

A firm must include in its core tier one capital a share premium account relating to the issue of a share forming part of its core tier one capital.

5.6

01/01/2016

A firm must include share premium account relating to the issue of a share forming part of another tier of capital:

  1. (1) in that other tier;
  2. (2) for a firm that is incorporated under the Companies Act 2006, as core tier one capital to the extent that the terms of issue of the share concerned provide that any premium is not repayable on redemption; or
  3. (3) for a firm that is not incorporated under the Companies Act 2006 as core tier one capital if its share premium account is subject to substantially the same or greater restraints on use than a share premium account falling into (2).

5.7

01/01/2016

A firm must either add (if positive) or deduct (if negative) valuation differences from its capital resources in accordance with the capital resources table.

5.8

01/01/2016

A firm that carries on general insurance business and which discounts or reduces its technical provisions for claims outstanding must deduct from its capital resources the difference between the undiscounted technical provisions or technical provisions before deductions, and the discounted technical provisions or technical provisions after deductions.

5.9

01/01/2016

The adjustment referred to in 5.8 must be made for all classes of general insurance business, except for risks listed under classes 1 and 2.

5.10

01/01/2016

For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions.

5.11

01/01/2016

For classes 1 and 2 (other than annuities), if the expected average interval between the settlement date of the claims being discounted and the accounting date is not at least four years, the firm must deduct:

  1. (1) the difference between the undiscounted technical provisions and the discounted technical provisions; or
  2. (2) where it can identify a subset of claims such that the expected average interval between the settlement date of the claims and the accounting date is at least four years, the difference between the undiscounted technical provisions and the discounted technical provisions for the other claims.

5.12

01/01/2016

5.8 to 5.11 do not apply to a pure reinsurer which ceased to conduct new reinsurance contracts before 31 December 2006.

5.13

01/01/2016

A firm must include in its core tier one capital any fund for future appropriations.

6

Other Tier One Capital

6.1

01/01/2016

A firm must only include a perpetual non-cumulative preference share at stage B of the calculation in the capital resources table if (in addition to satisfying the conditions in 4.3) it satisfies the following conditions:

  1. (1) any coupon on it is not cumulative, and the firm is under no obligation to pay a coupon in any circumstances; and
  2. (2) it is not an innovative tier one instrument.

6.2

01/01/2016

A firm must not include an item of capital that is an innovative tier one instrument in stages A (Core tier one capital) or B (Perpetual non-cumulative preference shares) of the calculation in the capital resources table.

6.3

01/01/2016

A tier one instrument is an innovative tier one instrument if:

  1. (1) it is redeemable; and
  2. (2) a reasonable person would think that:
    1. (a) the firm is likely to redeem it; or
    2. (b) the firm is likely to have an economic incentive to redeem it.

6.4

01/01/2016

A tier one instrument is an innovative tier one instrument if it has a cumulative or mandatory coupon.

6.5

01/01/2016

A potential tier one instrument is an innovative tier one instrument if:

  1. (1) it is or may become subject to a step-up; and
  2. (2) it is redeemable at any time (whether before, at or after the time of the step-up).

6.6

01/01/2016

A firm must not include in its tier one capital resources a potential tier one instrument that is or may become subject to a step-up if that step-up can arise earlier than the tenth anniversary of the date of issue of that item of capital.

6.7

01/01/2016

A firm must not include a capital instrument that is not a share in its innovative tier one capital resources unless (in addition to satisfying the conditions in 4.3) the firm's obligations under the instrument either:

  1. (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
  2. (2) do constitute such a liability but the terms of the instrument are such that:
    1. (a) any such liability is not relevant for the purposes of deciding whether:
      1. (i) the firm is, or is likely to become, unable to pay its debts; or
      2. (ii) its liabilities exceed its assets;
    2. (b) a person (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and
    3. (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

7

Step-Ups

7.1

01/01/2016

Where a rule in this Part says that a particular treatment applies to an item of capital that is subject to a step-up of a specified amount, the question of whether that rule is satisfied must be judged by reference to the cumulative amount of all step-ups since the issue of that item of capital rather than just by reference to a particular step-up.

7.2

01/01/2016

A firm must not include in its tier one capital resources a tier one instrument that is or may be subject to a step-up that is not one which results in an increase over the initial rate that is no greater than the higher of the following two amounts as at the date of issue of the relevant instrument:

  1. (1) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or
  2. (2) 50% of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.

7.3

01/01/2016

Subject to 7.4, if a tier two instrument is or may be subject to a step-up that does not meet the condition in 7.2 as at the date of issue, the first date that a step-up can take effect is deemed to be its final maturity date if that date is before its actual maturity date.

7.4

01/01/2016

If a tier two instrument:

  1. (1) is or may be subject to a step-up during the period beginning on the fifth anniversary of the date of issue of that item and ending immediately before the tenth anniversary of the date of issue; and
  2. (2) the step-up or possible step-up is one which may result in an increase over the initial rate that is greater than 50 basis points, less the swap spread between the initial index basis and the stepped-up index basis;

the first date that a step-up can take effect is deemed to be its final maturity date if that date is before its actual maturity date.

8

Deductions from Tier One

8.1

01/01/2016

A firm must deduct from its tier one capital resources the value of intangible assets.

9

Tier Two Capital

9.1

01/01/2016

A firm must not include a capital instrument in its tier two capital resources unless it complies with the following conditions:

  1. (1) the claims of the creditors must rank behind those of all unsubordinated creditors;
  2. (2) the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm and any such event of default must not prejudice the subordination in (1);
  3. (3) to the fullest extent permitted under the laws of the relevant jurisdictions, the remedies available to the subordinated creditor in the event of non-payment or other breach of the terms of the capital instrument must (subject to 9.2) be limited to petitioning for the winding-up of the firm or proving for the debt in the liquidation or administration;
  4. (4) any:
    1. (a) remedy permitted by (3);
    2. (b) remedy that cannot be excluded under the laws of the relevant jurisdictions as referred to in (3);
    3. (c) remedy permitted by 9.2; and
    4. (d) terms about repayment as referred to in (5);
    5. must not prejudice the matters in (1) and (2) and in particular any damages permitted by (b) or (c) and repayment obligation must be subordinated in accordance with (1);
  5. (5) without prejudice to (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2) or as permitted by 9.4 or 11.1 and any remedy described in (4)(a) to (c) must not prejudice this requirement;
  6. (6) subject to 9.3, the debt agreement or terms of the capital instrument are governed by the law of England and Wales, or of Scotland or of Northern Ireland;
  7. (7) to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;
  8. (8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);
  9. (9) the debt must be unsecured and fully paid up;
  10. (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9); and
  11. (11) the amount of the item included must be net of any foreseeable tax charge at the moment of its calculation or must be suitably adjusted in so far as such tax charges reduce the amount up to which that item may be applied to cover risks or losses.

9.2

01/01/2016

A firm must only include a capital instrument in its tier two capital resources when the remedies available to the subordinated creditor go beyond those referred to in 9.1(3), if the following conditions are satisfied:

  1. (1) those remedies are not available for failure to pay any amount of principal, interest or expenses or in respect of any other payment obligation; and
  2. (2) those remedies do not in substance amount to remedies to recover payment of the amounts in (1).

9.3

01/01/2016

9.1(6) does not apply if the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the same degree of subordination has been achieved under the law that governs the debt and the agreement as that which would have been achieved under the laws of England and Wales, or of Scotland, or of Northern Ireland.

9.4

01/01/2016

A tier two instrument must not provide for any right of the firm to redeem the instrument to be exercisable earlier than the fifth anniversary of the date of issue of the instrument unless the conditions in 9.5 are met.

9.5

01/01/2016

The conditions in 9.4 are that:

  1. (1) the circumstance that entitles the firm to exercise that right is a change in law or regulation in any relevant jurisdiction or in the interpretation of such law or regulation by any court or authority entitled to do so;
  2. (2) it would be reasonable for the firm to conclude that it is unlikely that that circumstance will occur, judged at the time of issue or, if later, at the time that the term is first included in the terms of the tier one instrument; and
  3. (3) the firm's right is conditional on it obtaining a waiver of 9.6.

9.6

01/01/2016

A firm must not redeem a tier one instrument in accordance with a term that meets the conditions set out in 9.5.

9.7

01/01/2016

A firm must notify the PRA in accordance with Notifications 7 three months before it becomes committed to the proposed repayment of a tier two instrument (unless that firm intends to repay an instrument on its final maturity date).

9.8

01/01/2016

When giving notice under 9.7, the firm must provide details of its position after such repayment in order to show how it will:

  1. (1) comply with Insurance Company – Capital Resources Requirements 3.1; and
  2. (2) have sufficient financial resources to meet Insurance Company – Overall Resources and Valuation 2.3.

9.9

01/01/2016

If a firm gives notice to the PRA of the redemption or repayment of any tier two instrument, the firm must no longer include that instrument in its tier two capital resources from the time the notice is given.

9.10

01/01/2016

A firm must not include in its tier two capital resources a capital instrument that is or may become subject to a step-up if that step-up can arise earlier than the fifth anniversary of the date of issue of that item of capital.

9.11

01/01/2016

A firm must not include in its tier two capital resources an item of capital does not comply with any requirement in 9 to 11 if the issue of that item of capital by the firm is connected with one or more other transactions or arrangements which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in whichever of those rules apply.

10

Upper Tier Two Capital

10.1

01/01/2016

A firm must not include a capital instrument in its upper tier two capital resources unless it meets the following conditions:

  1. (1) it must have no fixed maturity date;
  2. (2) the terms of the instrument must provide for the firm to have the option to defer any coupon, except that the firm need not have that right in the case of a coupon payable in the form of an item of capital that is included in the same stage of capital or a higher stage of capital as that first item of capital;
  3. (3) the terms of the instrument must provide for the loss-absorption capacity of the capital instrument and unpaid coupons, whilst enabling the firm to continue its business;
  4. (4) it meets the conditions in 10.2; and
  5. (5) the terms of the instrument are such that either the instrument is not redeemable or repayable or it is repayable or redeemable only at the option of the firm.

 

10.2

01/01/2016

A firm must not include a capital instrument in its upper tier two capital resources unless (in addition to satisfying all the other requirements in relation to tier two capital) the firm's obligations under the instrument either:

  1. (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
  2. (2) do constitute such a liability but the terms of the instrument are such that:
    1. (a) any such liability is not relevant for the purposes of deciding whether:
      1. (i) the firm is, or is likely to become, unable to pay its debts; or
      2. (ii) its liabilities exceed its assets;
    2. (b) a person (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and
    3. (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

11

Lower Tier Two Capital

11.1

01/01/2016

A firm must only include a capital instrument in its lower tier two capital resources if (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) either the holder has no right to repayment or it satisfies either of the following conditions:

  1. (1) it has an original maturity of at least five years; or
  2. (2) it is redeemable on notice from the holder, but the period of notice of repayment required to be given by the holder is five years or more.

11.2

01/01/2016

For the purposes of calculating the amount of a lower tier two instrument which may be included in a firm's capital resources:

  1. (1) in the case of an instrument with a fixed maturity date, in the final five years to maturity; and
  2. (2) in the case of an instrument with or without a fixed maturity date but where five years' or more notice of redemption or repayment has been given, in the final five years to the date of redemption or repayment;

the principal amount must be amortised on a straight line basis.

12

Deductions from Capital

12.1

01/01/2016

A firm which is not a pure reinsurer must deduct from total capital resources the value of any asset which is not an admissible asset, unless the asset is held to cover linked long-term liabilities under Insurance Company – Risk Management 4.

12.2

01/01/2016

A firm must deduct from its capital resources the value of its investments in any affiliated company that is an ancillary services undertaking.

12.3

01/01/2016

In relation to each affiliated company that has a Part 4A permission a firm must add to (if positive), at stage J in the capital resources table (Positive adjustments for related undertakings), or deduct from (if negative), at stage L in the capital resources table (Deductions from total capital), its capital resources the value of its shares in that undertaking calculated in accordance with Insurance Companies: Overall Resources and Valuation 8.1.

13

Admissible Assets

13.1

01/01/2016

An admissible asset is:

  1. (1) investments that are, or amounts owed arising from the disposal of:
    1. (a) debt securities, bonds and other money and capital market instruments;
    2. (b) loans;
    3. (c) shares and other variable yield participations;
    4. (d) units in:
      1. (i) collective investment schemes falling within the UCITS Directive;
      2. (ii) non-UCITS retail schemes;
      3. (iii) recognised schemes; or
      4. (iv) any other collective investment scheme where the firm’s investment in the scheme is sufficiently small to be consistent with a prudent overall investment strategy, having regard to the investment policy of the scheme and the information available to the firm to enable it to monitor the investment risk being taken by the scheme;
    5. (e) land, buildings and immovable property rights; or
    6. (f) an approved derivative or quasi-derivative transaction that satisfies the conditions in Insurance Company – Risk Management 6.2 or a stock lending transaction in respect of which the conditions in Insurance Company – Risk Management 8.2 have been met.
  2. (2) debts and claims that are:
    1. (a) debts owed by reinsurers, including reinsurers' shares of technical provisions (but excluding amounts recoverable from an ISPV);
    2. (b) deposits with and debts owed by ceding undertakings;
    3. (c) debts owed by policyholders and intermediaries arising out of direct and reinsurance operations (except where overdue for more than 3 months and other than commission prepaid to agents or intermediaries);
    4. (d) for general insurance business only, claims arising out of salvage and subrogation;
    5. (e) for long-term insurance business only, advances secured on, and not exceeding the surrender value of, contracts of long-term insurance issued by the firm;
    6. (f) tax recoveries; or
    7. (g) claims against the compensation scheme or any analogous scheme in any EEA state.
  3. (3) assets that are:
    1. (a) tangible fixed assets, other than land and buildings;
    2. (b) cash at bank and in hand, deposits with credit institutions and any other bodies authorised to receive deposits;
    3. (c) for general insurance business only, deferred acquisition costs;
    4. (d) accrued interest and rent, other accrued income and prepayments; or
    5. (e) for long-term insurance business only, reversionary interests.

13.2

01/01/2016

Subject to 13.3 below a unit in a collective investment scheme is only admissible for the purposes of 13.1 above if it falls within 13.1(1)(d), notwithstanding that it may also fall into one or more other categories in 13.1.

13.3

01/01/2016

A derivative, quasi-derivative or stock lending transaction is only admissible for the purposes of 13.1 if it falls within 13.1(1)(f), notwithstanding that it may also fall into one or more other categories in 13.1.