GENPRU General Prudential sourcebook

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GENPRU 1

Application

GENPRU 1.1

Application

  • 31/12/2006

GENPRU 1.1.1

handbook-guidance
There is no overall application statement for GENPRU. Each chapter or section has its own application statement.

GENPRU 1.1.2

handbook-guidance

Broadly speaking however, GENPRU applies to:

  1. (1) an insurer;
  2. (2) a bank;
  3. (3) a building society;
  4. (4) a BIPRU investment firm; and
  5. (5) groups containing such firms.

Scope

GENPRU 1.1.3

handbook-rule
GENPRU applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

GENPRU 1.2

Adequacy of financial resources

  • 31/12/2006

Application

GENPRU 1.2.1

handbook-rule

This section applies to:

  1. (1) a BIPRU firm; and
  2. (2) an insurer, unless it is:
    1. (a) a non-directive friendly society; or
    2. (b) a Swiss general insurer; or
    3. (c) an EEA-deposit insurer; or
    4. (d) an incoming EEA firm; or
    5. (e) an incoming Treaty firm.
  3. (3) [deleted]

GENPRU 1.2.2A

handbook-rule
In relation to any provision in this section which applies to a BIPRU firm, a reference in that provision to "financial resources" does not constitute a reference to "liquidity resources".

GENPRU 1.2.3A

handbook-guidance

In relation to:

  1. (1) a BIPRU firm;
  2. (2) an incoming EEA firm which:
    1. (a) is a full BCD credit institution; and
    2. (b) has a branch in the United Kingdom; and
  3. (3) a third country BIPRU firm which:
    1. (a) is a bank; and
    2. (b) has a branch in the United Kingdom;

BIPRU 12 contains rules and guidance in relation to the adequacy of that firm's liquidity resources.

GENPRU 1.2.6

handbook-rule

If an insurer carries on:

  1. (1) long-term insurance business; and
  2. (2) general insurance business;

This section applies separately to each type of business.

GENPRU 1.2.7

handbook-guidance

The guidance in this section is drafted with respect to a firm to which this section and the other provisions of GENPRU and BIPRU (except BIPRU 12) referred to in this section apply in full.

GENPRU 1.2.10

handbook-guidance
The scope of application of this section is not restricted to insurers that are subject to the relevant EU Directives.

GENPRU 1.2.11

handbook-guidance
The adequacy of a firm's financial resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise and so this section applies to a firm in relation to the whole of its business. In the case of a UCITS investment firm this means that this section is not limited to designated investment business excluding scheme management activity. It also applies to scheme management activity and to activities that are not designated investment business.

Purpose

GENPRU 1.2.12

handbook-guidance
Adequate financial resources and adequate systems and controls are necessary for the effective management of prudential risks. This section therefore has requirements relating to both of these topics.

GENPRU 1.2.13

handbook-guidance

This section amplifies Principle 4, under which a firm must maintain adequate financial resources. It is concerned with the adequacy of the financial resources that a firm needs to hold in order to be able to meet its liabilities as they fall due. These resources include both capital and liquidity resources. As noted in GENPRU 1.2.3A G, however, the FSA's rules and guidance in relation to the adequacy of the liquidity resources of a BIPRU firm are set out in BIPRU 12.

GENPRU 1.2.14

handbook-guidance

In the case of a bank or building society this section implements Article 123 and (in part) Annex XI of the Banking Consolidation Directive. In the case of a BIPRU investment firm this section implements Article 34 of the Capital Adequacy Directive so far as that Article applies Article 123 of the Banking Consolidation Directive.

GENPRU 1.2.15

handbook-guidance

This section also has rules requiring a firm to identify and assess risks to its being able to meet its liabilities as they fall due, how it intends to deal with those risks, and the amount and nature of financial resources that the firm considers necessary. GENPRU 1.2.60 R provides that a firm should document that assessment. The FSA will review that assessment as part of its own assessment of the adequacy of a firm's capital under its supervisory review and evaluation process (SREP). When forming a view of any individual capital guidance to be given to the firm, the FSA will also review the ARROW risk assessment and any other issues arising from day-to-day supervision.

GENPRU 1.2.16

handbook-guidance

This section also has rules requiring a firm to carry out appropriate stress tests and scenario analyses for the risks it has previously identified and to establish the amount of financial resources needed in each of the circumstances and events considered in carrying out the stress tests and scenario analyses. In the case of a BIPRU firm, the FSA will consider as part of its SREP whether the BIPRU firm should hold a capital planning buffer and, in such a case, the amount and quality of that buffer. The capital planning buffer is an amount separate, though related to, the individual capital guidance, insofar as its purpose is to ensure that a BIPRU firm is able to continue to meet the overall financial adequacy rule throughout the relevant capital planning period in the face of adverse circumstances, after allowing for realistic management actions. Therefore, when forming its view on a BIPRU firm's capital planning buffer, the FSA will take into account the assessment made in relation to the firm's ICG.

GENPRU 1.2.17

handbook-guidance
The basic requirements in this section are drafted to apply to a firm on a solo basis. This section then goes on to describe when its requirements do and do not apply on a solo basis and on a consolidated basis (see GENPRU 1.2.45 R to GENPRU 1.2.47 R and GENPRU 1.2.57 R to GENPRU 1.2.58 R). It also sets out some details about how the solo requirements are adjusted when they are applied on a consolidated basis (see GENPRU 1.2.48 R to GENPRU 1.2.56 G and GENPRU 1.2.29 G).

Outline of other related provisions

GENPRU 1.2.18

handbook-guidance
GENPRU 2.1 sets out the minimum capital resources requirements for a firm. GENPRU 2.2 sets out how capital resources are defined and measured for the purpose of meeting the requirements of GENPRU 2.1.

GENPRU 1.2.19

handbook-guidance
  1. (1) BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment) set out detailed guidance on how a firm should carry out the assessment referred to in GENPRU 1.2.15 G. The more thorough, objective, and prudent a firm's assessment is, and can be demonstrated as being, the more reliance the FSA will be able to place on the results of that assessment.
  2. (2) BIPRU 2.2 and INSPRU 7.1 also have information on how the FSA will review and respond to the assessments referred to in GENPRU 1.2.15 G and, in the case of BIPRU firms, in GENPRU 1.2.16 G. In particular they deal with the giving of individual capital guidance to a firm, which is guidance about the amount and quality of capital resources that the FSA thinks a firm should hold at all times under the overall financial adequacy rule as it applies on a solo level and a consolidated level. BIPRU 2.2. also deals with the giving of a capital planning buffer to a BIPRU firm on a solo level and a consolidated level.

GENPRU 1.2.20

handbook-guidance
SYSC sets out general rules and guidance on the establishment and maintenance of systems and controls.

GENPRU 1.2.21

handbook-guidance
  1. (1) SYSC 11 sets out material on systems and controls that apply specifically to liquidity risk as that concept relates to an insurer.
  2. (2) [deleted]
  3. (2A) BIPRU 12 sets out material on systems and controls that apply specifically to liquidity risk in relation to a BIPRU firm, a branch of an incoming EEA firm that is a full BCD credit institution and a branch of a third country BIPRU firm that is a bank.
  4. (3) [deleted]
  5. (4) SYSC 11.1.21 E is an evidential provision relating to the general stress and scenario testing rule concerning stress testing and scenario analyses. SYSC 11.1.24 E is an evidential provision relating to the overall Pillar 2 rule about contingency funding plans. Both of these evidential provisions apply only to an insurer to which that section of SYSC applies.
  6. (5) GENPRU 2.2 (Adequacy of financial resources) requires certain BIPRU investment firms to deduct illiquid assets when calculating their capital resources.

GENPRU 1.2.22

handbook-guidance
BIPRU 2.3 contains rules and guidance on interest rate risk in the non-trading book. That material elaborates on the general obligation in the overall Pillar 2 rule.

GENPRU 1.2.23

handbook-guidance

For a BIPRU firm using a VaR model BIPRU 7.10.72 R (Risk management standards: Stress testing) sets out certain stress tests that the firm should carry out.

GENPRU 1.2.24

handbook-guidance
BIPRU 10.2.22 R (Stress testing of credit risk concentrations) sets out further stress tests that a firm should carry out if it uses certain approaches to collateral for the purposes of the rules about large exposures.

GENPRU 1.2.25

handbook-guidance

For a BIPRU firm using the IRB approach BIPRU 4.3.39 R to BIPRU 4.3.40 R set out a recession credit rating migration stress test that the firm should carry out. Further rules and guidance on such stress tests are set out in BIPRU 2.2 (Internal capital adequacy standards).

Requirement to have adequate financial resources

GENPRU 1.2.26

handbook-rule
A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

GENPRU 1.2.26A

handbook-guidance
BIPRU 12 contains rules and guidance in relation to the adequacy of a BIPRU firm's liquidity resources. Consistent with GENPRU 1.2.2A R, in assessing the adequacy of its liquidity resources, a BIPRU firm should do so by reference to the overall liquidity adequacy rule, rather than the overall financial adequacy rule.

GENPRU 1.2.27

handbook-guidance

The liabilities referred to in the overall financial adequacy rule include a firm's contingent and prospective liabilities. They exclude liabilities that might arise from transactions that a firm has not entered into and which it could avoid, for example, by taking realistic management actions such as ceasing to transact new business after a suitable period of time has elapsed. They include liabilities or costs that arise both in scenarios where the firm is a going concern and those where the firm ceases to be a going concern. They also include claims that could be made against a firm, which ought to be paid in accordance with fair treatment of customers, even if such claims could not be legally enforced.

GENPRU 1.2.28

handbook-guidance
A firm should therefore make its assessment of adequate financial resources on realistic valuation bases for assets and liabilities taking into account the actual amounts and timing of cash flows under realistic adverse projections.

GENPRU 1.2.29

handbook-guidance
Risks may be addressed through holding capital to absorb losses that unexpectedly materialise. The ability to pay liabilities as they fall due also requires liquidity. Therefore, in assessing the adequacy of a firm's financial resources, both capital and liquidity needs should be considered. A firm should also consider the quality of its financial resources such as the loss-absorbency of different types of capital and the time required to liquidate different types of asset. SYSC 11.1.24 E is an evidential provision relating to the overall financial adequacy rule concerning contingency funding plans.

Systems, strategies, processes and reviews

GENPRU 1.2.30

handbook-rule

A firm must have in place sound, effective and complete processes, strategies and systems:

  1. (1) to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover:
    1. (a) the nature and level of the risks to which it is or might be exposed;
    2. (b) the risk in the overall financial adequacy rule; and
    3. (c) the risk that the firm might not be able to meet its CRR in the future; and
  2. (2) that enable it to identify and manage the major sources of risks referred to in (1), including the major sources of risk in each of the following categories where they are relevant to the firm given the nature and scale of its business:
    1. (a) credit risk;
    2. (b) market risk;
    3. (c) liquidity risk;
    4. (d) operational risk;
    5. (e) insurance risk;
    6. (f) concentration risk;
    7. (g) residual risk;
    8. (h) securitisation risk;
    9. (i) business risk;
    10. (j) interest rate risk (including, in the case of a BIPRU firm, interest rate risk in the non-trading book);
    11. (k) pension obligation risk; and
    12. (l) group risk.

GENPRU 1.2.31

handbook-rule
  1. (1) This rule defines some of the terms used in the overall Pillar 2 rule.
  2. (2) Residual risk means the risk that credit risk mitigation techniques used by the firm prove less effective than expected.
  3. (3) Securitisation risk includes the risk that the capital resources held by a firm in respect of assets which it has securitised are inadequate having regard to the economic substance of the transaction, including the degree of risk transfer achieved.
  4. (4) Business risk means any risk to a firm arising from changes in its business, including the risk that the firm may not be able to carry out its business plan and its desired strategy. It also includes risks arising from a firm's remuneration policy (see also the Remuneration Code which applies to BIPRU firms and the detailed application of which is set out in SYSC 19A.1).
  5. (5) Pension obligation risk is the risk to a firm caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). It also means the risk that the firm will make payments or other contribution to or with respect to a pension scheme because of a moral obligation or because the firm considers that it needs to do so for some other reason.

GENPRU 1.2.32

handbook-guidance
  1. (1) This paragraph gives guidance on some of the terms used in the overall Pillar 2 rule.
  2. (2) Insurance risk refers to the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.
  3. (3) Interest rate risk in the non-trading book is explained in BIPRU 2.3 (Interest rate risk in the non-trading book).
  4. (4) In a narrow sense, business risk is the risk to a firm that it suffers losses because its income falls or is volatile relative to its fixed cost base. However, in a broader sense, it is exposure to a wide range of macro-economic, geopolitical, industry, regulatory and other external risks that might deflect a firm from its desired strategy and business plan. GENPRU 1.2.73 G provides further guidance on business risk.
  5. (5) Further material on pension obligation risk can be found in GENPRU 1.2.79 G - GENPRU 1.2.86 G.
  6. (6) Group risk is the risk that the financial position of a firm may be adversely affected by its relationships (financial or non-financial) with other entities in the same group or by risks which may affect the financial position of the whole group, for example reputational contagion. Further guidance on group risk can be found in GENPRU 1.2.87 G to GENPRU 1.2.91 G.

GENPRU 1.2.33

handbook-rule
  1. (1) This rule amplifies some of the obligations in the overall Pillar 2 rule.
  2. (2) In the case of a BIPRU firm the processes, strategies and systems relating to concentration risk must include those necessary to ensure compliance with BIPRU 10 (Large exposures requirements).
  3. (3) As part of its obligations in respect of market risk, a BIPRU firm must consider whether the value adjustments and provisions taken for positions and portfolios in the trading book enable the firm to sell or hedge out its positions within a short period without incurring material losses under normal market conditions.
  4. (4) The processes, strategies and systems required by the overall Pillar 2 rule must take into account stress tests and scenario analyses that the firm is required to carry out under any other provision of the Handbook.

GENPRU 1.2.34

handbook-guidance
In the overall Pillar 2 rule, internal capital refers to the financial resources of a firm which it treats as being held against the risks listed in the overall Pillar 2 rule. The obligation in that rule to assess the distribution of such capital refers, in relation to a firm making an assessment on a solo basis, for example, to the need to take account of circumstances where part of a firm's financial resources are held by a branch of that firm which are subject to restrictions on its ability to transfer that capital. An assessment of internal capital distribution might also take account of such of a firm's financial resources as may be ring-fenced in the event of its insolvency.

GENPRU 1.2.35

handbook-rule
The processes, strategies and systems required by the overall Pillar 2 rule must be comprehensive and proportionate to the nature, scale and complexity of the firm's activities.

GENPRU 1.2.36

handbook-rule
As part of its obligations under GENPRU 1.2.30R (1) (Main requirement relating to risk processes, strategies and systems), a firm must identify separately the amount of tier one capital, tier two capital, tier three capital, other capital eligible to form part of its capital resources and each category of capital (if any) that is not eligible to form part of its capital resources which it considers adequate for the purposes described in GENPRU 1.2.30R (1).

GENPRU 1.2.37

handbook-rule

The processes and systems required by the overall Pillar 2 rule must:

  1. (1) include an assessment of how the firm intends to deal with each of the major sources of risk identified in accordance with GENPRU 1.2.30R (2);
  2. (2) take into account the impact of diversification effects and how such effects are factored into the firm's systems for measuring and managing risks; and
  3. (3) include an assessment of the firm-wide impact of the risks identified in accordance with GENPRU 1.2.30R (2), to which end a firm must aggregate the risks across its various business lines and units, making appropriate allowance for the correlation between risks.

GENPRU 1.2.38

handbook-guidance
Certain risks such as systems and controls weaknesses may not be adequately addressed by, for example, holding additional capital and a more appropriate response would be to rectify the weakness. In such circumstances, the amount of financial resources required to address these risks might be zero. However, a firm should consider whether holding additional capital might be an appropriate response until the identified weaknesses are rectified. A firm, should, in accordance with GENPRU 1.2.60 R (Documentation of risk assessments), document the approaches taken to manage these risks.

GENPRU 1.2.39

handbook-rule

A firm must:

  1. (1) carry out regularly the assessments required by the overall Pillar 2 rule; and
  2. (2) carry out regularly assessments of the processes, strategies and systems required by the overall Pillar 2 rule to ensure that they remain compliant with GENPRU 1.2.35 R.

GENPRU 1.2.40

handbook-guidance

A firm should carry out assessments of the sort described in the overall Pillar 2 rule and GENPRU 1.2.39 R at least annually, or more frequently if changes in the business, strategy, nature or scale of its activities or operational environment suggest that the current level of financial resources is no longer adequate. The appropriateness of the internal process, and the degree of involvement of senior management in the process, will be taken into account by the FSA when reviewing a firm's assessment as part of the FSA's own assessment of the adequacy of a firm's financial resources. The processes and systems should ensure that the assessment of the adequacy of a firm's financial resources is reported to its senior management as often as is necessary.

GENPRU 1.2.41

handbook-guidance
The assessments undertaken by firms in run-off may not need to be as comprehensive or frequent compared to a firm not in run off since this may better reflect the reduced nature and complexity of its business and reduced access to new capital. Whilst a firm in run-off will still need to carefully monitor the progress of the run off, a more comprehensive assessment may only be appropriate on commencement of the run off or when considering a reduction in capital through the payment of a dividend or other capital distribution or if the firm's circumstances change materially.

Stress and scenario tests

GENPRU 1.2.42

handbook-rule
  1. (1) As part of its obligation under the overall Pillar 2 rule, a firm must, for the major sources of risk identified in accordance with GENPRU 1.2.30R (2), carry out stress tests and scenario analyses that are appropriate to the nature, scale and complexity of those major sources of risk and to the nature, scale and complexity of the firm's business.
    1. (a) [deleted]
    2. (b) [deleted]
      1. (i) [deleted]
      2. (ii) [deleted]
      3. (iii) [deleted]
      4. (iv) [deleted]
  2. (2) In carrying out the stress tests and scenario analyses in (1), a firm must identify an appropriate range of adverse circumstances of varying nature, severity and duration relevant to its business and risk profile and consider the exposure of the firm to those circumstances, including:
    1. (a) circumstances and events occurring over a protracted period of time;
    2. (b) sudden and severe events, such as market shocks or other similar events; and
    3. (c) some combination of the circumstances and events described in (a) and (b), which may include a sudden and severe market event followed by an economic recession.
  3. (3) In carrying out the stress tests and scenario analyses in (1), the firm must estimate the financial resources that it would need in order to continue to meet the overall financial adequacy rule and the CRR in the adverse circumstances being considered.
  4. (4) In carrying out the stress tests and scenario analyses in (1), the firm must assess how risks aggregate across business lines or units, any material non-linear or contingent risks and how risk correlations may increase in stressed conditions.
  5. (5) As part of its obligation under the overall Pillar 2 rule, a BIPRU firm must also incorporate and take into account any stress tests and scenario analyses that it is required to carry out under BIPRU. In particular, a BIPRU firm with an IRB permission must incorporate and take into account the stress test required to be carried out under BIPRU 4.3.40 R (2).

GENPRU 1.2.42A

handbook-guidance
In order to comply with the general stress and scenario testing rule, a firm should undertake a broad range of stress tests which reflect a variety of perspectives, including sensitivity analysis, scenario analysis and stress testing on an individual portfolio as well as a firm-wide level.

GENPRU 1.2.42B

handbook-guidance
A BIPRU firm with an IRB permission which has any material credit exposures excluded from its IRB models should also include these exposures in its stress and scenario testing to meet its obligations under the general stress and scenario testing rule. A BIPRU firm without an IRB permission, or an insurer that has any material credit and counterparty credit risk exposures, should conduct analyses to assess risks to the credit quality of its counterparties, including any protection sellers, considering both on and off-balance sheet exposures.

GENPRU 1.2.42C

handbook-guidance
An insurer may choose to carry out its ICA through the use of stress testing and scenario analyses (see INSPRU 7.1.10 G and INSPRU 7.1.68 G). If it does so, in carrying out the stress tests and scenario analyses referred to in GENPRU 1.2.42 R, an insurer should take into account the stress tests it uses for its ICA.

GENPRU 1.2.42D

handbook-guidance
In carrying out the stress tests and scenario analyses required by GENPRU 1.2.42R (1), a firm should also consider any impact of the adverse circumstances on its capital resources. In particular, a firm should consider the capital resources gearing rules where its tier one capital is eroded by the event.

GENPRU 1.2.42E

handbook-guidance
A firm should assign adequate resources, including IT systems, to stress testing and scenario analysis, taking into account the stress testing techniques employed, so as to be able to accommodate different and changing stress tests at an appropriate level of granularity.

GENPRU 1.2.42F

handbook-guidance
GENPRU 1.2.63 G to GENPRU 1.2.78 G provide additional guidance on stress testing and scenario analyses. In particular, GENPRU 1.2.73A G provides specific guidance on capital planning.

GENPRU 1.2.43

handbook-guidance
Stress tests and scenario analyses should be carried out at least annually. A firm should, however, consider whether the nature of the major sources of risks identified by it in accordance with GENPRU 1.2.30R (2) (Main requirement relating to risk processes, strategies and systems) and their possible impact on its financial resources suggest that such tests and analyses should be carried out more frequently. For instance, a sudden change in the economic outlook may prompt a firm to revise the parameters of some of its stress tests and scenario analyses. Similarly, if a firm has recently become exposed to a particular sectoral concentration, it may wish to add some stress tests and scenario analyses in order to reflect that concentration. SYSC 11.1.21 E is an evidential provision relating to the general stress and scenario testing rule concerning scenario analysis in relation to liquidity risk.

Application of this section on a solo and consolidated basis: General

GENPRU 1.2.44

handbook-guidance
  1. (1) GENPRU 1.2.45 R - GENPRU 1.2.56 G explain when the ICAAP rules apply on a solo basis and when they apply on a consolidated basis. This material also explains how the ICAAP rules are adjusted to apply on a consolidated basis.
  2. (2) GENPRU 1.2.57 R - GENPRU 1.2.59 R provide that the overall financial adequacy rule always applies on a solo basis. They also explain when and how it applies on a consolidated basis.

Application of this section on a solo and consolidated basis: Processes and tests

GENPRU 1.2.45

handbook-rule

If an insurer is a member of an insurance group and INSPRU 6.1.9 R, INSPRU 6.1.10 R or INSPRU 6.1.15 R (Requirement to maintain group capital) apply to it with respect to that insurance group the ICAAP rules:

  1. (1) apply to that insurer on a consolidated basis; and
  2. (2) do not apply to it on a solo basis.

GENPRU 1.2.46

handbook-rule

The ICAAP rules do not apply on a solo basis to a BIPRU firm to which the ICAAP rules:

  1. (1) apply on a consolidated basis under BIPRU 8.2.1 R (Basic consolidation rule for a UK consolidation group); or
  2. (2) apply on a sub-consolidated basis under BIPRU 8.3.1 R (Basic consolidation rule for a non-EEA sub-group).

GENPRU 1.2.47

handbook-rule

The ICAAP rules apply on a solo basis:

  1. (1) to an insurer to which those rules do not apply on a consolidated basis under GENPRU 1.2.45 R;
  2. (2) to a BIPRU investment firm to which those rules do not apply on a consolidated or sub-consolidated basis as referred to in GENPRU 1.2.46 R (including a BIPRU investment firm with an investment firm consolidation waiver); and
  3. (3) a firm referred to in GENPRU 1.2.2 R (Application of this section to certain non-EEA firms).

GENPRU 1.2.48

handbook-rule

The requirements of the ICAAP rules as they apply on a consolidated basis must be carried out on the basis of the consolidated position of:

  1. (1) (if GENPRU 1.2.45 R applies) that insurance group;
  2. (2) (if BIPRU 8.2.1 R (Basic consolidation rule for a UK consolidation group) applies) the UK consolidation group of which the firm is a member; and
  3. (3) (if BIPRU 8.3.1 R (Basic consolidation rule for a non-EEA sub-group) applies) the non-EEA sub-group of which the firm is a member.

GENPRU 1.2.49

handbook-rule
  1. (1) In accordance with the general principles in GENPRU 1.2.48 R and BIPRU 8 (Group risk - consolidation), for the purpose of the ICAAP rules as they apply on a consolidated basis:
    1. (a) the firm must ensure that the relevant group as defined in (2) have the processes, strategies and systems required by the overall Pillar 2 rule;
    2. (b) the risks to which the overall Pillar 2 rule and the general stress and scenario testing rule refer are those risks as they apply to each member of the relevant group;
    3. (c) the reference in the overall Pillar 2 rule to amounts and types of financial resources, capital resources and internal capital (referred to in this rule as resources) must be read as being to the amounts and types that the firm considers should be held by the members of the relevant group as defined in (2);
    4. (d) other references to resources must be read as being to resources of the members of the relevant group as defined in (2);
    5. (e) references to the CRR are to the consolidated capital requirements applicable to the relevant group under BIPRU 8 (Group risk - consolidation) or, as the case may be, INSPRU 6 (Group risk: Insurance groups);
    6. (f) the reference in the overall Pillar 2 rule to the distribution of resources must be read as including a reference to the distribution between members of the relevant group as defined in (2); and
    7. (g) the reference in the overall Pillar 2 rule to the overall financial adequacy rule must be read as being to that rule as adjusted under GENPRU 1.2.59 R (Application of the overall financial adequacy rule on a consolidated basis).
  2. (2) For the purpose of this rule the relevant group is the group referred to in GENPRU 1.2.48 R and the members of that group are those undertakings that are included in the scope of consolidation with respect to the insurance group, UK consolidation group or, as the case may be, non-EEA sub-group in question.

GENPRU 1.2.50

handbook-guidance
GENPRU 1.2.49 R means that non-financial members of the firm's group are excluded from the group assessment. Notwithstanding the scope of GENPRU 1.2.49 R, a firm should nevertheless take account of risks arising from the activities of those excluded members in its overall assessment of risk.

GENPRU 1.2.51

handbook-rule
  1. (1) This rule relates to the assessment of the amounts, types and distribution of financial resources, capital resources and internal capital (referred to in this rule as "resources") under the overall Pillar 2 rule as applied on a consolidated basis and to the assessment of diversification effects as referred to in GENPRU 1.2.37R (2) as applied on a consolidated basis.
  2. (2) A firm must be able to explain how it has aggregated the risks referred to in the overall Pillar 2 rule and the resources required by each member of the relevant group as referred to in GENPRU 1.2.49R (2) and how it has taken into account any diversification benefits with respect to the group in question.
  3. (3) In particular, to the extent that the transferability of resources affects the assessment in (2), a firm must be able to explain how it has satisfied itself that resources are transferable between members of the group in question in the stressed cases and the scenarios referred to in the general stress and scenario testing rule.

GENPRU 1.2.52

handbook-rule
  1. (1) A firm must allocate the total amount of financial resources, capital resources and internal capital identified as necessary under the overall Pillar 2 rule (as applied on a consolidated basis) between different parts of the relevant group (as defined in GENPRU 1.2.49 R). GENPRU 1.2.36 R (Identifying different tiers of capital) does not apply to this allocation.
  2. (2) The firm must carry out the allocation in (1) in a way that adequately reflects the nature, level and distribution of the risks to which the group is subject and the effect of any diversification benefits.

GENPRU 1.2.53

handbook-rule

A firm must also allocate the total amount of financial resources, capital resources and internal capital (referred to in this rule as "resources") identified as necessary under the overall Pillar 2 rule as applied on a consolidated basis between each firm which is a member of the relevant group (as defined in GENPRU 1.2.49 R) on the following basis:

  1. (1) the amount allocated to each firm must be decided on the basis of the principles in GENPRU 1.2.52R (2); and
  2. (2) if the process in (1) were carried out for each group member, the total so allocated would equal the total amount of resources identified as necessary under the overall Pillar 2 rule as applied on a consolidated basis.

GENPRU 1.2.54

handbook-guidance
A firm to which the ICAAP rules apply on a consolidated basis need not prepare a consolidated basis assessment if such an assessment has been prepared by another member of its group. Where that is the case, a firm may adopt such an assessment as its own. A firm nevertheless remains responsible for the assessment.

GENPRU 1.2.55

handbook-guidance
The purpose of GENPRU 1.2.51 R - GENPRU 1.2.53 R is to enable the FSA to assess the extent, if any, to which a firm's assessment, calculated on a consolidated basis, is lower than it would be if each separate legal entity were to assess the amount of capital it would require to mitigate its risks (to the same level of confidence) were it not part of a group subject to consolidated supervision under BIPRU 8 (Group risk - consolidation) or INSPRU 6.1 (Group risk: Insurance groups). The reason the FSA wishes to make this assessment is so that individual capital guidance which it gives is fair and comparable as between different firms and groups. Group diversification benefits which a firm might assert exist can be a material consideration in a capital adequacy assessment. Understanding the methods used to aggregate the different risks (for example, the correlation assumptions) is crucial to a proper evaluation of such benefits.

GENPRU 1.2.56

handbook-guidance

Whereas a single legal entity can generally use its capital to absorb losses wherever they arise, there are often practical and legal restrictions on the ability of a group to do so. For instance:

  1. (1) capital which is held by overseas regulated firms may not be capable of being remitted to a firm in the UK which has suffered a loss;
  2. (2) a firm which is insolvent or likely to become so may be obliged to look to the interests of its creditors first before transferring capital to other group companies; and
  3. (3) a parent company may have to balance the interests of its shareholders against the protection of the creditors of a subsidiary undertaking which is or might become insolvent and may, rationally, conclude that a subsidiary undertaking should be allowed to fail rather than provide capital to support it.

Application of this section on a solo and consolidated basis: Adequacy of resources

GENPRU 1.2.57

handbook-rule
The overall financial adequacy rule applies to a firm on a solo basis whether or not it also applies to the firm on a consolidated basis.

GENPRU 1.2.58

handbook-rule
The overall financial adequacy rule applies to a firm on a consolidated basis if the ICAAP rules apply to it on a consolidated basis.

GENPRU 1.2.59

handbook-rule
  1. (1) When the overall financial adequacy rule applies on a consolidated basis, the firm must ensure that at all times its group maintains overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that the liabilities of any members of its group cannot be met as they fall due.
  2. (2) The group referred to in (1) is the relevant group as defined in GENPRU 1.2.49 R.
  3. (3) The members of the group referred to in (1) must be identified in accordance with GENPRU 1.2.49 R.

Documentation of risk assessments

GENPRU 1.2.60

handbook-rule

A firm must make a written record of the assessments required under this section. These assessments include assessments carried out on a consolidated basis and on a solo basis. In particular it must make a written record of:

  1. (1) the major sources of risk identified in accordance with GENPRU 1.2.30R (2) (Main requirement relating to risk processes, strategies and systems);
  2. (2) how it intends to deal with those risks; and
  3. (3) details of the stress tests and scenario analyses carried out, including any assumptions made in relation to scenario design, and the resulting financial resources estimated to be required in accordance with the general stress and scenario testing rule.

GENPRU 1.2.61

handbook-rule
A firm must retain the records of its assessments referred to in GENPRU 1.2.60 R for at least three years.

GENPRU 1.2.62

handbook-guidance
Where a firm assesses the adequacy of its CRR in its particular circumstances in accordance with BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment) as a basis for deciding what financial resources are adequate, it should include this in the documentation produced in accordance with GENPRU 1.2.60 R.

Additional guidance on stress tests and scenario analyses

GENPRU 1.2.63

handbook-guidance

The general stress and scenario testing rule requires a firm to carry out stress tests and scenario analyses as part of its obligations under the overall Pillar 2 rule. Both stress tests and scenario analyses are undertaken by a firm to further a better understanding of the vulnerabilities that it faces under adverse conditions. They are based on the analysis of the impact of a range of events of varying nature, severity and duration. These events can be financial, operational or legal or relate to any other risk that might have an economic impact on the firm.

GENPRU 1.2.64

handbook-guidance
Stress testing typically refers to shifting the values of individual parameters that affect the financial position of a firm and determining the effect on the firm's financial position.

GENPRU 1.2.65

handbook-guidance
Scenario analysis typically refers to a wider range of parameters being varied at the same time. Scenario analyses often examine the impact of adverse events on the firm's financial position, for example, simultaneous movements in a number of risk categories affecting all of a firm's business operations, such as business volumes, investment values and interest rate movements.

GENPRU 1.2.66

handbook-guidance
There are three broad purposes of stress testing and scenario analysis. Firstly, it can be used as a means of quantifying how much capital might be absorbed if an adverse event or events occurred. As such it represents a simple 'what if' approach to estimating exposure to risks. This might be a proportionate approach to risk management for an unsophisticated business. Secondly, it can be used to provide a check on the outputs and accuracy of risk models; particularly, in identifying non-linear effects when aggregating risks. Thirdly, it can be used to explore the sensitivities in longer term business plans and how capital needs might change over time.

GENPRU 1.2.68

handbook-guidance
Subject to GENPRU 1.2.76 G, the purpose of stress tests and scenario analyses under the general stress and scenario testing rule is to test the adequacy of overall financial resources. Scenarios need only be identified, and their impact assessed, in so far as this facilitates that purpose. In particular, the nature, depth and detail of the analysis depend, in part, upon the firm's capital strength and the robustness of its risk prevention and risk mitigation measures.

GENPRU 1.2.69

handbook-guidance

Both stress testing and scenario analyses are forward-looking analysis techniques, which seek to anticipate possible losses that might occur if an identified risk crystallises. In applying them, a firm should decide how far forward to look. This should depend upon:

  1. (1) how quickly it would be able to identify events or changes in circumstances that might lead to a risk crystallising resulting in a loss; and
  2. (2) after it has identified the event or circumstance, how quickly and effectively it could act to prevent or mitigate any loss resulting from the risk crystallising and to reduce exposure to any further adverse event or change in circumstance.

GENPRU 1.2.70

handbook-guidance

Where a firm is exposed to market risk, the time horizon over which stress tests and scenario analyses should be carried out will depend on, among other things, the maturity and liquidity of the positions stressed. For example, for the market risk arising from the holding of investments, this will depend upon:

  1. (1) the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily and quickly identified; and
  2. (2) the extent to which the market in those assets is sufficiently liquid (and would remain liquid in the changed circumstances contemplated in the stress test or scenario analysis) to allow the firm, if needed, to sell, hedge or otherwise mitigate the risks relating to its holding so as to prevent or reduce exposure to future price fluctuations. In devising stress tests and scenario analyses for market risk, a BIPRU firm should also take into account BIPRU 7.1.17 R to BIPRU 7.1.20 G.

GENPRU 1.2.71

handbook-guidance

In identifying scenarios, and assessing their impact, a firm should take into account, where material, how changes in circumstances might impact upon:

  1. (1) the nature, scale and mix of its future activities; and
  2. (2) the behaviour of counterparties, and of the firm itself, including the exercise of choices (for example, options embedded in financial instruments or contracts of insurance).

GENPRU 1.2.72

handbook-guidance

In determining whether it would have adequate financial resources in the event of each identified realistic adverse scenario, a firm should:

  1. (1) only include financial resources that could reasonably be relied upon as being available in the circumstances of the identified scenario; and
  2. (2) take account of any legal or other restriction on the use of financial resources.

GENPRU 1.2.73

handbook-guidance
  1. (1) [deleted]
  2. (1A) [deleted]
  3. (2) [deleted]
  4. (3) [deleted]
  5. (4) [deleted]
  6. (5) [deleted]

Capital planning

GENPRU 1.2.73A

handbook-guidance
  1. (1) In identifying an appropriate range of adverse circumstances and events in accordance with GENPRU 1.2.42R (2):
    1. (a) a firm will need to consider the cycles it is most exposed to and whether these are general economic cycles or specific to particular markets, sectors or industries;
    2. (b) for the purposes of GENPRU 1.2.42R (2)(a), the amplitude and duration of the relevant cycle should include a severe downturn scenario based on forward looking hypothetical events, calibrated against the most adverse movements in individual risk drivers experienced over a long historical period;
    3. (c) the adverse scenarios considered should in general be acyclical and, accordingly, the scenario should not become more severe during a downturn and less severe during an upturn. However, the FSA does expect scenarios to be updated with relevant new economic data on a pragmatic basis to ensure that the scenario continues to be relevant; and
    4. (d) the adverse scenarios considered should reflect a firm's risk tolerance of the adverse conditions through which it expects to remain a going concern.
  2. (2) In making the estimate required by GENPRU 1.2.42R (3), a firm should project both its capital resources and its required capital resources over a time horizon of 3 to 5 years, taking account of its business plan and the impact of relevant adverse scenarios. In making the estimate, the firm should consider both the capital resources required to meet its CRR and the capital resources needed to meet the overall financial adequacy rule. The firm should make these projections in a manner consistent with its risk management processes and systems as set out in GENPRU 1.2.37 R.
  3. (3) In projecting its financial position over the relevant time horizon, the firm should:
    1. (a) reflect how its business plan would "flex" in response to the adverse events being considered, taking into account factors such as changing consumer demand and changes to new business assumptions;
    2. (b) consider the potential impact on its stress testing of dynamic feedback effects and second order effects of the major sources of risk identified in accordance with GENPRU 1.2.30R (2);
    3. (c) estimate the effects on the firm's financial position of the adverse event without adjusting for management actions;
    4. (d) separately, identify any realistic management actions that the firm could and would take to mitigate the adverse effects of the stress scenario; and
    5. (e) estimate the effects of the stress scenario on the firm's financial position after taking account of realistic management actions.
  4. (4) A firm should identify any realistic management actions intended to maintain or restore its capital adequacy. These could include ceasing to transact new business after a suitable period has elapsed, balance sheet shrinkage, restricting distribution of profits or raising additional capital. A firm should reflect management actions in its projections only where it could and would take such actions, taking account of factors such as market conditions in the stress scenario and any effects upon the firm's reputation with its counterparties and investors. The combined effect on capital and retained earnings should be estimated. In order to assess whether prospective management actions in a stress scenario would be realistic and to determine which actions the firm would and could take, the firm should take into account any preconditions that might affect the value of management actions as risk mitigants and analyse the difference between the estimates in (3)(c) and (3)(e) in sufficient detail to understand the implications of taking different management actions at different times, particularly where they represent a significant divergence from the firm's business plan.
  5. (5) The firm should document its stress testing and scenario analysis policies and procedures, as well as the results of its tests in accordance with GENPRU 1.2.60 R. These records should be included within the firm's ICAAP or ICA submission document.
  6. (6) The FSA will review the firm's records referred to in (5) as part of its SREP. The purpose of examining these is to enable the FSA to judge whether a firm will be able to continue to meet its CRR and the overall financial adequacy rule throughout the projection period.
  7. (7) If, after taking account of realistic management actions, a firm's stress testing management plan shows that the firm's projected capital resources are less than those required to continue to meet its CRR or less than those needed to continue to meet the overall financial adequacy rule over the projection period, the FSA may require the firm to set out additional countervailing measures and off-setting actions to reduce such difference or to restore the firm's capital adequacy after the stress event.
  8. (8) The firm's senior management or governing body should be actively involved and engaged in all relevant stages of the firm's stress testing and scenario analysis programme. This would include establishing an appropriate stress testing programme, reviewing the programme's implementation (including the design of scenarios) and challenging, approving and actioning the results of the stress tests.
  9. (9) For an insurer:
    1. (a) the treatment of new business when making capital projections is likely to be different from its ICA. In projecting its financial position, an insurer should take account of new business based on the firm's business plan, but flexed to take account of potential changes in trading conditions and strategy. When assessing its current capital adequacy under its ICA, an insurer should take account of the effects of closure to new business (see GENPRU 1.2.27 G, GENPRU 1.2.73AG (3) and (4)and INSPRU 7.1.16 G to INSPRU 7.1.19 G). Also, an insurer may use methods that are more approximate than used for its ICA (for example, in projecting the with-profits insurance capital component for realistic basis life firms and the capital resources needed to meet the overall financial adequacy rule); and
    2. (b) where management discretion is exercised as a normal part of an insurer's business (for example, in changing bonus rates or surrender values in accordance with the PPFM for with-profits business), under (3)(c) the insurer does not need to estimate the effect of an adverse event on its financial position without adjusting for such changes. However, the effect on the financial position of varying such actions should be estimated and understood.

GENPRU 1.2.73B

handbook-guidance
The FSA may formulate macroeconomic and financial market scenarios which a firm may use as an additional input to its ICAAP or ICA submission. In addition, the FSA may also ask a firm to apply specific scenarios directly in its ICAAP or ICA submission.

GENPRU 1.2.74

handbook-guidance
A firm may consider scenarios in which expected future profits will provide capital reserves against future risks. However, it would only be appropriate to take into account profits that can be foreseen with a reasonable degree of certainty as arising before the risk against which they are being held could possibly arise. In estimating future reserves, a firm should deduct future dividend payment estimates from projections of future profits.

GENPRU 1.2.75

handbook-guidance
  1. (1) [deleted]
  2. (2) Stress and scenario analyses should, in the first instance, be aligned with the risk appetite of the firm, as well as the nature, scale and complexity of its business and of the risks that it bears. The calibration of the stress and scenario analyses should be reconciled to a clear statement setting out the premise upon which the firm's internal capital assessment under the overall Pillar 2 rule is based.
  3. (3) [deleted]
  4. (4) In identifying adverse circumstances and events in accordance with GENPRU 1.2.42R (2), a firm should consider the results of any reverse stress testing conducted in accordance with SYSC 20. Reverse stress testing may be expected to provide useful information about the firm's vulnerabilities and variations around the most likely ruin scenarios for the purpose of meeting the firm's obligations under GENPRU 1.2.42 R. In addition, such a comparison may help a firm to assess the sensitivity of its financial position to different stress calibrations.

GENPRU 1.2.76

handbook-guidance
A firm should use the results of its stress testing and scenario analysis not only to assess capital needs, but also to decide if measures should be put in place to minimise the adverse effect on the firm if the risk covered by the stress or scenario test actually materialises. Such measures might be a contingency plan or might be more concrete risk mitigation steps.

GENPRU 1.2.77

handbook-guidance
Additional guidance on stress tests and scenario analyses for the assessment of capital resources is available in BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment).

GENPRU 1.2.78

handbook-guidance

Additional guidance in relation to stress tests and scenario analysis for liquidity risk as that concept relates to an insurer is available in SYSC 11 (Liquidity risk systems and controls). BIPRU 12 sets out the main Handbook provisions in relation to liquidity risk for a BIPRU firm.

Pension obligation risk

GENPRU 1.2.79

handbook-guidance
GENPRU 1.2.80 G to GENPRU 1.2.86 G contain guidance on the assessment required by GENPRU 1.2.30R (2)(k) for a firm exposed to pension obligation risk as defined in GENPRU 1.2.31R (5).

GENPRU 1.2.80

handbook-guidance

The pension scheme itself (i.e. the scheme's assets and liabilities) is not the focus of the risk assessment but rather the firm's obligations towards the pension scheme. A firm should include in its estimate of financial resources both its expected obligations to the pension scheme and any increase in obligations that may arise in a stress scenario.

GENPRU 1.2.81

handbook-guidance
If a firm has a current funding obligation in excess of normal contributions or there is a risk that such a funding obligation will arise then, when calculating available capital resources, it should reverse out any accounting deficit and replace this in its capital adequacy assessment with its best estimate, calculated in discussion with the scheme's actuaries or trustees, of the cash that will need to be paid into the scheme in addition to normal contributions over the foreseeable future. This may differ from the approach taken in assessing pension scheme risks for the purposes of calculating resources to meet the CRR, where a firm may not need to consider funding obligations beyond the next five years.

GENPRU 1.2.82

handbook-guidance
A firm should also assess the risks that may increase its current funding obligations towards the pension scheme and that might lead to the firm not being able to pay its other liabilities as they fall due.

GENPRU 1.2.83

handbook-guidance

A firm may wish to consider the following scenarios:

  1. (1) one in which the firm gets into difficulties with an effect on its ability to fund the pension scheme; and
  2. (2) one in which the pension scheme position deteriorates (for example, because investment returns fall below expected returns or because of increases in life expectancy) with an effect on the firm's funding obligations; taking into account the management actions the firm could and would take.

GENPRU 1.2.83A

handbook-guidance
A firm is expected to determine where the scope of any stress test impacts upon its pension obligation risk and estimate how the relevant measure of pension obligation risk will change in the scenario in question. For example, in carrying out stress tests under GENPRU 1.2.42 R a firm must consider how a stress scenario, such as an economic recession, would impact on the firm's current obligations towards its pension scheme and any potential increase in those obligations. Risks such as interest rate risk or reduced investment returns may have a direct impact on a firm's financial position as well as an indirect impact resulting from an increase in the firm's pension scheme obligations. Both effects should be taken into account in a firm's estimate of financial resources under GENPRU 1.2.30 R.

GENPRU 1.2.84

handbook-guidance
Scenarios in which a firm's employees suffer a loss or members of a pension scheme suffer a loss do not necessarily affect the firm's ability to pay its liabilities as they fall due.

GENPRU 1.2.85

handbook-guidance

A firm should consider issues such as:

  1. (1) the extent to which trustees of the pension scheme or a pension regulator (such as the one created under the Pensions Act 2004) can compel a certain level of contributions or a one-off payment in adverse financial situations or in order to meet the minimum legal requirements under the scheme's trust deed and rules or under the applicable laws relating to the pension scheme;
  2. (2) whether the valuation bases used to set pension scheme contribution rates are consistent with the firm's current business plans and anticipated changes in the workforce; and
  3. (3) which valuation basis is appropriate given the expected investment return on scheme assets and actions the firm can take if those returns do not materialise.

GENPRU 1.2.86

handbook-guidance
A firm should carry out analyses only to a degree of sophistication and complexity which is commensurate with the materiality of its pension risks.

Group risk

GENPRU 1.2.87

handbook-guidance
GENPRU 1.2.88G to GENPRU 1.2.91G contain additional guidance on the assessment required by GENPRU 1.2.30R (2)(l) (Group risk).

GENPRU 1.2.88

handbook-guidance

A firm should include in the written record referred to in GENPRU 1.2.60 R a description of the broad business strategy of the insurance group, the UK consolidation group or the non-EEA sub-group of which it is a member, the group's view of its principal risks and its approach to measuring, managing and controlling the risks. This description should include the role of stress testing, scenario analysis and contingency planning in managing risk at the solo and consolidated level.

GENPRU 1.2.89

handbook-guidance

A firm should satisfy itself that the systems (including IT) of the insurance group, the UK consolidation group or the non-EEA sub-group of which it is a member are sufficiently sound to support the effective management and, where applicable, the quantification of the risks that could affect the insurance group, the UK consolidation group or the non-EEA sub-group, as the case may be.

GENPRU 1.2.90

handbook-guidance
In performing stress tests and scenario analyses, a firm should take into account the risk that its group may have to bring back on to its consolidated balance sheet the assets and liabilities of off-balance sheet entities as a result of reputational contagion, notwithstanding the appearance of legal risk transfer.

GENPRU 1.2.91

handbook-guidance
A firm should carry out stress tests and scenario analyses to a degree of sophistication which is commensurate with the complexity of its group and the nature of its group risk.

GENPRU 1.3

Valuation

  • 31/12/2006

Application

GENPRU 1.3.1

handbook-rule
  1. (1) This section of the Handbook applies to an insurer, unless it is:
    1. (a) non-directive friendly society;
    2. (b) an incoming EEA firm; or
    3. (c) an incoming Treaty firm.
  2. (2) This section of the Handbook applies to a BIPRU firm.
  3. (3) This section of the Handbook applies to a UK ISPV.

Purpose

GENPRU 1.3.2

handbook-guidance
This section sets out, for the purposes of GENPRU, BIPRU and INSPRU, rules and guidance as to how a firm should recognise and value assets, liabilities, exposures, equity and income statement items.

GENPRU 1.3.3

handbook-guidance
  1. (1) In the case of a BIPRU firm, this section implements Article 74 of the Banking Consolidation Directive, Article 64(4) of the Banking Consolidation Directive (Own funds) and Article 33 and Part B of Annex VII of the Capital Adequacy Directive.
  2. (2) In the case of an insurer, GENPRU 1.3.4 R implements the requirements of Articles 23.3(viii) and 24.2(iv) of the Consolidated Life Directive.

General requirements: Accounting principles to be applied

GENPRU 1.3.4

handbook-rule

Subject to GENPRU 1.3.9 R to GENPRU 1.3.10 R and GENPRU 1.3.36 R, except where a rule in GENPRU, BIPRU or INSPRU provides for a different method of recognition or valuation, whenever a rule in GENPRU, BIPRU or INSPRU refers to an asset, liability, exposure, equity or income statement item, a firm must, for the purpose of that rule, recognise the asset, liability, exposure, equity or income statement item and measure its value in accordance with whichever of the following are applicable:

  1. (1) the insurance accounts rules, or the Friendly Societies (Accounts and Related Provisions) Regulations 1994;
  2. (2) Financial Reporting Standards and Statements of Standard Accounting Practice issued or adopted by the Accounting Standards Board;
  3. (3) Statements of Recommended Practice, issued by industry or sectoral bodies recognised for this purpose by the Accounting Standards Board;
  4. (4) the Building Societies (Accounts and Related Provisions) Regulation 1998;
  5. (5) international accounting standards;
  6. (6) the Companies Act 1985; and
  7. (7) the Companies Act 2006;

as applicable to the firm for the purpose of its external financial reporting (or as would be applicable if the firm was a company with its head office in the United Kingdom).

GENPRU 1.3.5

handbook-guidance

Except where a rule in GENPRU, BIPRU or INSPRU makes different provision, GENPRU 1.3.4 R applies whenever a rule in GENPRU, BIPRU or INSPRU refers to the value or amount of an asset, liability, exposure, equity or income statement item, including:

  1. (1) whether, and when, to recognise or de-recognise an asset or liability;
  2. (2) the amount at which to value an asset, liability, exposure, equity or income statement item; and
  3. (3) which description to place on an asset, liability, exposure, equity or income statement item.

GENPRU 1.3.6

handbook-guidance

In particular, unless an exception applies, GENPRU 1.3.4 R should be applied for the purposes of GENPRU, BIPRU or INSPRU to determine how to account for:

  1. (1) netting of amounts due to or from the firm;
  2. (2) the securitisation of assets and liabilities (see also GENPRU 1.3.7 G);
  3. (3) leased tangible assets;
  4. (4) assets transferred or received under a sale and repurchase or stock lending transaction; and
  5. (5) assets transferred or received by way of initial or variation margin under a derivative or similar transaction.

GENPRU 1.3.7

handbook-guidance
In the case of an insurer or a UK ISPV, where assets or liabilities are securitised, GENPRU 1.3.4 R only permits de-recognition where Financial Reporting Standards (or, where applicable, International Accounting Standards) permit either de-recognition or the linked presentation. However, the FSA will consider granting a waiver to permit de-recognition in other circumstances provided that the firm can demonstrate that securitisation has effectively transferred risk

GENPRU 1.3.8

handbook-guidance

Articles 23.3(viii) and 24.2(iv) of the Consolidated Life Directive require assets of an insurer that are managed on its behalf by a subsidiary undertaking to be taken into account for the purposes of determining the insurer's admissible assets and its assets in excess of concentration limits. The application of GENPRU 1.3.4 R will result in such assets remaining on the balance sheet of the insurer.

General requirements: Adjustments to accounting values

GENPRU 1.3.9

handbook-rule

For the purposes of GENPRU, BIPRU or INSPRU, except where a rule in GENPRU, BIPRU or INSPRU provides for a different method of recognition or valuation:

  1. (1) when a firm, upon initial recognition, designates its liabilities as at fair value through profit or loss, it must always adjust any value calculated in accordance with GENPRU 1.3.4 R by subtracting any unrealised gains or adding back in any unrealised losses which are not attributable to changes in a benchmark interest rate;
  2. (2) in respect of a defined benefit occupational pension scheme:
    1. (a) a firm must derecognise any defined benefit asset;
    2. (b) a firm may substitute for a defined benefit liability the firm's deficit reduction amount.

GENPRU 1.3.10

handbook-rule
An election made under GENPRU 1.3.9R (2) must be applied consistently for the purposes of GENPRU, BIPRU or INSPRU in respect of any one financial year.

GENPRU 1.3.11

handbook-guidance
A firm should keep a record of and be ready to explain to its supervisory contacts in the FSA the reasons for any difference between the deficit reduction amount and any commitment the firm has made in any public document to provide funding in respect of a defined benefit occupational pension scheme.

GENPRU 1.3.12

handbook-guidance
The provisions of GENPRU 1.3.9 R to GENPRU 1.3.10 R and GENPRU 1.3.36 R apply only to the extent that the items referred to in those paragraphs would otherwise be recognised under the accounting requirements applicable to the firm. Some of those requirements may only be relevant to a firm subject to international accounting standards.

General requirements: Methods of valuation and systems and controls

GENPRU 1.3.13

handbook-rule
  1. (1) Except to the extent that GENPRU, BIPRU or INSPRU provide for another method of valuation, GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification, Adjustments or reserves) apply:
    1. (a) for the purposes set out in GENPRU 1.3.41 R;
    2. (b) for the purposes set out in GENPRU 1.3.39 R; and
    3. (c) to any balance sheet position measured at market value or fair value.
  2. (2) A firm must establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.
  3. (3) Systems and controls under (2) must include at least the following elements:
    1. (a) documented policies and procedures for the process of valuation, including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month-end and ad-hoc verification procedures; and
    2. (b) reporting lines for the department accountable for the valuation process that are:
      1. (i) clear and independent of the front office; and
      2. (ii) ultimately to a main board executive director.

General requirements: Marking to market

GENPRU 1.3.14

handbook-rule
Wherever possible, a firm must use mark to market in order to measure the value of the investments and positions to which this rule applies under GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R. Marking to market is valuation (on at least a daily basis in the case of the trading book positions of a BIPRU firm) at readily available close out prices from independent sources.

GENPRU 1.3.15

handbook-rule
For the purposes of GENPRU 1.3.14 R, examples of readily available close out prices include exchange prices, screen prices, or quotes from several independent reputable brokers.

GENPRU 1.3.16

handbook-rule
  1. (1) When marking to market, a firm must use the more prudent side of bid/offer unless the firm is a significant market maker in a particular position type and it can close out at the mid-market price.
  2. (2) When calculating the current exposure value of a credit risk exposure for counterparty credit risk purposes:
    1. (a) a firm must use the more prudent side of bid/offer or the mid-market price and the firm must be consistent in the basis it chooses; and
    2. (b) where the difference between the more prudent side of bid/offer and the mid-market price is material, the firm must consider making adjustments or establishing reserves.

General requirements: Marking to model

GENPRU 1.3.17

handbook-rule
Where marking to market is not possible, a firm must use mark to model in order to measure the value of the investments and positions to which this rule applies under GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R. Marking to model is any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input. GENPRU 1.3.18 R to GENPRU 1.3.25 R apply when marking to model.

GENPRU 1.3.18

handbook-rule

When the model used is developed by the firm, that model must be:

  1. (1) based on appropriate assumptions which have been assessed and challenged by suitably qualified parties independent of the development process;
  2. (2) independently tested, including validation of the mathematics, assumptions, and software implementation; and
  3. (3) (in the case of a BIPRU firm) developed or approved independently of the front office.

GENPRU 1.3.19

handbook-rule
A firm must ensure that its senior management are aware of the positions which are subject to mark to model and understand the materiality of the uncertainty this creates in the reporting of the performance of the business of the firm and the risks to which it is subject.

GENPRU 1.3.20

handbook-rule
A firm must source market inputs in line with market prices so far as possible and assess the appropriateness of the market inputs for the position being valued and the parameters of the model on a frequent basis.

GENPRU 1.3.21

handbook-rule
A firm must use generally accepted valuation methodologies for particular products where these are available.

GENPRU 1.3.22

handbook-rule
A firm must establish formal change control procedures, hold a secure copy of the model, and periodically use that model to check valuations.

GENPRU 1.3.23

handbook-rule
A firm must ensure that its risk management functions are aware of the weaknesses of the models used and how best to reflect those in the valuation output.

GENPRU 1.3.24

handbook-rule
A firm must periodically review the model to determine the accuracy of its performance.

GENPRU 1.3.25

handbook-rule
Examples of periodical review are assessing the continued appropriateness of the assumptions, analysis of profit and loss versus risk factors and comparison of actual close out values to model outputs.

General requirements: Independent price verification

GENPRU 1.3.26

handbook-rule
In addition to marking to market or marking to model, a firm must perform independent price verification. This is the process by which market prices or model inputs are regularly verified for accuracy and independence.

GENPRU 1.3.27

handbook-guidance
For independent price verification, where independent pricing sources are not available or pricing sources are more subjective (for example, only one available broker quote), prudent measures such as valuation adjustments may be appropriate.

GENPRU 1.3.28

handbook-rule
In the case of the trading book positions of a BIPRU firm, while daily marking to market may be performed by dealers, verification of market prices and model inputs must be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently).

General requirements: Valuation adjustments or reserves

GENPRU 1.3.29

handbook-rule
The recognition of any gains or losses arising from valuations subject to GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R must be recognised for the purpose of calculating capital resources in accordance with GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification, Adjustments or reserves). However if GENPRU, BIPRU or INSPRU provide for another treatment of such gains or losses, that other treatment must be applied.

GENPRU 1.3.30

handbook-rule
A firm must establish and maintain procedures for considering valuation adjustments or reserves. These procedures must be compliant with the requirements set out in GENPRU 1.3.33 R.

GENPRU 1.3.31

handbook-rule
A firm using third-party valuations, or marking to model, must consider whether valuation adjustments are necessary.

GENPRU 1.3.32

handbook-rule
A firm must consider the need for establishing reserves for less liquid positions and, on an ongoing basis, review their continued appropriateness in accordance with the requirements set out in GENPRU 1.3.33 R. Less liquid positions could arise from both market events and institution-related situations e.g. concentration positions and/or stale positions.

GENPRU 1.3.33

handbook-rule
  1. (1) This paragraph sets out the requirements referred to in GENPRU 1.3.30 R and GENPRU 1.3.32 R.
  2. (2) A firm must consider the following adjustments or reserves: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where appropriate, model risk.
  3. (3) A firm must consider several factors when determining whether a valuation reserve is necessary for less liquid positions. These factors include the amount of time it would take to hedge out the position/risks within the position; the average and volatility of bid/offer spreads; the availability of market quotes (number and identity of market makers); the average and volatility of trading volumes; market concentrations; the ageing of positions; the extent to which valuation relies on marking to model and the impact of other model risks.

GENPRU 1.3.34

handbook-rule
If the result of establishing adjustments or reserves under GENPRU 1.3.29 R to GENPRU 1.3.33 R is a valuation which differs from the fair value determined in accordance with GENPRU 1.3.4 R, a firm must reconcile the two valuations.

GENPRU 1.3.35

handbook-guidance
Reconciliation differences under GENPRU 1.3.34 R should not be reflected in the valuations under GENPRU 1.3 but should be disclosed to the FSA in prudential returns.

Specific requirements: BIPRU firms

GENPRU 1.3.36

handbook-rule

Adjustments to accounting values

  1. (1) For the purposes of GENPRU and BIPRU, the adjustments in (2) and (3) apply to values calculated pursuant to GENPRU 1.3.4 R in addition to those required by GENPRU 1.3.9 R to GENPRU 1.3.10 R.
  2. (2) A BIPRU firm must not recognise either:
    1. (a) the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost; or
    2. (b) any unrealised gains or losses on debt instruments held, or formerly held, in the available-for-sale category.
  3. (3) A BIPRU investment firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but exclude from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.
  4. (4) The items referred to in (2) and (3) must be excluded from capital resources.

GENPRU 1.3.37

handbook-guidance
Provisions for equity instruments held in the available-for-sale category can be found in GENPRU 2.2.185 R.

Trading book and revaluations

GENPRU 1.3.38

handbook-rule

GENPRU 1.3.39

handbook-rule
Trading book positions are subject to prudent valuation rules as specified in GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification, Adjustments or reserves). In accordance with those rules, a firm must ensure that the value applied to each of its trading book positions appropriately reflects the current market value. This value must contain an appropriate degree of certainty having regard to the dynamic nature of trading book positions, the demands of prudential soundness and the mode of operation and purpose of capital requirements in respect of trading book positions.

GENPRU 1.3.40

handbook-rule
Trading book positions must be re-valued at least daily.

Investments, derivatives and quasi-derivatives

GENPRU 1.3.41

handbook-rule
  1. (1) For the purposes of GENPRU and INSPRU, an insurer or a UK ISPV must apply GENPRU 1.3.14 R to GENPRU 1.3.34 R (Marking to market, Marking to model, Independent price verification, Adjustments or reserves) to account for:
    1. (a) investments that are, or amounts owed arising from the disposal of:
      1. (i) debt securities, bonds and other money- and capital-market instruments;
      2. (ii) loans;
      3. (iii) shares and other variable yield participations;
      4. (iv) units in UCITS schemes, non-UCITS retail schemes, recognised schemes and any other collective investment scheme falling within paragraph(1)(A)(d)(iv) of GENPRU 2 Annex 7; and
    2. (b) derivatives and quasi-derivatives
  2. (2) In the case of an insurer, (1) is subject to GENPRU 1.3.43 R.

Shares in and debts due from related undertakings

GENPRU 1.3.42

handbook-rule

GENPRU 1.3.43

handbook-rule

GENPRU 1.3.13 R and GENPRU 1.3.41 R do not apply to shares in, and debts due from a related undertaking that is:

  1. (1) a regulated related undertaking;
  2. (2) an ancillary services undertaking; or
  3. (3) any other subsidiary undertaking, the shares of which a firm elects to value in accordance with GENPRU 1.3.47 R.

GENPRU 1.3.44

handbook-guidance

The effect of GENPRU 1.3.43 R is that shares in, and debts due from, related undertakings of the types referred to are not valued on a mark to market basis by insurers. As a result, debts due from these undertakings, and shares in related undertakings which are ancillary services undertakings, are valued at their accounting book value in accordance with GENPRU 1.3.4 R. Shares in related undertakings referred to in GENPRU 1.3.43R (1) or (3) are valued by insurers in accordance with GENPRU 1.3.45 R to GENPRU 1.3.50 R.

GENPRU 1.3.45

handbook-rule

Except where the contrary is expressly stated in GENPRU, whenever a rule in GENPRU or INSPRU refers to shares held in, and debts due from, an undertaking referred to in GENPRU 1.3.43R (1) or GENPRU 1.3.43R (3), a firm must value the shares held in accordance with GENPRU 1.3.47 R.

GENPRU 1.3.46

handbook-rule
In relation to shares in, and debts due from, an undertaking referred to in GENPRU 1.3.43R (1), GENPRU 1.3.45 R does not apply for the purposes of GENPRU 2.2.256 R (Adjustments for regulated related undertakings other than insurance undertakings) and INSPRU 6.1 (Group risk: Insurance groups).

GENPRU 1.3.47

handbook-rule

For the purposes of GENPRU 1.3.45 R, the value of the shares held in an undertaking referred to in GENPRU 1.3.43R (1) or GENPRU 1.3.43R (3) is the sum of:

  1. (1) the regulatory surplus value of that undertaking; less
  2. (2) for the purposes of GENPRU 2.2.256 R (Adjustments for regulated related undertakings other than insurance undertakings), the book value of the total investments in the tier one capital resources and tier two capital resources of that undertaking by the firm and its related undertakings; or
  3. (3) for other purposes in GENPRU and INSPRU, the sum of:
    1. (a) the book value of the investments by the firm and its related undertakings in the tier two capital resources of the undertaking; and
    2. (b) if the undertaking is an insurance undertaking, its ineligible surplus capital and any restricted assets of the undertaking which have been excluded under INSPRU 6.1.41R (1).

GENPRU 1.3.48

handbook-rule

For the purposes of GENPRU 1.3.47R (1), the regulatory surplus value of an undertaking referred to in GENPRU 1.3.43R (1) or GENPRU 1.3.43R (3) is, subject to GENPRU 1.3.49 R, the sum of:

  1. (1) the total capital after deductions of the undertaking; less
  2. (2) the individual capital resources requirement of the undertaking.

GENPRU 1.3.49

handbook-rule
  1. (1) Subject to GENPRU 1.3.50 R, for the purposes of GENPRU 1.3.48 R, only the relevant proportion of the:
    1. (a) total capital after deductions of the undertaking; and
    2. (b) individual capital resources requirement of the undertaking;
    3. is to be taken into account.
  2. (2) In (1), the relevant proportion is the proportion of the total number of shares issued by the undertaking held, directly or indirectly, by the firm.

GENPRU 1.3.50

handbook-rule
If the individual capital resources requirement of an undertaking in GENPRU 1.3.43R (1) that is a subsidiary undertaking exceeds total capital after deductions, then the full amount of the items referred to in GENPRU 1.3.49R (1) must be taken into account for the purposes of GENPRU 1.3.48 R.

GENPRU 1.3.51

handbook-rule

For the purposes of GENPRU 1.3.47 R to GENPRU 1.3.50 R:

  1. (1) in relation to an undertaking referred to in GENPRU 1.3.43R (1):
    1. (a) subject to (2), individual capital resources requirement has the meaning given by INSPRU 6.1.34 R;
    2. (b) total capital after deductions means:
      1. (i) when used in relation to a regulated related undertaking that is subject to the capital resources table, the total capital after deductions (as calculated at stage M of the capital resources table) of the undertaking; and
      2. (ii) when used in relation to a regulated related undertaking that is not subject to the capital resources table, the total capital after deductions calculated as if that undertaking were required to calculate its total capital after deductions in accordance with stage M of the calculation in the capital resources table, but with such adjustments being made to secure that the undertaking's calculation of its total capital after deductions complies with the relevant sectoral rules applicable to it; and
    3. (c) ineligible surplus capital has the meaning given by INSPRU 6.1.67 R;
  2. (2) in relation to an undertaking referred to in GENPRU 1.3.43R (3),
    1. (a) the individual capital resources requirement is zero; and
    2. (b) the total capital after deductions means the total capital after deductions of the undertaking calculated as if the undertaking were an insurance holding company required to calculate its total capital resources in accordance with the capital resources table but with such adjustments being made to secure that the undertaking's calculation of its total capital after deductions complies with the sectoral rules for the insurance sector.

GENPRU 1.3.52

handbook-guidance

GENPRU 1.3.47 R to GENPRU 1.3.51 R set out several different valuation bases for an insurer's shares in related undertakings. The regulatory surplus value (defined in GENPRU 1.3.48 R) measures the related undertaking's own capital surplus or deficit. This is used: (i) in GENPRU 1.3.47 R as a basis for calculating the impact on the firm's position of its investments in related undertakings; and (ii) in INSPRU 6.1 as a starting point for the calculation of ineligible surplus capital.

GENPRU 1.3.53

handbook-guidance

GENPRU 1.3.47 R determines how, for the purposes of the solo capital adequacy calculation of an insurer, that insurer's capital resources should be adjusted to take into account its investments in related undertakings.

GENPRU 1.3.54

handbook-guidance
The rules that specify how, for the purposes of the adjusted solo capital calculation, an insurer should incorporate its related undertakings into its capital resources and capital resources requirement are set out in INSPRU 6.1.

Insurance Special Purpose Vehicles

GENPRU 1.3.55

handbook-rule
Except where a rule in GENPRU or INSPRU makes a different provision, an insurer must not place any value on amounts recoverable from an ISPV for the purposes of any rule in GENPRU or INSPRU.

GENPRU 1.3.56

handbook-guidance

An insurer may value amounts recoverable from an ISPV if it obtains a waiver of GENPRU 1.3.55 R under section 148 of the Act. The conditions that will need to be met, in addition to the statutory tests under section 148(4) of the Act, before the FSA will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G.

General insurance business: Community co-insurance operations -

GENPRU 1.3.57

handbook-rule

Where a relevant insurer determines the amount of a liability in order to make provision for outstanding claims under a Community co-insurance operation, then, if the leading insurer has informed the relevant insurer of the amount of the provision made by the leading insurer for such claims, the amount determined by the relevant insurer:

  1. (1) must be at least as great as the amount of the provision made by the leading insurer; or
  2. (2) in a case where it is not the practice in the United Kingdom to make such provision separately, must be sufficient, when all liabilities are taken into account, to include provision at least as great as that made by the leading insurer for such claims,
  3. due regard being had in either case to the proportion of the risk covered by the relevant insurer and by the leading insurer respectively.

GENPRU 1.4

Actions for damages

  • 31/12/2006

GENPRU 1.4.1

handbook-rule
A contravention of the rules in GENPRU does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).
  • 31/12/2006

GENPRU 1.5

Application of GENPRU 1 to Lloyd's

  • 31/12/2006

Application of GENPRU 1.2

GENPRU 1.5.1

handbook-rule

GENPRU 1.2 applies to managing agents and to the Society in accordance with:

  1. (1) for managing agents, INSPRU 8.1.4 R; and
  2. (2) for the Society, INSPRU 8.1.2 R.

GENPRU 1.5.2

handbook-rule

Insurance market direction

GENPRU 1.5.3

handbook-guidance
The insurance market direction in GENPRU 1.5.5 D is given under section 316(1) of the Act (Direction by Authority) and applies to members.

GENPRU 1.5.4

handbook-guidance

The purpose of the insurance market direction in GENPRU 1.5.5 D is to enable the FSA to make the rule in GENPRU 1.5.7 R applying to members, in order to:

  1. (1) protect policyholders against the risk that members may not have adequate financial resources to meet liabilities under or in respect of contracts of insurance as they fall due;
  2. (2) promote confidence in the market at Lloyd's by requiring members to maintain financial resources which are adequate to meet their liabilities.

GENPRU 1.5.5

handbook-directions
With effect from 1 January 2005, Part X of the Act (Rules and Guidance) applies to the members of the Society taken together in relation to the insurance market activities of effecting and carrying out contracts of insurance written at Lloyd's, for the purpose of applying the rules and guidance in GENPRU 1.5.7 R to GENPRU 1.5.9 G.

GENPRU 1.5.6

handbook-guidance
Part X of the Act is a core provision specified in section 317(1) of the Act (The core provisions). Section 317(2) provides that references in an applied core provision to an authorised person are to be read as references to a person in the class to which the insurance market direction applies. From 1 January 2005, references in Part X of the Act are to be read as references to members for the purposes of GENPRU 1.5.7 R to GENPRU 1.5.9 G.

Members' obligation to maintain adequate financial resources

GENPRU 1.5.7

handbook-rule
The members taken together must at all times maintain overall financial resources, including capital and liquidity resources, that are adequate, both as to amount and quality, to ensure that there is no significant risk that liabilities under or in respect of contracts of insurance written at Lloyd's will not be met as they fall due.

GENPRU 1.5.8

handbook-guidance

Under GENPRU:

  1. (1) managing agents must ensure that adequate financial resources are available to support the insurance business carried on through each syndicate that they manage; and
  2. (2) the Society must, having regard to the availability and value of the central assets, ensure that the financial resources supporting the insurance business of each member are adequate at all times.

GENPRU 1.5.9

handbook-guidance
In practice, compliance with the requirements described in GENPRU 1.5.8 G is likely to have the effect that members comply with GENPRU 1.5.7 R.

Application of GENPRU 1.3

GENPRU 1.5.10

handbook-rule

GENPRU 1.3 applies to managing agents and to the Society in accordance with:

  1. (1) for managing agents, INSPRU 8.1.4 R; and
  2. (2) for the Society, INSPRU 8.1.2 R.

Amounts receivable but not yet received

GENPRU 1.5.11

handbook-rule

When recognising and valuing assets that are available to meet liabilities arising from a member's insurance business, neither the Society nor managing agents may attribute any value to any amounts receivable but not yet received from that member or another member, except for:

  1. (1) timing differences provided that a corresponding amount has been deducted from syndicate assets or funds at Lloyd's;
  2. (2) the Society's callable contributions, which are valued according to GENPRU 1.5.17 R to GENPRU 1.5.18 R; and
  3. (3) debts owed by a member to another member of the Society where the debt is a liability arising out of the insurance business he carries on at Lloyd's.

Letters of credit, guarantees and life assurance policies

GENPRU 1.5.12

handbook-rule

When recognising and valuing assets held as members' funds at Lloyd's the Society may, if the conditions in GENPRU 1.5.13 R are satisfied, attribute a value to letters of credit and guarantees that it holds in respect of a member's insurance business.

GENPRU 1.5.13

handbook-rule

The conditions referred to in GENPRU 1.5.12 R are that letters of credit and guarantees must be:

  1. (1) in the form prescribed by the Society from time to time and notified to the FSA; and
  2. (2) issued by a credit institution or an insurance undertaking.

GENPRU 1.5.14

handbook-rule

When recognising and valuing assets held as members' funds at Lloyd's the Society may attribute a value to verifiable sums arising out of life assurance policies.

GENPRU 1.5.15

handbook-rule

The Society must value any letter of credit, guarantee or life assurance policy at its net realisable value. The Society must make all appropriate deductions, including those in respect of:

  1. (1) the expenses of realisation; and
  2. (2) any reduction in value that would be likely to occur if the asset needed to be realised at short notice to meet liabilities falling due earlier than expected.

GENPRU 1.5.16

handbook-rule
If a member relies on a value attributed to a letter of credit or guarantee to meet any applicable capital resources requirement and that letter of credit or guarantee will expire in less than one month, the Society must take appropriate steps to ensure that the applicable capital resources requirement will continue to be met, including taking steps to ensure that sums due under the letter of credit or guarantee are drawn down when due and carried to the appropriate Lloyd's trust fund.

The Society's callable contributions

GENPRU 1.5.17

handbook-rule

For the purposes of GENPRU 1.5.15R (2), the amount assumed to be callable from a member must not exceed the lower of:

  1. (1) the maximum callable contribution that member is or may be liable to make in that financial year; and
  2. (2) the amount by which the member's own capital resources exceed the member's own capital resources requirement.

GENPRU 1.5.18

handbook-rule
The Society must value callable contributions taking appropriate account of any legal, constructive or other limits on its ability to call for contributions from members or to realise the amount called.

GENPRU 1.5.19

handbook-rule
The Society must give the FSA adequate advance notice if it proposes to change the maximum amount of the callable contribution that members may be liable to make in any financial year.

GENPRU 1.5.20

handbook-guidance
The FSA would normally expect not less than six months' notice under GENPRU 1.5.19 R.

Liabilities

GENPRU 1.5.21

handbook-rule
Subject to GENPRU 1.5.22 R, the Society must recognise and value all of a member's liabilities in respect of its insurance business.

GENPRU 1.5.22

handbook-rule
The Society need not recognise or value a member's liabilities that are recognised and valued at syndicate level by managing agents in accordance with GENPRU 1.3.

GENPRU 1.5.23

handbook-rule

For the purposes of calculating a member's capital resources, when valuing a member's funds at Lloyd's the Society must deduct the value of a member's liabilities determined under GENPRU 1.5.21 R.

GENPRU 1.5.24

handbook-guidance

The liabilities to be valued under GENPRU 1.5.21 R and deducted under GENPRU 1.5.23 R include:

  1. (1) amounts owing to members' agents;
  2. (2) amounts owing to the Society;
  3. (3) an appropriate accrual for tax payable on any profits;
  4. (4) (where required under any applicable accounting principle in accordance with GENPRU 1.3.4 R), any contingent liability relating to liabilities reinsured into Equitas Reinsurance Ltd; and
  5. (5) amounts apportioned to members in respect of the credit equalisation provision in INSPRU 1.4.

GENPRU 1.5.25

handbook-rule
In recognising and valuing a member's liabilities, the Society and managing agents may, to the extent permitted by applicable accounting principles, leave out of account the liabilities in respect of 1992 and prior general insurance business reinsured by Equitas Reinsurance Limited.

GENPRU 1.5.26

handbook-guidance
There may be contingent liabilities associated with the reinsurance into Equitas. GENPRU 1.3 requires managing agents and the Society to treat those contingent liabilities in accordance with applicable accounting principles: see GENPRU 1.3.4 R. Depending on the circumstances, managing agents or the Society may need to disclose or account for such a liability.

Export chapter as

GENPRU 2

Capital

GENPRU 2.1

Calculation of capital resources requirements

  • 31/12/2006

Application

GENPRU 2.1.1

handbook-rule

This section applies to:

  1. (1) a BIPRU firm; and
  2. (2) an insurer, unless it is:
    1. (a) a non-directive friendly society; or
    2. (b) a Swiss general insurer; or
    3. (c) an EEA-deposit insurer; or
    4. (d) an incoming EEA firm; or
    5. (e) an incoming Treaty firm.

GENPRU 2.1.2

handbook-guidance
The scope of application of this section is not restricted to firms that are subject to the relevant EU Directives.

GENPRU 2.1.3

handbook-rule
  1. (1) This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
  2. (2) Where an insurer carries on both long-term insurance business and general insurance business, except where a particular provision provides otherwise, this section applies separately to each type of business.

GENPRU 2.1.4

handbook-guidance

The adequacy of a firm's capital resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise.

GENPRU 2.1.5

handbook-guidance
The requirements in this section apply to a firm on a solo basis.

Purpose

GENPRU 2.1.6

handbook-guidance

Principle 4 requires a firm to maintain adequate financial resources. GENPRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. The adequacy of a firm's capital resources needs to be assessed both by that firm and the FSA. Through its rules, the FSA sets minimum capital resources requirements for firms. It also reviews a firm's own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate (see GENPRU 1.2 (Adequacy of financial resources), BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment)).

GENPRU 2.1.7

handbook-guidance
This section sets capital resources requirements for a firm. GENPRU 2.2 (Capital resources) sets out how, for the purpose of meeting capital resources requirements, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are set out in GENPRU 1.3 (Valuation) and, for an insurer, INSPRU and, for a BIPRU firm, BIPRU.

GENPRU 2.1.8

handbook-guidance
  1. (1) This section implements minimum EC standards for the capital resources required to be held by an insurer undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC), the Reinsurance Directive (2005/68/EC) or the First Non-Life Directive (1973/239/EEC) as amended.
  2. (2) This section also implements provisions of the Capital Adequacy Directive and Banking Consolidation Directive concerning the level of capital resources which a BIPRU firm is required to hold. In particular it implements (in part) Articles 9, 10 and 75 of the Banking Consolidation Directive and Articles 5, 9, 10 and 18 of the Capital Adequacy Directive.
  3. (3) In the case of a UCITS investment firm this section implements (in part) Article 5a of the UCITS Directive.

Monitoring requirements

GENPRU 2.1.9

handbook-rule
A firm must at all times monitor whether it is complying with GENPRU 2.1.13 R (the main capital adequacy rule for insurer) or the main BIPRU firm Pillar 1 rules and be able to demonstrate that it knows at all times whether it is complying with those rules.

GENPRU 2.1.10

handbook-guidance
For the purposes of GENPRU 2.1.9 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with GENPRU 2.1.13 R and the main BIPRU firm Pillar 1 rules (as applicable) at all times. This does not necessarily mean that a firm needs to measure the precise amount of its capital resources and its CRR on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by the FSA .

GENPRU 2.1.11

handbook-rule
A firm must notify the FSA immediately of any breach, or expected breach, of GENPRU 2.1.13 R (in the case of an insurer) or the main BIPRU firm Pillar 1 rules (in the case of a BIPRU firm).

Additional capital requirements

GENPRU 2.1.12

handbook-guidance
The FSA may impose a higher capital requirement than the minimum requirement set out in this section as part of the firm's Part IV permission (see GENPRU 1.2 (Adequacy of financial resources), BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment)).

Main requirement: Insurers

GENPRU 2.1.13

handbook-rule
  1. (1) Subject to (2), an insurer must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).
  2. (2) An insurer which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with INSPRU 6.1.9 R (Requirement to maintain group capital), is deemed to comply with this rule.

GENPRU 2.1.14

handbook-rule

An insurer must comply with GENPRU 2.1.13 R separately in respect of both its long-term insurance business and its general insurance business unless it is a pure reinsurer or a captive reinsurer which has a single MCR in respect of its entire business in accordance with GENPRU 2.1.26 R.

GENPRU 2.1.15

handbook-guidance

In order to comply with GENPRU 2.1.14 R, an insurer carrying on both general insurance business and long-term insurance business will need to allocate its capital resources between its general insurance business and long-term insurance business so that the capital resources allocated to its general insurance business are equal to or in excess of its CRR for its general insurance business and the capital resources allocated to its long-term insurance business are equal to or in excess of its CRR for its long-term insurance business. Whereas long-term insurance assets cannot be used towards meeting a firm's CRR for its general insurance business, surplus general insurance assets may be used towards meeting the CRR for its long-term insurance business (see INSPRU 1.5.30 R to INSPRU 1.5.32 G). INSPRU 1.5 (Internal-contagion risk) sets out the detailed requirements for the separation of long-term and general insurance business.

GENPRU 2.1.16

handbook-guidance

Insurers commonly use different terminology for the various GENPRU requirements. For example, the MCR is traditionally known as the required minimum margin.

Calculation of the CRR for an insurer

GENPRU 2.1.17

handbook-rule

GENPRU 2.1.18

handbook-rule

The CRR for any insurer to which this rule applies (see GENPRU 2.1.19 R and GENPRU 2.1.20 R) is the higher of:

  1. (1) the MCR in GENPRU 2.1.24A R; and
  2. (2) the ECR in GENPRU 2.1.38 R.

GENPRU 2.1.19

handbook-rule

Subject to GENPRU 2.1.20 R, GENPRU 2.1.18 R applies to an insurer carrying on long-term insurance business, other than:

  1. (1) a non-directive mutual;
  2. (2) an insurer which has no with-profits insurance liabilities; and
  3. (3) an insurer which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of GENPRU 2.1.18 R) have remained, less than £500 million.

GENPRU 2.1.20

handbook-rule

GENPRU 2.1.18 R also applies to an insurer of a type listed in GENPRU 2.1.19R (3) if:

  1. (1) the insurer makes an election that GENPRU 2.1.18 R is to apply to it; and
  2. (2) that election is made by written notice given to the FSA in a way that complies with the requirements for written notice in SUP 15.7 (Form and method of notification).

GENPRU 2.1.21

handbook-guidance
The effect of GENPRU 2.1.19R (3) is that an insurer to which GENPRU 2.1.18 R applies because it has with-profits insurance liabilities of £500 million or more, will continue to be subject to GENPRU 2.1.18 R even if its with-profits insurance liabilities fall below £500 million. However, if that happens, it may apply for a waiver from GENPRU 2.1.18 R under section 148 of the Act. In exercising its discretion under section 148 of the Act, the FSA will have regard (among other factors) to whether there has been a material and permanent change to the insurer's business and to the prospects of it continuing to have with-profits insurance liabilities of less than £500 million.

GENPRU 2.1.22

handbook-guidance
An insurer that has always had with-profits insurance liabilities of less than £500 million since GENPRU 2.1.18 R came into force may wish to "opt in" to GENPRU 2.1.18 R and therefore become a realistic basis life firm. By doing so, it becomes obliged to calculate a with-profits insurance capital component (see GENPRU 2.1.38 R and INSPRU 1.3 (With-profits insurance capital component)), but it also becomes entitled to certain modifications to the way that a firm is required to calculate its mathematical reserves (see INSPRU 1.2.46 R (Future net premiums: adjustment for deferred acquisition costs) and INSPRU 1.2.76 R (Persistency assumptions)). The firm is also then required to report its liabilities on a realistic basis (see IPRU(INS) rule 9.31R(b)). In order to "opt in", the insurer must make an election under GENPRU 2.1.20 R that GENPRU 2.1.18 R is to apply to it. If an insurer that has elected to calculate and report its with-profits insurance liabilities on a realistic basis subsequently decides that it no longer wishes to do so, it may seek to "opt out" by applying for a waiver from GENPRU 2.1.18 R under section 148 of the Act. In exercising its discretion under section 148 of the Act, the FSA will have regard (among other factors) to whether there has been a material and permanent change to the firm's business and to whether it continues to have with-profits insurance liabilities of less than £500 million.

GENPRU 2.1.23

handbook-rule
The CRR for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply, is equal to the MCR in GENPRU 2.1.25 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.

Calculation of the MCR (Insurer only)

GENPRU 2.1.24

handbook-rule

Subject to GENPRU 2.1.26 R, for an insurer carrying on general insurance business the MCR in respect of that business is the higher of:

  1. (1) the base capital resources requirement for general insurance business applicable to that firm; and
  2. (2) the general insurance capital requirement.

GENPRU 2.1.24A

handbook-rule

Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business to which GENPRU 2.1.18 R applies the MCR in respect of that business is the higher of:

  1. (1) the base capital resources requirement for long-term insurance business applicable to that firm; and
  2. (2) the long-term insurance capital requirement.

GENPRU 2.1.25

handbook-rule

Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply, the MCR in respect of that business is the higher of:

  1. (1) the base capital resources requirement for long-term insurance business applicable to that firm; and
  2. (2) the sum of:
    1. (a) the long-term insurance capital requirement; and
    2. (b) the resilience capital requirement.

GENPRU 2.1.26

handbook-rule

For a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business:

  1. (1) the MCR in respect of its general insurance business is the general insurance capital requirement; and
  2. (2) the MCR in respect of its long-term insurance business is the sum of:
    1. (a) the long-term insurance capital requirement; and
    2. (b) the resilience capital requirement;
  3. unless the sum of:
  4. (3) the general insurance capital requirement; and
  5. (4) the sum of:
    1. (a) the long-term insurance capital requirement; and
    2. (b) the resilience capital requirement;

is lower than the base capital resources requirement, in which case the firm has a single MCR in respect of its entire business equal to the base capital resources requirement.

GENPRU 2.1.27

handbook-guidance

The MCR gives effect to the EU Directive minimum requirements. For general insurance business, the EU Directive minimum is the higher of the general insurance capital requirement and the relevant base capital resources requirement. For long-term insurance business, the EU Directive minimum is the higher of the long-term insurance capital requirement and the base capital resources requirement. For pure reinsurers and captive reinsurers carrying on both general insurance business and long-term insurance business, however, the base capital resources requirement is the EU Directive required minimum only when it is higher than the sum of the general insurance capital requirement and the long-term insurance capital requirement. The base capital resources requirement is the minimum guarantee fund for the purposes of article 29(2) of the Consolidated Life Directive (2002/83/EC), article 17(2) of the First Non-Life Directive (1973/239/EEC) as amended and article 40(2) of the Reinsurance Directive (2005/68/EC). The resilience capital requirement is an FSA minimum requirement for long-term insurance business for regulatory basis only life firms that is additional to the EU minimum requirement for long-term insurance business.

GENPRU 2.1.28

handbook-guidance
The calculation of the resilience capital requirement is set out in INSPRU 3.1 (Market Risk in insurance).

Calculation of the base capital resources requirement for an insurer

GENPRU 2.1.29

handbook-rule

The amount of an insurer's base capital resources requirement is set out in the table in GENPRU 2.1.30 R. If an insurer falls within one or more of the descriptions of type of firm set out in GENPRU 2.1.30 R, its base capital resources requirement is the highest amount set out against the different types of firm within whose description it falls.

Table: Base capital resources requirement for an insurer

GENPRU 2.1.30

handbook-rule


This table belongs to GENPRU 2.1.29 R

GENPRU 2.1.31

handbook-guidance
  1. (1) Under the Insurance Directives the amount of the base capital resources requirement specified in the last column of the table in GENPRU 2.1.30 R for an insurer which is not a Non-directive insurer is subject to annual review. The relevant amounts will be increased by the percentage change in the European index of consumer prices (comprising all EU member states, as published by Eurostat) from 20 March 2002, to the relevant review date, rounded up to a multiple of €100,000, provided that where the percentage change since the last increase is less than 5%, no increase will take place.
  2. (2) Similar provisions for the index-linking of the base capital resources requirement are included in the Reinsurance Directive, although in that case the index-linking starts from 10 December 2005. However, to ensure consistency as between all firms affected by the index-linking of the base capital resources requirement under the Insurance Directives and the Reinsurance Directive, the FSA intends, so far as possible, to amend the amounts in GENPRU 2.1.30 R for all such firms (and GENPRU 2.3.9 R for the base capital resources requirements applying to Lloyd's) when an index-linked increase is required by the Insurance Directives. The FSA may, however, have to depart from this approach where the result would be that the base capital resources requirement required for any type of firm under GENPRU 2.1.30 R is less than the increased amount resulting from the operation of an index-linking provision to which it is subject.

GENPRU 2.1.32

handbook-guidance

Any increases in the base capital resources requirement referred to in GENPRU 2.1.31 G will be published on the FSA website.

GENPRU 2.1.33

handbook-rule
In the case of an insurer and for the purposes of the base capital resources requirement, the exchange rate from the Euro to the pound sterling for each year beginning on 31 December is the rate applicable on the last day of the preceding October for which the exchange rates for the currencies of all the European Union member states were published in the Official Journal of the European Union.

Calculation of the general insurance capital requirement (Insurer only)

GENPRU 2.1.34

handbook-rule

An insurer must calculate its general insurance capital requirement as the highest of:

  1. (1) the premiums amount;
  2. (2) the claims amount; and
  3. (3) the brought forward amount.

GENPRU 2.1.35

handbook-guidance
The calculation of each of the premiums amount, claims amount and brought forward amount is set out in INSPRU 1.1 (Capital resources requirement and technical provisions for insurance business).

Calculation of the long-term insurance capital requirement (Insurer only)

GENPRU 2.1.36

handbook-rule

An insurer must calculate its long-term insurance capital requirement as the sum of:

  1. (1) the insurance death risk capital component;
  2. (2) the insurance health risk and life protection reinsurance capital component;
  3. (3) the insurance expense risk capital component; and
  4. (4) the insurance market risk capital component.

GENPRU 2.1.37

handbook-guidance
The calculation of each of the capital components is set out in INSPRU 1.1 (Capital resources requirement and technical provisions for insurance business).

Calculation of the ECR (Insurer only)

GENPRU 2.1.38

handbook-rule

For an insurer carrying on long-term insurance business the ECR in respect of that business is the sum of:

  1. (1) the long-term insurance capital requirement; and
  2. (2) the with-profits insurance capital component.

GENPRU 2.1.39

handbook-guidance
Details of the resilience capital requirement and the with-profits insurance capital component are set out in INSPRU 3.1 (Market Risk in insurance) and INSPRU 1.3 (With-profits insurance capital component) respectively.

Main requirement: BIPRU firms

GENPRU 2.1.40

handbook-rule
A BIPRU firm must maintain at all times capital resources equal to or in excess of the amount specified in the table in GENPRU 2.1.45 R (Calculation of the variable capital requirement for a BIPRU firm).

GENPRU 2.1.41

handbook-rule
A BIPRU firm must maintain at all times capital resources equal to or in excess of the base capital resources requirement (see the table in GENPRU 2.1.48 R).

GENPRU 2.1.42

handbook-rule
At the time that it first becomes a bank, building society or BIPRU investment firm, a firm must hold initial capital of not less than the base capital resources requirement applicable to that firm.

GENPRU 2.1.43

handbook-guidance
The purpose of the base capital resources requirement for a BIPRU firm is to act as a minimum capital requirement or floor. It has been written as a separate requirement as there are restrictions in GENPRU 2.2 (Capital resources) on the types of capital that a BIPRU firm may use to meet the base capital resources requirement which do not apply to some other parts of the capital requirement calculation. In order to preserve the base capital resources requirement's role as a floor rather than an additional requirement, GENPRU 2.2.60 R allows a BIPRU firm to meet the base capital resources requirement with capital that is also used to meet the variable capital requirements in GENPRU 2.1.40 R.

GENPRU 2.1.44

handbook-guidance
The base capital resources requirement and the variable capital requirement in GENPRU 2.1.40 R are together called the capital resources requirement (CRR) in the case of a BIPRU firm.

Calculation of the variable capital requirement for a BIPRU firm

GENPRU 2.1.45

handbook-rule
Table: Calculation of the variable capital requirement for a BIPRU firm
This table belongs to GENPRU 2.1.40 R

Adjustment of the variable capital requirement calculation for UCITS investment firms

GENPRU 2.1.46

handbook-rule
When a UCITS investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only in respect of designated investment business. For this purpose scheme management activity is excluded from designated investment business.

Calculation of the base capital resources requirement for a BIPRU firm

GENPRU 2.1.47

handbook-rule

The amount of a BIPRU firm's base capital resources requirement is set out in the table in GENPRU 2.1.48 R.

Table: Base capital resources requirement for a BIPRU firm

GENPRU 2.1.48

handbook-rule


This table belongs to GENPRU 2.1.47 R

Definition of BIPRU 730K firm, BIPRU 125K firm and BIPRU 50K firm

GENPRU 2.1.49

handbook-guidance
The terms BIPRU 730K firm, BIPRU 125K firm and BIPRU 50K firm are defined in BIPRU 1.1 (Application and purpose). However for convenience the table in GENPRU 2.1.50 G briefly summarises them.

Table: Definition of BIPRU 730K firm, BIPRU 125K firm and BIPRU 50K firm

GENPRU 2.1.50

handbook-guidance


This table belongs to GENPRU 2.1.49 G

Calculation of the credit risk capital requirement (BIPRU firm only)

GENPRU 2.1.51

handbook-rule

A BIPRU firm must calculate its credit risk capital requirement as the sum of:

  1. (1) the credit risk capital component;
  2. (2) the counterparty risk capital component; and
  3. (3) the concentration risk capital component.

Calculation of the market risk capital requirement (BIPRU firm only)

GENPRU 2.1.52

handbook-rule
  1. (1) A BIPRU firm must calculate its market risk capital requirement as the sum of:
    1. (a) the interest rate PRR (including the basic interest rate PRR for equity derivatives set out in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives));
    2. (b) the equity PRR;
    3. (c) the commodity PRR;
    4. (d) the foreign currency PRR;
    5. (e) the option PRR; and
    6. (f) the collective investment undertaking PRR.
  2. (2) Any amount calculated under BIPRU 7.1.9 R - BIPRU 7.1.13 R (Instruments for which no PRR treatment has been specified) must be allocated between the PRR charges in (1) in the most appropriate manner.

Calculation of the fixed overheads requirement (BIPRU investment firm only)

GENPRU 2.1.53

handbook-rule

In relation to a BIPRU investment firm which is required to calculate a fixed overheads requirement, the amount of that requirement is equal to one quarter of the firm's relevant fixed expenditure calculated in accordance with GENPRU 2.1.54 R.

  • 31/12/2006

GENPRU 2.1.54

handbook-rule

For the purpose of GENPRU 2.1.53 R, and subject to GENPRU 2.1.55 R to GENPRU 2.1.57 R, a BIPRU investment firm's relevant fixed expenditure is the amount described as total expenditure in its most recent audited annual report and accounts, less the following items (if they are included within such expenditure):

  1. (1) staff bonuses, except to the extent that they are guaranteed;
  2. (2) employees' and directors' shares in profits, except to the extent that they are guaranteed;
  3. (3) other appropriations of profits;
  4. (4) shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue;
  5. (5) interest charges in respect of borrowings made to finance the acquisition of the firm's readily realisable investments;
  6. (6) interest paid to customers on client money;
  7. (7) interest paid to counterparties;
  8. (8) fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;
  9. (9) foreign exchange losses; and
  10. (10) other variable expenditure.
  • 31/12/2006

GENPRU 2.1.55

handbook-rule

The relevant fixed expenditure of a firm in the following circumstances is:

  1. (1) where its most recent audited annual report and accounts do not represent a twelve month period, an amount calculated in accordance with GENPRU 2.1.54 R, pro-rated so as to produce an equivalent annual amount; and
  2. (2) where it has not completed twelve months' trading, an amount based on forecast expenditure included in the budget for the first twelve months' trading, as submitted with its application for authorisation.
  • 31/12/2006

GENPRU 2.1.56

handbook-rule

A firm must adjust its relevant fixed expenditure calculation so far as necessary if and to the extent that since the date covered by the most recent audited annual report and accounts or (if GENPRU 2.1.55R (2) applies) since the budget was prepared:

  1. (1) its level of fixed expenditure changes materially; or
  2. (2) its regulated activities comprised within its permission change.
  • 31/12/2006

GENPRU 2.1.57

handbook-rule
If a firm has a material proportion of its expenditure incurred on its behalf by third parties and such expenditure is not fully recharged to that firm then the firm must adjust its relevant fixed expenditure calculation by adding back in the whole of the difference between the amount of the expenditure and the amount recharged.
  • 31/12/2006

GENPRU 2.1.58

handbook-guidance
For the purpose of GENPRU 2.1.57 R, the FSA would consider as material 10% of a firm's expenditure incurred on its behalf by third parties.
  • 31/12/2006

GENPRU 2.1.59

handbook-guidance
For the purpose of GENPRU 2.1.54 R to 2.1.57 R, fixed expenditure is expenditure which is inelastic relative to fluctuations in a firm's levels of business. Fixed expenditure is likely to include most salaries and staff costs, office rent, payment for the rent or lease of office equipment, and insurance premiums. It may be viewed as the amount of funds which a firm would require to enable it to cease business in an orderly manner, should the need arise. This is not an exhaustive list of such expenditure and a firm will itself need to identify (taking appropriate advice where necessary) which costs amount to fixed expenditure.
  • 31/12/2006

Calculation of base capital resources requirement for banks authorised before 1993

GENPRU 2.1.60

handbook-rule
  1. (1) This rule applies to a bank that meets the following conditions:
    1. (a) on 31 December 2006 it had the benefit of IPRU(BANK) rule 3.3.12 (Reduced minimum capital requirement for a bank that is a credit institution which immediately before 1 January 1993 was authorised under the Banking Act 1987);
    2. (b) the relevant amount (as referred to in IPRU(BANK) rule 3.3.12) applicable to it was below €5 million as at 31 December 2006; and
    3. (c) on 1 January 2007 it did not comply with the base capital resources requirement as set out in the table in GENPRU 2.1.48 R (€5 million requirement).
  2. (2) Subject to (3), the applicable base capital resources requirement as at any time (the "relevant time") is the higher of:
    1. (a) the relevant amount applicable to it under IPRU(BANK) rule 3.3.12 as at 31 December 2006 as adjusted under GENPRU 2.1.62R (2); and
    2. (b) the highest amount of eligible capital resources which that bank has held between 1 January 2007 and the relevant time.
  3. (3) This rule ceases to apply when:
    1. (a) that bank's eligible capital resources at any time since 1 January 2007 equal or exceed €5 million; or
    2. (b) a person (other than an existing controller) becomes the parent undertaking of that bank.
  4. (4) If this rule ceases to apply under (3)(a) it continues not to apply if the bank's eligible capital resources later fall below €5 million.

GENPRU 2.1.61

handbook-guidance
Where two or more banks merge, all of which individually have the benefit of GENPRU 2.1.60 R, the FSA may agree in certain circumstances that the base capital resources requirement for the bank resulting from the merger may be the sum of the aggregate capital resources of the merged banks, calculated at the time of the merger, provided this figure is less than €5 million.

GENPRU 2.1.62

handbook-rule

For the purpose of GENPRU 2.1.60 R:

  1. (1) an existing controller of a bank means:
    1. (a) a person who has been a parent undertaking of that bank since 31 December 2006 or earlier; or
    2. (b) a person who became a parent undertaking of that bank after 31 December 2006 but who, when he became a parent undertaking of that bank, was a subsidiary undertaking of an existing controller of that bank;
  2. (2) the relevant amount of capital as referred to in GENPRU 2.1.60R (2)(a) is adjusted by identifying the time as of which the amount of capital it was obliged to hold under IPRU(BANK) rule 3.3.12 as referred to in GENPRU 2.1.60R (2)(a) was fixed and then recalculating the capital resources it held at that time in accordance with the definition of eligible capital resources (as defined in (3)); and
  3. (3) eligible capital resources mean capital resources eligible under GENPRU 2.2 (Capital resources) to be used to meet the base capital resources requirement.

GENPRU 2.2

Capital resources

  • 31/12/2006

Application

GENPRU 2.2.1

handbook-rule

This section applies to:

  1. (1) a BIPRU firm; and
  2. (2) an insurer unless it is:
    1. (a) a non-directive friendly society; or
    2. (b) a Swiss general insurer; or
    3. (c) an EEA-deposit insurer; or
    4. (d) an incoming EEA firm; or
    5. (e) an incoming Treaty firm.

Purpose

GENPRU 2.2.2

handbook-guidance
GENPRU 2.1 (Calculation of capital resources requirement) sets out minimum capital resources requirements for a firm. This section (GENPRU 2.2) sets out how, for the purpose of these requirements, capital resources are defined and measured.

GENPRU 2.2.3

handbook-guidance
This section implements minimum EC standards for the composition of capital resources required to be held by an insurer undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC), the First Non-Life Directive (1973/239/EEC) as amended or the Reinsurance Directive (2005/68/EC).

GENPRU 2.2.4

handbook-guidance
This section also implements minimum EC standards for the composition of capital resources required to be held by a BIPRU firm. In particular it implements Articles 56 - 61, Articles 63 - 64, Article 66 and Articles 120 - 122 of the Banking Consolidation Directive (2006/48/EC) and Articles 12 - 16, Article 17 (in part), Article 22(1)(c) (in part) and paragraphs 13 - 15 of Part B of Annex VII of the Capital Adequacy Directive (2006/49/EC).

Contents guide

GENPRU 2.2.5

handbook-guidance
The table in GENPRU 2.2.6 G sets out where the main topics in this section can be found.

Table: Arrangement of GENPRU 2.2

GENPRU 2.2.6

handbook-guidance

This table belongs to GENPRU 2.2.5 G

Simple capital issuers

GENPRU 2.2.7

handbook-guidance

Parts of this section are irrelevant to a BIPRU firm whose capital resources consist of straightforward capital instruments. Therefore the FSA's Personal handbooks facility available on its website allows a BIPRU firm to screen out those parts of this section that are not relevant to a simple capital issuer.

Principles underlying the definition of capital resources

GENPRU 2.2.8

handbook-guidance

The FSA has divided its definition of capital into categories, or tiers, reflecting differences in the extent to which the capital instruments concerned meet the purpose and conform to the characteristics of capital listed in GENPRU 2.2.9 G. The FSA generally prefers a firm to hold higher quality capital that meets the characteristics of permanency and loss absorbency that are features of tier one capital. Capital instruments falling into core tier one capital can be included in a firm's regulatory capital without limit. Typically, other forms of capital are either subject to limits (see the capital resources gearing rules) or, in the case of some specialist types of capital, may only be included with the express consent of the FSA (which takes the form of a waiver under section 148 of the Act). Details of the individual components of capital are set out in the capital resources table.

Tier one capital

GENPRU 2.2.9

handbook-guidance

Tier one capital typically has the following characteristics:

  1. (1) it is able to absorb losses;
  2. (2) it is permanent or (in the case of a BIPRU firm) available when required;
  3. (3) it ranks for repayment upon winding up, administration or similar procedure after all other debts and liabilities; and
  4. (4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.

GENPRU 2.2.10

handbook-guidance

The forms of capital that qualify for Tier one capital are set out in the capital resources table and include, for example, share capital, reserves, partnership and sole trader capital, verified interim net profits and, for a mutual, the initial fund plus permanent members' accounts. Tier one capital is divided into:

  1. (1) in the case of an insurer, core tier one capital, perpetual non-cumulative preference shares and innovative tier one capital; and
  2. (2) in the case of a BIPRU firm, core tier one capital and hybrid capital. Hybrid capital is further divided into the different stages B1, B2 and C of the calculation in the capital resources table.

Upper and lower tier two capital

GENPRU 2.2.11

handbook-guidance

Tier two capital includes forms of capital that do not meet the requirements for permanency and absence of fixed servicing costs that apply to tier one capital. Tier two capital includes, for example:

  1. (1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred - for example, cumulative preference shares); only perpetual capital instruments may be included in upper tier two capital;
  2. (2) capital which is not perpetual (that is, it has a fixed term) or which may have fixed servicing costs that cannot generally be either waived or deferred (for example, most subordinated debt); such capital should normally be of a medium to long-term maturity (that is, an original maturity of at least five years); dated capital instruments are included in lower tier two capital;
  3. (3) (for BIPRU firms) certain revaluation reserves such as reserves arising from the revaluation of land and buildings, including any net unrealised gains for the fair valuation of equities held in the available-for-sale financial assets category; and
  4. (4) (for BIPRU firms) general/collective provisions.

Tier three capital

GENPRU 2.2.12

handbook-guidance
Tier three capital consists of forms of capital conforming least well to the characteristics of capital listed in GENPRU 2.2.9 G: either subordinated debt of short maturity (upper tier three capital) or net trading book profits that have not been externally verified (lower tier three capital).

Non-standard capital instruments

GENPRU 2.2.13

handbook-guidance
There may be examples of capital instruments that, although based on a standard form, contain structural features that make the rules in this section difficult to apply. In such circumstances, a firm may seek individual guidance on the application of those rules to the capital instrument in question. See SUP 9 (Individual guidance) for the process to be followed when seeking individual guidance.

Deductions from capital

GENPRU 2.2.14

handbook-guidance
Deductions should be made at the relevant stage of the calculation of capital resources to reflect capital that may not be available to the firm or assets of uncertain value (for example, holdings of intangible assets and assets that are inadmissible for an insurer, or, in the case of a bank or building society, where that firm has made investments in a subsidiary undertaking or in another financial institution or in respect of participations that it holds).

GENPRU 2.2.15

handbook-guidance
Deductions should also be made, in the case of certain BIPRU investment firms for illiquid assets (see GENPRU 2.2.19 R).

GENPRU 2.2.16

handbook-guidance
A full list of deductions from capital resources is shown in the capital resources table applicable to the firm.

Which method of calculating capital resources applies to which type of firm

GENPRU 2.2.17

handbook-rule
A firm must calculate its capital resources in accordance with the version of the capital resources table applicable to the firm, subject to the capital resources gearing rules. The version of the capital resources table that applies to a firm is specified in the table in GENPRU 2.2.19 R.

GENPRU 2.2.18

handbook-rule
In the case of a BIPRU firm the capital resources table also sets out how the capital resources requirement is deducted from capital resources in order to decide whether its capital resources equal or exceed its capital resources requirement.

Table: Applicable capital resources calculation

GENPRU 2.2.19

handbook-rule

This table belongs to GENPRU 2.2.17 R

Calculation of capital resources: Which rules apply to BIPRU investment firms

GENPRU 2.2.20

handbook-guidance

GENPRU 2.2.19 R sets out three different methods of calculating capital resources for BIPRU investment firms. The differences between the three methods relate to whether and how material holdings and illiquid assets are deducted when calculating capital resources. The method depends on whether a firm has an investment firm consolidation waiver. If a firm does have such a waiver, it should deduct illiquid assets, own group material holdings and certain contingent liabilities. If a firm does not have such a waiver, it should choose to deduct either material holdings or, subject to notifying the FSA, illiquid assets.

GENPRU 2.2.21

handbook-guidance
A consequence of a firm deducting all of its illiquid assets under GENPRU 2 Annex 5 is that it is allowed a higher limit on short term subordinated debt under GENPRU 2.2.49 R.

Calculation of capital resources: Insurers

GENPRU 2.2.22

handbook-guidance
Capital resources for an insurer can be calculated either as the total of eligible assets less foreseeable liabilities (which is the approach taken in the Insurance Directives) or by identifying the components of capital. Both calculations give the same result for the total amount of capital resources. The approach taken in this section has been to specify the components of capital and the relevant deductions. This is set out in the capital resources table. This approach is the same as that used for the calculation of capital resources for banks, building societies and BIPRU investment firms. A simple example, showing the reconciliation of the two methods, is given in the table in GENPRU 2.2.23 G.

Table: Approaches to calculating capital resources

GENPRU 2.2.23

handbook-guidance


This table belongs to GENPRU 2.2.22 G

Limits on the use of different forms of capital: General

GENPRU 2.2.24

handbook-guidance

As the various components of capital differ in the degree of protection that they offer the firm and its customers and consumers, restrictions are placed on the extent to which certain types of capital are eligible for inclusion in a firm's capital resources. These rules are called the capital resources gearing rules.

Limits on the use of different forms of capital: Use of higher tier capital in lower tiers

GENPRU 2.2.25

handbook-rule

A firm may include in a lower stage of capital, capital resources which are eligible for inclusion in a higher stage of capital if the capital resources gearing rules would prevent the use of that capital in that higher stage of capital. However:

  1. (1) the capital resources gearing rules applicable to that lower stage of capital apply to higher stage of capital included in that lower stage of capital; and
  2. (2) (subject to GENPRU 2.2.26 R and GENPRU 2.2.26A R) the rules in GENPRU governing the eligibility of capital in that lower stage of capital continue to apply.

GENPRU 2.2.26

handbook-rule

An item of tier one capital which is included in a firm's tier two capital resources under GENPRU 2.2.25 R is not subject to the requirement to obtain a legal opinion in GENPRU 2.2.159R (12).

GENPRU 2.2.26A

handbook-rule

A dated item of tier one capital which is included in a BIPRU firm's tier two capital resources under GENPRU 2.2.25 R is not subject to the requirement to have no fixed maturity date in GENPRU 2.2.177R (1).

GENPRU 2.2.28

handbook-rule
In the case of a BIPRU firm, the requirement to obtain a legal opinion in GENPRU 2.2.159R (12) does not apply to hybrid capital treated under GENPRU 2.2.25 R but the requirements to obtain a legal opinion in GENPRU 2.2.118 R continue to apply.

Limits on the use of different forms of capital: Limits relating to tier one capital applicable to insurers

GENPRU 2.2.29

handbook-rule
In relation to the tier one capital resources of an insurer, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions), at least 50% must be accounted for by core tier one capital.

GENPRU 2.2.30

handbook-rule

In relation to the tier one capital resources of an insurer, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions), no more than 15% may be accounted for by innovative tier one capital.

Limits on the use of different forms of capital: Limits relating to tier one capital applicable to BIPRU firms

GENPRU 2.2.30A

handbook-rule

In relation to the tier one capital resources of a BIPRU firm, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions):

  1. (1) no more than 50% may be accounted for by hybrid capital;
  2. (2) no more than 35% may be accounted for by hybrid capital included at stages B2 and C of the calculation in the capital resources table; and
  3. (3) no more than 15% may be accounted for by hybrid capital included at stage C of the calculation in the capital resources table.

Limits on the use of different forms of capital: Limits relating to tier one capital: Purpose of the requirements

GENPRU 2.2.31

handbook-guidance

The purpose of the requirements in GENPRU 2.2.29 R and GENPRU 2.2.30AR (1) is to ensure that the firm's tier one capital resources includes a minimum proportion of core tier one capital which provides the highest quality capital. Within the 50% limit on non-core tier one capital:

  1. (1) GENPRU 2.2.30 R places a further sub-limit on the amount of innovative tier one capital that an insurer may include in its tier one capital resources; and
  2. (2) GENPRU 2.2.30AR (2) and GENPRU 2.2.30AR (3) place further sub-limits on the amounts of hybrid capital included at stages B2 and C of the calculation in the capital resources table that a BIPRU firm may include in its tier one capital resources.

These limits are necessary to ensure that most of a firm's tier one capital comprises items of capital of the highest quality.

Limits on the use of different forms of capital: Insurers

GENPRU 2.2.32

handbook-rule

At least 50% of an insurer's MCR must be accounted for by the sum of:

  1. (1) the amount calculated at stage A of the calculation in the capital resources table (Core tier one capital); and
  2. (2) notwithstanding GENPRU 2.2.29 R, the amount calculated at stage B of the calculation in the capital resources table (Perpetual non-cumulative preference shares);
  3. less the amount calculated at stage E of the calculation in the capital resources table (Deductions from tier one capital).

GENPRU 2.2.33

handbook-rule

Subject to GENPRU 2.2.34A R, an insurer carrying on long-term insurance business must meet the higher of:

  1. (1) 1/3 of the long-term insurance capital requirement; and
  2. (2) the base capital resources requirement;
  3. with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E in the capital resources table (Deductions from tier one capital).

GENPRU 2.2.34

handbook-rule

Subject to GENPRU 2.2.34A R, an insurer carrying on general insurance business must meet the higher of:

  1. (1) 1/3 of the general insurance capital requirement; and
  2. (2) the base capital resources requirement;
  3. with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E (Deductions from tier one capital) in the capital resources table.

GENPRU 2.2.34A

handbook-rule

A pure reinsurer carrying on both long-term insurance business and general insurance business must meet the higher of:

  1. (1) 1/3 of the sum of the long-term insurance capital requirement and the general insurance capital requirement; and
  2. (2) the base capital resources requirement;
  3. with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E (Deductions from tier one capital) in the capital resources table.

GENPRU 2.2.35

handbook-rule

In GENPRU 2.2.33 R, GENPRU 2.2.34 R and GENPRU 2.2.34A R:

  1. (1) items listed at stage B (Perpetual non-cumulative preference shares) in the capital resources table may be included notwithstanding GENPRU 2.2.29 R;
  2. (2) innovative tier one capital that meets the conditions (other than GENPRU 2.2.159R (12) (Requirement for a legal opinion)) for it to be included as upper tier two capital at stage G (Upper tier two capital) in the capital resources table may be treated as an item listed at stage G; and
  3. (3) an insurer must exclude from the calculation the higher of the following:
    1. (a) the amount (if any) by which the sum of the items listed at stages G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table exceeds the total (net of deductions) of the remaining constituents of adjusted stage M; and
    2. (b) the amount (if any) by which the sum of the items listed at stage H in the capital resources table exceeds one-third of the total (net of deductions) of the remaining constituents of adjusted stage M;
  4. where adjusted stage M means the amount calculated at stage M of the calculation in the capital resources table (Total capital after deductions) less the amount of any innovative tier one capital that is not treated as upper tier two capital for the purpose of GENPRU 2.2.33 R, GENPRU 2.2.34 R or GENPRU 2.2.34A R, as the case may be.

GENPRU 2.2.36

handbook-guidance

The purpose of the requirements in GENPRU 2.2.33 R to GENPRU 2.2.34A R is to comply with the requirements of the Insurance Directives and the Reinsurance Directive that an insurer must maintain a guarantee fund of higher quality capital resources items.

GENPRU 2.2.37

handbook-rule

Subject to GENPRU 2.2.38 R, an insurer 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.

GENPRU 2.2.38

handbook-rule

At least 75% of an insurer's MCR must be accounted for by the sum of:

  1. (1) the amount calculated at stage A (Core tier one capital) plus, notwithstanding GENPRU 2.2.29 R, the amount calculated at stage B (Perpetual non-cumulative preference shares) less the amount calculated at stage E (Deductions from tier one capital) of the calculation in the capital resources table; and
  2. (2) the amount calculated at stage G (Upper tier two capital) of the calculation in the capital resources table.

GENPRU 2.2.39

handbook-guidance
In GENPRU 2.2.38 R the amount of any innovative tier one capital that meets the conditions for it to be included as upper tier two capital at stage G (Upper tier two capital) in the capital resources table may be included in the amount calculated at stage G.

GENPRU 2.2.40

handbook-guidance

GENPRU 2.2.32 R, GENPRU 2.2.37 R and GENPRU 2.2.38 R give effect to the requirements of the Insurance Directives and the Reinsurance Directive that no more than 50% of the amount which is the lesser of the available solvency margin and the required solvency margin should consist of tier two capital resources and that no more than 25% of that amount should consist of lower tier two capital resources.

GENPRU 2.2.41

handbook-rule

An insurer (other than a pure reinsurer) that carries on both long-term insurance business and general insurance business must apply the relevant limits in GENPRU 2.2.32 R to GENPRU 2.2.38 R separately for each type of business.

Limits on the use of different kinds of capital: Purposes for which tier three capital may not be used (BIPRU firm only)

GENPRU 2.2.44

handbook-rule

Tier one capital and tier two capital are the only type of capital resources that a BIPRU firm may use for the purpose of meeting:

  1. (1) the credit risk capital component;
  2. (2) the operational risk capital requirement;
  3. (3) the counterparty risk capital component; and
  4. (4) the base capital resources requirement.

GENPRU 2.2.45

handbook-rule
GENPRU 2.2.44 R (and the capital resources gearing rules that relate to it) also applies for the purposes of any other requirement in the Handbook for which it is necessary to calculate the capital resources of a BIPRU firm, except for the purposes described in GENPRU 2.2.47 R and except as may otherwise be stated in the relevant part of the Handbook.

Limits on the use of different kinds of capital: Tier two limits (BIPRU firm only)

GENPRU 2.2.46

handbook-rule

For the purpose of GENPRU 2.2.44 R:

  1. (1) the amount of the items which may be included in a BIPRU firm's tier two capital resources must not exceed the amount calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions); and
  2. (2) the amount of the items which may be included in a BIPRU firm's lower tier two capital resources must not exceed 50% of the amount calculated at stage F of the calculation in the capital resources table.

Limits on the use of different kinds of capital: Purposes for which tier three capital may be used (BIPRU firm only)

GENPRU 2.2.47

handbook-rule

For the purposes of meeting:

  1. (1) the market risk capital requirement;
  2. (2) the concentration risk capital component; and
  3. (3) the fixed overheads requirement (where applicable);
a BIPRU firm may only use the following parts of its capital resources:
  1. (4) tier one capital to the extent that it is not required to meet the requirements in GENPRU 2.2.44 R (GENPRU 2.2.48 R explains how to calculate how much tier one capital is required to meet the requirements in GENPRU 2.2.44 R);
  2. (5) tier two capital to the extent that it:
    1. (a) comes within the limits in GENPRU 2.2.46 R (100% limit for tier two capital resources and 50% limit for lower tier two capital resources); and
    2. (b) it is not required to meet the requirements in GENPRU 2.2.44 R;
(GENPRU 2.2.48 R explains how to calculate how much tier two capital is required to meet the requirements in GENPRU 2.2.44 R);
  1. (6) tier two capital that cannot be used for the purposes in GENPRU 2.2.44 R because it falls outside the limits in GENPRU 2.2.46 R; and
  2. (7) tier three capital.

GENPRU 2.2.48

handbook-rule
The amount of tier one capital and tier two capital that is not used to meet the requirements in GENPRU 2.2.44 R as referred to in GENPRU 2.2.47R (4) and (5) is equal to the amount calculated at stage N of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) less the parts of the capital resources requirement deducted immediately after stage N of the capital resources table (the parts of the capital resources requirements listed in GENPRU 2.2.44 R).

Limits on the use of different kinds of capital: Combined tier two and tier three limits (BIPRU firm only)

GENPRU 2.2.49

handbook-rule

For the purpose of meeting the requirements in GENPRU 2.2.47R (1) to GENPRU 2.2.47R (3) and subject to GENPRU 2.2.50 R, a BIPRU firm must not include any item in either:

  1. (1) its tier two capital resources falling within GENPRU 2.2.47R (6) (excess tier two capital); or
  2. (2) its upper tier three capital resources;
to the extent that the sum of (1) and (2) would exceed 250% of the amount resulting from the following calculation:
  1. (3) calculate the amount at stage F of the calculation in the capital resources table (Total tier one capital after deductions); and
  2. (4) deduct from (3) those parts of the firm's tier one capital used to meet the requirements in GENPRU 2.2.44R (1) and (2) as established by GENPRU 2.2.48 R.

GENPRU 2.2.50

handbook-rule
In relation to a BIPRU investment firm which calculates its capital resources under GENPRU 2 Annex 4 (Capital resources table for a BIPRU investment firm deducting material holdings), the figure of 200% replaces that of 250% in GENPRU 2.2.49 R.

Example of how the capital resources calculation for BIPRU firms works

GENPRU 2.2.51

handbook-guidance

GENPRU 2.2.52 G to GENPRU 2.2.59 G illustrate how to calculate a BIPRU firm's capital resources and how the capital resources gearing rules. In this example the BIPRU firm has a combined credit, operational and counterparty risk requirement of £100 (of which £10 is due to counterparty risk) and a market risk requirement of £90, making a total capital requirement of £190. Its capital resources are as set out in the table in GENPRU 2.2.52 G.

Table: Example of the calculation of the capital resources of a BIPRU firm

GENPRU 2.2.52

handbook-guidance

This table belongs to GENPRU 2.2.51 G

GENPRU 2.2.54

handbook-guidance
In the example in the table in GENPRU 2.2.52 G the firm has total tier one capital after deductions of £80. Its tier two capital of £80 is therefore the maximum permitted under GENPRU 2.2.46 R (Tier two limits), that is 100% of tier one capital.

GENPRU 2.2.55

handbook-guidance
The combined credit, operational and counterparty risk capital requirement is deducted after stage N of the capital resources table and the market risk requirement following stage T of the capital resources table. These calculations are shown in the table in GENPRU 2.2.56 G.

Table: Example of how capital resources of a BIPRU firm are measured against its capital resources requirement

GENPRU 2.2.56

handbook-guidance

This table belongs to GENPRU 2.2.55 G

GENPRU 2.2.57

handbook-guidance

The gearing limit in GENPRU 2.2.49 R (Combined tier two and tier three limits) requires that the upper tier three capital used to meet the market risk requirement does not exceed 250% of the relevant tier one capital.

GENPRU 2.2.58

handbook-guidance

In this example it is assumed that the maximum possible amount of tier one capital is carried forward to meet the market risk requirement. There are other options as to the allocation of tier one capital and tier two capital to the credit, operational, and counterparty risk requirement.
In order to calculate the relevant tier one capital for the upper tier three gearing limit in accordance with GENPRU 2.2.49 R it is first necessary to allocate tier one capital and tier two capital to the individual credit, operational and counterparty risk requirements. This allocation process underlies the calculation of the overall amount referred to in GENPRU 2.2.48 R. The calculation in GENPRU 2.2.49R (3) and GENPRU 2.2.49R (4) then focuses on the tier one element of this earlier calculation.
In this worked example, if it is assumed that the counterparty risk requirement has been met by tier one capital, the relevant tier one capital for gearing is £50. This is because the deductions of £20 and the credit and operational risk requirements of £90 have been met by tier two capital in the first instance. However, the total sum of deductions and credit and operational risk requirements exceed the tier two capital amount of £80 by £30. Hence the £80 of tier one capital has been reduced by £30 to leave £50.
In practical terms, the same result is achieved for the relevant tier one capital for gearing by taking the amount carried forward to meet market risk of £40 and adding back the £10 in respect of the counterparty risk requirement. Again, there are other options as to the allocation to credit, operational, and counterparty risk of the constituent elements of Stage N of the capital resources table.
The outcome of these calculations can be summarised as follows:

  1. (1) the relevant tier one capital for the gearing calculation is £50;
  2. (2) 250% of the relevant tier one capital is £125; and
  3. (3) the upper tier three capital used to meet market risk is £50.

GENPRU 2.2.59

handbook-guidance
The 250% gearing limit is met as the limit of £125 is greater than the upper tier three capital of £50 used in this example.

Capital used to meet the base capital resources requirement (BIPRU firm only)

GENPRU 2.2.60

handbook-rule
A BIPRU firm may use the capital resources used to meet the base capital resources requirement to meet any other part of the capital resources requirement.

GENPRU 2.2.61

handbook-guidance
The explanation for GENPRU 2.2.60 R can be found in GENPRU 2.1.43 G (Base capital resources requirement). In brief the reason is that the base capital resources requirement is not in practice meant to act as an additional capital resources requirement. It is meant to act as a floor to the capital resources requirement.

Tier one capital: General

GENPRU 2.2.62

handbook-rule

A firm may 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 GENPRU 2.2.63 R;
  2. (2) it complies with the conditions set out in GENPRU 2.2.64 R;
  3. (3) it is not excluded under GENPRU 2.2.65 R (Connected transactions); and
  4. (4) it is not excluded by any of the rules in GENPRU 2.2.

GENPRU 2.2.63

handbook-rule

The categories referred to in GENPRU 2.2.62R (1) are:

  1. (1) permanent share capital;
  2. (2) eligible partnership capital;
  3. (3) eligible LLP members' capital;
  4. (4) sole trader capital;
  5. (5) (in the case of an insurer) a perpetual non-cumulative preference share;
  6. (6) [deleted]
  7. (7) (in the case of an insurer) an innovative tier one instrument; and
  8. (8) (in the case of a BIPRU firm) hybrid capital.

General conditions for eligibility as tier one capital

GENPRU 2.2.64

handbook-rule

The conditions that an item of capital of a firm must comply with under GENPRU 2.2.62R (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 GENPRU 2.2.70 R (Basic requirements for redeemability) and GENPRU 2.2.76 R (Redeemable instrument subject to a step-up);
  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:
      1. (i) in the case of a BIPRU firm, core tier one capital; and
      2. (ii) in the case of an insurer, 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:
    1. (a) in the case of an insurer, in particular it complies with GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) and, in the case of an innovative tier one instrument, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption); and
    2. (b) in the case of a BIPRU firm, it does not, through appropriate mechanisms, hinder the recapitalisation of the firm, and in particular it complies with:
      1. (i) GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption);
      2. (ii) in the case of core tier one capital, GENPRU 2.2.83AR (9) to GENPRU 2.2.83AR (10) (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)); and
      3. (iii) in the case of hybrid capital, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption);
  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:
    1. (a) in the case of an insurer, no higher than a share of a company incorporated under the Companies Act 2006 (whether or not it is such a share); or
    2. (b) in the case of a BIPRU firm, lower than any items of capital that are:
      1. (i) eligible for inclusion within the firm's tier two capital resources; and
      2. (ii) not eligible for inclusion within the firm's tier one capital resources; and
  10. (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, GENPRU 2.2.271 R (Other requirements: insurers carrying on with-profits business (Insurer only)).

GENPRU 2.2.65

handbook-rule
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 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 GENPRU 2.2.64R (1) to GENPRU 2.2.64R (9).

Guidance on certain of the general conditions for eligibility as tier one capital

GENPRU 2.2.66

handbook-guidance
GENPRU 2.2.65 R is an example of the general principle in GEN 2.2.1 R (Purposive interpretation). Its purpose is to emphasise that an item of capital does not meet the conditions for inclusion in tier one capital if in isolation it does meet those requirements but it fails to meet those requirements when other transactions are taken into account. Examples of such connected transactions might include guarantees or any other side agreement provided to the holders of the capital instrument by the firm or a connected party or a related transaction designed, for example, to enhance their security or to achieve a tax benefit, but which may compromise the loss absorption capacity or permanence of the original capital item.

GENPRU 2.2.67

handbook-guidance
GENPRU 2.2.64R (2) is stricter than the Companies Act definition of fully paid, which only requires an undertaking to pay.

GENPRU 2.2.67A

handbook-guidance
The purpose of GENPRU 2.2.64R (4) is to ensure that a firm retains flexibility over the payment of coupons and can preserve cash in times of financial stress. However, a firm may include, as part of the capital instrument terms, a right to make payments of a coupon mandatory if an item of capital becomes ineligible to form part of its capital resources (e.g. through a change in the relevant rules) and the firm has notified the FSA that the instrument is ineligible.

GENPRU 2.2.68

handbook-guidance
The FSA considers that dividend pushers diminish the quality of capital by breaching the principle of complete discretion over coupons set out in GENPRU 2.2.64R (4). A dividend pusher operates so that, in a given period of time, payments must be made on senior securities if payments have previously been made on junior securities or securities ranking pari passu. As such, dividend pushers may not be included in the terms of tier one capital, unless the firm has the option to fund the "pushed payment" in stock.

GENPRU 2.2.68A

handbook-rule

A BIPRU firm must not include a capital instrument in its tier one capital resources if:

  1. (1) the capital instrument is affected by a dividend stopper; and
  2. (2) the dividend stopper operates in a way that hinders recapitalisation.

GENPRU 2.2.68B

handbook-guidance
A dividend stopper prevents the firm from paying any coupon on more junior or pari passu instruments in a period in which the firm omits payments to the holder of the capital instrument containing the dividend stopper, and so may hinder the recapitalisation of the firm contrary to GENPRU 2.2.64R (6).

GENPRU 2.2.69

handbook-guidance
An item of capital does not comply with GENPRU 2.2.64R (10) if it is marketed as a capital instrument that would only qualify for a lower level of capital or on the basis that investing in it is like investing in an instrument in a lower tier of capital. For example, an undated capital instrument should not be marketed as a dated capital instrument if the terms of the capital instrument include an option by the issuer to redeem the capital instrument at a specified date in the future.

Tier one capital: payment of coupons (BIPRU firm only)

GENPRU 2.2.69A

handbook-rule
A BIPRU firm must not make a payment of a coupon on an item of hybrid capital if the firm has no distributable reserves.

GENPRU 2.2.69B

handbook-rule
A BIPRU firm must cancel the payment of a coupon on an item of hybrid capital if the BIPRU firm does not meet its capital resources requirement or if the payment of that coupon would cause it to breach its capital resources requirement.

GENPRU 2.2.69C

handbook-rule

A BIPRU firm must not pay a coupon on an item of hybrid capital in the form of core tier one capital in accordance with GENPRU 2.2.64R (4)(b) unless:

  1. (1) the firm meets its capital resources requirement; and
  2. (2) such a substituted payment preserves the firm's financial resources.

GENPRU 2.2.69D

handbook-guidance

The FSA considers that a BIPRU firm's financial resources are not preserved under GENPRU 2.2.69CR (2) unless, among other things, the conditions of the substituted payment are that:

  1. (1) there is no decrease in the amount of the firm's core tier one capital;
  2. (2) the deferred coupon is satisfied without delay using newly issued core tier one capital that has an aggregate fair value no more than the amount of the coupon;
  3. (3) the firm is not obliged to find new investors for the newly issued instruments; and
  4. (4) if the holder of the newly issued instruments subsequently sells the instruments and the sale proceeds are less than the value of the coupon, the firm is not obliged to issue further new instruments to cover the loss incurred by the holder of the instruments.

GENPRU 2.2.69E

handbook-rule
A BIPRU firm must cancel the payment of a coupon if circumstances arise whereby the payment of the coupon by newly issued instruments, in accordance with GENPRU 2.2.64R (4)(b), does not comply with the requirements of GENPRU 2.2.69C R.

GENPRU 2.2.69F

handbook-guidance
  1. (1) In relation to the cancellation or deferral of the payment of a coupon in accordance with GENPRU 2.2.64R (4) and GENPRU 2.2.64R (5), GENPRU 2.2.68A R, or GENPRU 2.2.69B R, the FSA expects that situations where a coupon may need to be cancelled or deferred will be resolved through analysis and discussion between the firm and the FSA. If the FSA and the firm do not agree on the cancellation or deferral of the payment of a coupon, then the FSA may consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's Part IV permission to require it to cancel or defer a coupon in accordance with the FSA's view of the financial and solvency situation of the firm.
  2. (2) In considering a firm's financial and solvency situation, the FSA will normally take into account, among other things, the following:
    1. (a) the firm's financial and solvency position before and after the payment of the coupon, in particular whether that payment, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement or the overall financial adequacy rule;
    2. (b) an appropriately stressed capital plan, covering 3-5 years, which includes the effect of the proposed payment of the coupon; and
    3. (c) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of those risks, including stress tests on the main risks showing potential loss under different scenarios.
  3. (3) if the BIPRU firm is required to cancel or defer the payment of a coupon by the FSA, it may still be able to pay the coupon by way of newly issued core tier one capital in accordance with GENPRU 2.2.64R (4)(b) and GENPRU 2.2.69C R. The FSA may consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's Part IV permission to impose conditions on the use of such a mechanism or to require its cancellation, based on the factors outlined in this guidance.

Redemption of tier one instruments

GENPRU 2.2.70

handbook-rule

A firm may not include a capital instrument in its tier one capital resources, unless its contractual terms are such that:

  1. (1) (if it is redeemable other than in circumstances set out in GENPRU 2.2.64R (3)(a) (redemption on a winding up)) it is redeemable only at the option of the firm or, in the case of a BIPRU firm, on the date of maturity;
  2. (2) the firm cannot exercise that redemption right:
    1. (a) before the fifth anniversary of its date of issue;
    2. (b) unless it has given notice to the FSA in accordance with GENPRU 2.2.74 R; and
    3. (c) unless at the time of exercise of that right it complies with GENPRU 2.1.13 R (the main capital adequacy rule for insurers) or the main BIPRU firm Pillar 1 rules and will continue to do so after redemption;
  3. (3) (in the case of a BIPRU firm and if it is undated) if it provides for a moderate incentive for the BIPRU firm to redeem it, that incentive does not occur before the tenth anniversary of its date of issue; and
  4. (4) (in the case of a BIPRU firm and if it is dated):
    1. (a) it has an original maturity date of at least 30 years after its date of issue; and
    2. (b) it does not provide an incentive to redeem on any date other than its maturity date.

GENPRU 2.2.70A

handbook-guidance
In the case of a BIPRU firm, an incentive to redeem is a feature of a capital instrument that would lead a reasonable market participant to have an expectation that the firm will redeem the instrument. The FSA considers that interest rate step-ups and principal stock settlements, in conjunction with a call option, are incentives to redeem. Only instruments with moderate incentives to redeem are permitted as tier one capital, in accordance with the limited conversion ratio in GENPRU 2.2.138 R and the rule on step-ups in GENPRU 2.2.147 R.

GENPRU 2.2.71

handbook-rule

A firm may include a term in a tier one instrument allowing the firm to redeem it before the date in GENPRU 2.2.70R (2)(a) if the following conditions are satisfied:

  1. (1) the other conditions in GENPRU 2.2.70 R are met;
  2. (2) the circumstance that entitles the firm to exercise that right is:
    1. (a) (in the case of an insurer) 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; and
    2. (b) (in the case of a BIPRU firm) a change in the applicable tax treatment or regulatory classification of those instruments;
  3. (3)
    1. (a) (in the case of an insurer) 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
    2. (b) (in the case of a BIPRU firm) the circumstance that entitles the firm to exercise that right was not reasonably foreseeable at the date of issue of the tier one instrument; and
  4. (4) the firm's right is conditional on it obtaining the FSA's consent in the form of a waiver of GENPRU 2.2.72 R.

GENPRU 2.2.72

handbook-rule
A firm must not redeem a tier one instrument in accordance with a term included under GENPRU 2.2.71 R.

GENPRU 2.2.73

handbook-guidance

The purpose of GENPRU 2.2.71 R to GENPRU 2.2.72 R is this. In general a tier one instrument should not be redeemable by the firm before its fifth anniversary. However there may be circumstances in which it would be reasonable for the firm to redeem it before then. GENPRU 2.2.71 R allows the firm to include a right to redeem the instrument before the fifth anniversary in certain circumstances. A tax call is an example of a term that may be allowed. GENPRU 2.2.71 R says that the terms of the tier one instrument should provide that the firm should not be able to exercise that right without the FSA's consent. Any such consent will be given in the form of a waiver allowing early repayment. Thus although a firm may include a right to redeem early in the terms of a tier one instrument without the need to apply for a waiver the actual exercise of that right will require a waiver.

GENPRU 2.2.74

handbook-rule

A firm must not redeem any tier one instrument that it has included in its tier one capital resources unless it has notified the FSA of its intention at least one month before it becomes committed to do so. When giving notice, the firm must provide details of its position after such redemption in order to show how it will:

  1. (1) meet its capital resources requirement;
  2. (2) have sufficient financial resources to meet the overall financial adequacy rule; and
  3. (3) in the case of a BIPRU firm, not otherwise suffer any undue effects to its financial or solvency conditions.

GENPRU 2.2.74A

handbook-guidance

The FSA considers that, in order to comply with GENPRU 2.2.74 R, the firm should, at a minimum, provide the FSA with the following information:

  1. (1) a comprehensive explanation of the rationale for the redemption;
  2. (2) the firm's financial and solvency position before and after the redemption, in particular whether that redemption, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement;
  3. (3) an appropriately stressed capital plan covering 3-5 years, which includes the effect of the proposed redemption; and
  4. (4) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of such risks including stress tests on the main risks showing potential loss under different scenarios.

GENPRU 2.2.74B

handbook-rule
If a BIPRU firm does not comply with its capital resources requirement or if the redemption of any dated tier one instrument would cause it to breach its capital resources requirement, it must suspend the redemption of its dated tier one instruments.

GENPRU 2.2.75

handbook-rule
If a firm gives notice of the redemption or repayment of any tier one instrument, the firm must no longer include that instrument in its tier one capital resources.

Step-ups and redeemable tier one instruments: Insurer only

GENPRU 2.2.76

handbook-rule

In the case of an insurer, in relation to an innovative tier one instrument which is redeemable and which 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 GENPRU 2.2.70R (2)(a) is amended by replacing "fifth anniversary" with "tenth anniversary".

Meaning of redemption

GENPRU 2.2.77

handbook-rule
  1. (1) This rule applies to a tier one instrument, tier two instrument or tier three instrument (instrument A) that under its terms is exchanged for or converted into another instrument or is subject to a similar process.
  2. (2) This rule also applies to instrument A if under its terms it is redeemed out of the proceeds of the issue of new securities.
  3. (3) If the instrument with which instrument A is replaced is included in the same stage of capital or a higher stage of capital as instrument A, instrument A is treated as not having been redeemed or repaid for the purposes of GENPRU 2.2.
  4. (4) (3) does not apply to GENPRU 2.2.114 R (Redeemable instrument likely to be repaid etc), GENPRU 2.2.74 R (Notice of redemption of tier one instruments), GENPRU 2.2.174 R (Notice of redemption of tier two instruments) or GENPRU 2.2.245 R (so far as it relates to notice of redemption of tier three instruments).
  5. (5) (3) only applies if 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. 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.

GENPRU 2.2.78

handbook-rule
  1. (1) A share is not redeemable for the purposes of this section 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.
  2. (2) A capital instrument is not redeemable for the purposes of this section merely because the firm that issued it has a right to purchase it similar to the right in (1).

GENPRU 2.2.79

handbook-guidance
This section generally uses the term repay and redeem interchangeably.

Purchases of tier one instruments: BIPRU firm only

GENPRU 2.2.79A

handbook-rule

A BIPRU firm must not purchase a tier one instrument that it has included in its tier one capital resources unless:

  1. (1) the firm initiates the purchase;
  2. (2) [deleted]
  3. (3) the firm has given notice to the FSA in accordance with GENPRU 2.2.79G R; and
  4. (4) (in the case of hybrid capital) it is on or after the fifth anniversary of the date of issue of the instrument.

GENPRU 2.2.79B

handbook-guidance
In exceptional circumstances a BIPRU firm may apply for a waiver of GENPRU 2.2.79AR (4) under section 148 (Modification or waiver of rules) of the Act.

GENPRU 2.2.79C

handbook-rule

GENPRU 2.2.79AR (4) does not apply if:

  1. (1) the firm replaces the capital instrument it intends to purchase with a capital instrument that is included in a higher stage of capital or the same stage of capital; and
  2. (2) the replacement capital instrument has already been issued.

GENPRU 2.2.79D

handbook-rule

GENPRU 2.2.79AR (4) does not apply if:

  1. (1) the firm intends to hold the purchased instrument for a temporary period as market maker; and
  2. (2) the purchased instruments held by the firm do not exceed the lower of:
    1. (a) 10% of the relevant issuance; or
    2. (b) 3% of the firm's total issued hybrid capital.

GENPRU 2.2.79E

handbook-guidance
In the circumstances provided for in GENPRU 2.2.79D R, a firm would purchase the instrument and, instead of cancelling it, the firm would hold the instrument for a temporary period. In that case a firm should have in place adequate policies to take into account any relevant regulations and rules, which include those relating to market abuse.

GENPRU 2.2.79F

handbook-rule
For the purposes of calculating its tier one capital resources, a firm must deduct the amount of any item of hybrid capital which it then holds.

GENPRU 2.2.79G

handbook-rule

A BIPRU firm must not purchase a tier one instrument in accordance with GENPRU 2.2.79A R unless it has notified the FSA of its intention at least one month before it becomes committed to doing so. When giving notice, the firm must provide details of its position after the purchase in order to show how, over an appropriate timescale, adequately stressed, and without planned recourse to the capital markets, it will:

  1. (1) meet its capital resources requirement; and
  2. (2) have sufficient financial resources to meet the overall financial adequacy rule.

GENPRU 2.2.79H

handbook-guidance

The FSA considers that:

  1. (1) in order to comply with GENPRU 2.2.79G R, the firm should, at a minimum, provide the FSA with the following information:
    1. (a) a comprehensive explanation of the rationale for the purchase;
    2. (b) the firm's financial and solvency position before and after the purchase, in particular whether the purchase, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement or the overall financial adequacy rule;
    3. (c) an appropriately stressed capital plan covering 3-5 years, which includes the effect of the proposed purchase; and
    4. (d) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of such risks including stress tests on the main risks showing potential loss under different scenarios; and
  2. (2) the proposed purchase should not be on the basis that the firm reduces capital on the date of the purchase and then plans to raise new external capital during the following 3-5 years to replace the purchased capital.

GENPRU 2.2.79I

handbook-rule
A BIPRU firm must not announce to the holders of a tier one instrument its intention to purchase that instrument unless it has notified that intention to the FSA in accordance with GENPRU 2.2.79G R and it has not, during the period of one month from the date of giving notice, received an objection from the FSA.

GENPRU 2.2.79J

handbook-rule
If a BIPRU firm announces the purchase of any tier one instrument, the firm must no longer include that instrument in its tier one capital resources.

GENPRU 2.2.79K

handbook-rule
If a BIPRU firm does not comply with its capital resources requirement, or if the purchase of any tier one instrument would cause it to breach its capital resources requirement, it must suspend the purchase of tier one instruments.

GENPRU 2.2.79L

handbook-guidance
A firm should continue to exclude from its tier one capital resources all tier one instruments that are the subject of a purchase notification under GENPRU 2.2.79G R and for which the offer to purchase has been declined by the instrument holders unless the purchase offer period has expired.

Loss absorption

GENPRU 2.2.80

handbook-rule

A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in GENPRU 2.2):

  1. (1) (in the case of a firm that is a company as defined in the Companies Act 2006 it is "called-up share capital" within the meaning given to that term in that Act; or
  2. (2) (in the case of a building society) it is a deferred share; or
  3. (3) (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);
substantially the same as called-up share capital falling into (1).

GENPRU 2.2.81

handbook-rule
A firm may not include a capital instrument other than a share in its tier one capital resources unless it complies with GENPRU 2.2.80R (3).

GENPRU 2.2.82

handbook-guidance
There are additional loss absorption requirements for (in the case of an insurer) innovative tier one capital and (in the case of a BIPRU firm) hybrid capital in GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption) and (in the case of a BIPRU firm) for core tier one capital in GENPRU 2.2.83AR (9) to (10) (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)).

Core tier one capital: permanent share capital

GENPRU 2.2.83

handbook-rule

Permanent share capital means an item of capital which (in addition to satisfying GENPRU 2.2.64 R) meets the following conditions:

  1. (1) it is:
    1. (a) an ordinary share; or
    2. (b) a members' contribution; or
    3. (c) part of the initial fund of a mutual; or
    4. (d) a deferred share;
  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;
  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); and
  4. (4) (in the case of a BIPRU firm) it meets the conditions set out in GENPRU 2.2.83A R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)).

General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)

GENPRU 2.2.83A

handbook-rule

The conditions that a BIPRU firm's permanent share capital must comply with under GENPRU 2.2.83AR (4) or that a BIPRU firm's eligible partnership capital or eligible LLP members' capital must comply with under GENPRU 2.2.95 R are as follows:

  1. (1) it is undated;
  2. (2) the terms upon which it is issued do not give the holder a preferential right to the payment of a coupon;
  3. (3) the terms upon which it is issued do not indicate the amount of any coupon that may be payable nor impose an upper limit on the amount of any coupon that may be payable;
  4. (4) the firm's obligations under the instrument do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986 and the holder has no right to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm arising from the non-payment of a coupon or any other sums payable under the instrument;
  5. (5) there is no contractual or other obligation arising out of the terms upon which it is issued that requires the firm to repay capital to the holders other than on a liquidation of the firm;
  6. (6) the terms upon which it is issued do not include a dividend pusher or a dividend stopper;
  7. (7) the firm is under no obligation to issue core tier one capital or to make a payment in kind in lieu of making a coupon payment and non-payment of a coupon is not an event of default on the part of the firm;
  8. (8) it is simple and the terms upon which it is issued are clearly defined;
  9. (9) it is able to fully and unconditionally absorb losses on a non-discretionary basis as soon as they arise to allow the firm to continue trading, and it absorbs losses before all capital instruments that are not eligible for inclusion in stage A of the capital resources table and equally and proportionately with all capital instruments that are eligible for inclusion in stage A of the capital resources table;
  10. (10) it ranks for repayment on winding up, administration or any other similar process lower than all other items of capital, and on a liquidation of the firm the holders have a claim on the residual assets remaining after satisfaction of all prior claims that is proportional to their holding and do not have a priority claim or a fixed claim for the nominal amount of their holding;
  11. (11) the firm has not provided the holder with a direct or indirect financial contribution specifically to pay for the whole or a part of its subscription or purchase;
  12. (12) a reasonable person would not think that the firm is likely to redeem or purchase it because of the description of its characteristics used in its marketing and in its contractual terms of issue; and
  13. (13) its issue is not connected with one or more other transactions which, when taken together with its issue, could result in it no longer displaying all of the characteristics set out in GENPRU 2.2.83R (2), GENPRU 2.2.83AR (1) to (12) and (in the case of permanent share capital) GENPRU 2.2.83R (3).

GENPRU 2.2.83B

handbook-rule

A BIPRU firm must not include in stage A of the capital resources table different classes of the same share type (for example "A ordinary shares" and "B ordinary shares") that meet the conditions in GENPRU 2.2.83 R and GENPRU 2.2.83A R but have differences in voting rights, unless it has notified the FSA of its intention at least one month before the shares are issued or (in the case of existing issued shares) the differences in voting rights take effect.

GENPRU 2.2.83C

handbook-rule
A BIPRU firm must not pay a coupon on a tier one instrument included in stage A of the capital resources table if it has no distributable reserves.

GENPRU 2.2.83D

handbook-guidance
A BIPRU firm may disclose its dividend policy, provided that the policy only reflects the current intention of the firm and does not undermine the firm's right to choose the amount of any coupon that it pays.

Core tier one capital: exception to eligibility criteria (building societies only)

GENPRU 2.2.83E

handbook-rule

A building society may include in stage A of the capital resources table a capital instrument that includes in its terms of issue an upper limit on the amount of any coupon that may be payable and the prohibition on a coupon limit under GENPRU 2.2.83AR (3) does not apply to that capital instrument, provided that:

  1. (1) the capital instrument satisfies all other conditions for eligibility as core tier one capital set out in GENPRU 2.2.83 R to GENPRU 2.2.83A R;
  2. (2) the coupon limit has been imposed by law or the constitutional documents of the firm;
  3. (3) the objective of the limit is to protect the capital reserves of the firm;
  4. (4) the firm continues to have the effective right to choose the amount of any coupon that it pays;
  5. (5) all other capital instruments issued by the firm and included in stage A of the capital resources table:
    1. (a) meet the conditions set out in GENPRU 2.2.83R (2), GENPRU 2.2.83R (3) and GENPRU 2.2.83A R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)); and
    2. (b) if subject to a coupon limit, are subject to the same coupon limit; and
  6. (6) any preferential coupon on a capital instrument included in stage A of the capital resources table, arising as a result of the inclusion of a coupon limit on another capital instrument, must be restricted to a fixed multiple of the coupon payment on the capital instrument that is subject to the coupon limit. GENPRU 2.2.83AR (2) to (3) do not prevent a capital instrument from being included in stage A of the capital resources table if the only reason for those prohibitions not being met is that a preferential coupon arises, and is restricted, in the manner referred to in this paragraph (6).

GENPRU 2.2.83F

handbook-rule

A building society must not issue a capital instrument that includes a coupon limit in its terms of issue in accordance with GENPRU 2.2.83E R unless it has notified the FSA of its intention to do so at least one month before the intended date of issue.

GENPRU 2.2.83G

handbook-guidance
Under GENPRU 2.2.83ER (4), an effective right means that in practice the firm has, and exercises, full discretion to choose the amount of coupon that it pays (for example, it has not fettered that discretion by indicating to instrument holders that the coupon limit is the standard level of coupon they will receive).

GENPRU 2.2.83H

handbook-guidance

The purpose of GENPRU 2.2.83ER (6) is to limit the potential preferential rights that may arise on capital instruments that are not subject to a coupon limit. The FSA considers that "preferential" refers to both priority of coupon payment and level of coupon payment. Therefore the FSA considers that:

  1. (1) a coupon arising on a capital instrument which is not subject to an explicit coupon limit within its terms of issue is likely to be preferential to a coupon on a capital instrument included in the same stage of capital which is subject to a coupon limit; and
  2. (2) the preference so arising should be restricted so that it is not an unlimited preference.

Core tier one capital: additional information

GENPRU 2.2.84

handbook-guidance
In the case of an insurer, GENPRU 2.2.83R (2) and GENPRU 2.2.83R (3) have the effect that the firm should be under no obligation to make any payment in respect of a tier one instrument if it is to form part of its permanent share capital unless and until the firm is wound up. A tier one instrument that forms part of permanent share capital should not therefore count as a liability before the firm is wound up. The fact that relevant company law permits the firm to make earlier repayment does not mean that the tier one instruments are not eligible. However, the firm should not be required by any contractual or other obligation arising out of the terms of that capital to repay permanent share capital. Similarly a tier one instrument may still qualify if company law allows dividends to be paid on this capital, provided the firm is not contractually or otherwise obliged to pay them. There should therefore be no fixed costs. GENPRU 2.2.83A R to GENPRU 2.2.83F R impose more specific conditions on coupon payment and winding up which are applicable to BIPRU firms.

GENPRU 2.2.84A

handbook-guidance
Under GENPRU 2.2.83AR (13) a tier one instrument does not meet the conditions for inclusion as core tier one capital if in isolation it does meet those requirements but fails to meet those requirements when other transactions are taken into account. Examples of those transactions include guarantees, pledges of assets or other side agreements provided by the firm to the holder of a tier one instrument designed to enhance the legal or economic seniority of the tier one instrument.

Core tier one capital: profit and loss account and other reserves: Losses

GENPRU 2.2.85

handbook-rule
  1. (1) Negative amounts, including any interim net losses (but in the case of a BIPRU investment firm, only material interim net losses), must be deducted from profit and loss account and other reserves.
  2. (2) For these purposes material interim net losses mean unaudited interim losses arising from a firm's trading book and non-trading book business which exceed 10% of the sum of its capital resources calculated at stage A (Core tier one capital) in the capital resources table.
  3. (3) If interim losses as referred to in (2) exceed the 10% figure in (2) then a BIPRU investment firm must deduct the whole amount of those losses and not just the excess.

Core tier one capital: profit and loss account and other reserves: Losses arising from valuation adjustments (BIPRU firm only)

GENPRU 2.2.86

handbook-rule
  1. (1) This rule applies to trading book valuation adjustments or reserves referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G (Valuation adjustments and reserves). It applies to a BIPRU firm.
  2. (2) When valuation adjustments or reserves give rise to losses of the current financial year, a firm must treat them in accordance with GENPRU 2.2.85 R.
  3. (3) Valuation adjustments or reserves which exceed those made under the accounting framework to which a firm is subject must be treated in accordance with (2) if they give rise to losses and under GENPRU 2.2.248 R (Net interim trading book profits) otherwise.

Core tier one capital: profit and loss account and other reserves: Dividends

GENPRU 2.2.87

handbook-rule
Dividends must be deducted from reserves as soon as they are foreseeable.

GENPRU 2.2.87A

handbook-guidance

Each firm must assess for itself when, in its particular circumstances, dividends are foreseeable. A dividend is foreseeable at the latest:

  1. (1) in the case of an interim dividend, when it is declared by the directors; or
  2. (2) in the case of a final dividend, when the directors approve the dividend to be proposed at the annual general meeting.

Core tier one capital: profit and loss account and other reserves: Capital contributions

GENPRU 2.2.88

handbook-rule
A firm must account for a capital contribution as an increase in reserves and may, notwithstanding GENPRU 2.2.63 R, count that increase in reserves as core tier one capital.

GENPRU 2.2.89

handbook-guidance
An item of capital qualifies as a capital contribution if it is a gift of capital (and, as such, is not repayable) and a coupon is not payable on it.

Core tier one capital: profit and loss account and other reserves: Securitisation (BIPRU firm only)

GENPRU 2.2.90

handbook-rule
In the case of a BIPRU firm which is the originator of a securitisation, net gains arising from the capitalisation of future income from the securitised assets and providing credit enhancement to positions in the securitisation must be excluded from profit and loss account and other reserves.

Core tier one capital: profit and loss account and other reserves: Valuation

GENPRU 2.2.91

handbook-guidance
Profit and loss account and other reserves should be valued in accordance with the rules in GENPRU 1.3 (Valuation).

Core tier one capital: profit and loss account and other reserves: Revaluation reserves (BIPRU firm only)

GENPRU 2.2.92

handbook-guidance

A revaluation reserve is not included as part of a BIPRU firm's profit and loss account and other reserves. It is dealt with separately and forms part of a BIPRU firm's upper tier two capital.

Core tier one capital: partnership capital account (BIPRU firm only)

GENPRU 2.2.93

handbook-rule

Eligible partnership capital means a partners' account:

  1. (1) into which capital contributed by the partners is paid; and
  2. (2) from which under the terms of the partnership agreement an amount representing capital may be withdrawn by a partner only if:
    1. (a) he ceases to be a partner and an equal amount is transferred to another such account by his former partners or any person replacing him as their partner;
    2. (b) the partnership is wound up or otherwise dissolved; or
    3. (c) the BIPRU firm has ceased to be authorised or no longer has a Part IV permission.

Core tier one capital: Eligible LLP members' capital (BIPRU firm only)

GENPRU 2.2.94

handbook-rule

Eligible LLP members' capital means a members' account:

  1. (1) into which capital contributed by the members is paid; and
  2. (2) from which under the terms of the limited liability partnership agreement an amount representing capital may be withdrawn by a member only if:
    1. (a) he ceases to be a member and an equal amount is transferred to another such account by his former fellow members or any person replacing him as a member;
    2. (b) the limited liability partnership is wound up or otherwise dissolved; or
    3. (c) the BIPRU firm has ceased to be authorised or no longer has a Part IV permission.

Core tier one capital: Eligible LLP members' and partnership capital accounts (BIPRU firm only)

GENPRU 2.2.95

handbook-rule
A BIPRU firm that is a partnership or a limited liability partnership may not include eligible partnership capital or eligible LLP members' capital in its tier one capital resources unless (in addition to GENPRU 2.2.62 R (General conditions relating to tier one capital)) it complies with GENPRU 2.2.83R (2) (Coupons should not be cumulative or mandatory) and GENPRU 2.2.83A R to GENPRU 2.2.83C R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only). However, GENPRU 2.2.64R (3) (Redemption), GENPRU 2.2.83AR (5) (Capital repayment) and GENPRU 2.2.83AR (12) (Characteristics in contract) are replaced by GENPRU 2.2.93 R or GENPRU 2.2.94 R.

GENPRU 2.2.96

handbook-guidance

If a firm has surplus eligible partnership capital or eligible LLP members' capital that it wishes to repay in circumstances other than those set out in GENPRU 2.2.93 R or GENPRU 2.2.94 R it may apply to the FSA for a waiver to allow it to do so. If a firm applies for such a waiver the information that the firm supplies with the application might include:

  1. (1) a demonstration that the firm would have sufficient capital resources to meet its capital resources requirement immediately after the repayment;
  2. (2) a demonstration that the firm would have sufficient financial resources to meet any individual capital guidance and the firm's latest assessment under the overall Pillar 2 rule immediately after the repayment; and
  3. (3) a two to three year capital plan demonstrating that the firm would be able to meet the requirements in (1) and (2) at all times without needing further capital injections.

Core tier one capital: Other capital items for limited liability partnerships and partnerships (BIPRU firm only)

GENPRU 2.2.97

handbook-rule
The items permanent share capital and share premium account (which form part of core tier one capital) do not apply to a BIPRU firm that is a partnership or a limited liability partnership.

GENPRU 2.2.98

handbook-rule
Without prejudice to GENPRU 2.2.62 R (Tier one capital: General), the item other reserves (which forms part of the item profit and loss and other reserves) applies to a BIPRU firm that is a partnership or a limited liability partnership to the extent the reserves correspond to reserves that are eligible for inclusion as other reserves in the case of a BIPRU firm that is incorporated under the Companies Act 2006.

GENPRU 2.2.99

handbook-guidance
A BIPRU firm that is a partnership or a limited liability partnership should include profit and loss (taking into account interim losses or material interim net losses) in its core tier one capital.

Core tier one capital: partnership and limited liability partnership excess drawings (BIPRU firm only)

GENPRU 2.2.100

handbook-rule
A BIPRU firm which is a partnership or limited liability partnership must deduct at stage E of the calculation in the capital resources table (Deductions from tier one capital) the amount by which the aggregate of the amounts withdrawn by its partners or members exceeds the profits of that firm. Amounts of eligible partnership capital or eligible LLP members' capital repaid in accordance with GENPRU 2.2.93 R or GENPRU 2.2.94 R are not included in this calculation.

Core tier one capital: Share premium account

GENPRU 2.2.101

handbook-rule
  1. (1) A firm must include share premium account relating to the issue of a share forming part of its core tier one capital in its core tier one capital.
  2. (2) A firm must include share premium account relating to the issue of a share forming part of another tier of capital in that other tier.
  3. (3) A firm that is incorporated under the Companies Act 2006 may include its share premium account as core tier one capital notwithstanding (2) to the extent that the terms of issue of the share concerned provide that any premium is not repayable on redemption.
  4. (4) Paragraph (3) applies to a firm that is not incorporated under the Companies Act 2006 if its share premium account is subject to substantially the same or greater restraints on use than a share premium account falling into (3).

Core tier one capital: externally verified interim net profits

GENPRU 2.2.102

handbook-rule

Externally verified interim net profits are interim profits which have been verified by a firm's external auditors after deduction of tax, forseeable dividends and other appropriations.

GENPRU 2.2.103

handbook-guidance
A firm may include interim profits before a formal decision has been taken only if these profits have been verified, in accordance with the relevant Auditing Practices Board's Practice Note, by persons responsible for the auditing of the accounts.

Core tier one capital: valuation differences (insurer only)

GENPRU 2.2.104

handbook-rule

GENPRU 2.2.105

handbook-rule

Valuation differences are all differences between the valuation of assets and liabilities as valued in GENPRU and the valuation that the insurer uses for its external financial reporting purposes, except valuation differences which are dealt with elsewhere in the capital resources table. The sum of these valuation differences must either be added to (if positive) or deducted from (if negative) an insurer's capital resources in accordance with the capital resources table.

GENPRU 2.2.106

handbook-guidance
Additions to and deductions from capital resources will arise from the application of asset and liability valuation and admissibility rules (see GENPRU 1.3 (Valuation), GENPRU 2.2.251 R (Deductions from total capital: Inadmissible assets) and GENPRU 2 Annex 7 (Admissible assets in insurance)). Downward adjustments include discounting of technical provisions for general insurance business (which is optional for financial reporting but not permitted for regulatory valuation - see GENPRU 2.2.107 R) and derecognition of any defined benefit asset in respect of a defined benefit occupational pension scheme (see GENPRU 1.3.9R (2) (General requirements: Adjustments to accounting values)). Details of valuation differences relating to technical provisions and liability adjustments for long-term insurance business are set out in INSPRU 1.2 (Mathematical reserves). In particular, contingent loans or other arrangements which are not valued as a liability under INSPRU 1.2.79 R (2) (Reinsurance) result in a positive valuation difference.

GENPRU 2.2.107

handbook-rule
  1. (1) Subject to (3), this rule applies to an insurer that carries on general insurance business and which discounts or reduces its technical provisions for claims outstanding.
  2. (2) An insurer of a kind referred to in (1) 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. This adjustment must be made for all general insurance business classes, except for risks listed under classes 1 and 2. For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions. 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 insurer must deduct:
    1. (a) the difference between the undiscounted technical provisions and the discounted technical provisions; or
    2. (b) 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.
  3. (3) This rule does not apply to a pure reinsurer which became a firm in run-off before 31 December 2006 and whose Part IV permission has not subsequently been varied to add back the regulated activity of effecting contracts of insurance.

Core tier one capital: fund for future appropriations (insurer only)

GENPRU 2.2.108

handbook-rule
In relation to an insurer the 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.

Core tier one capital: deferred shares (building society only)

GENPRU 2.2.108A

handbook-rule
A building society may include a deferred share at stage A of the calculation in the capital resources table if (in addition to satisfying all the other requirements in relation to tier one capital) it is permanent share capital and is otherwise equivalent to an ordinary share in terms of its capital qualities, taking into account the specific constitution of building societies under the Building Societies Act 1986.

GENPRU 2.2.108B

handbook-guidance
The other main provisions relevant to inclusion of a deferred share in tier one capital are GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64 R (General conditions for eligibility as tier one capital), GENPRU 2.2.65 R (Connected transactions) and GENPRU 2.2.80 R (Loss absorption).

Other tier one capital: perpetual non-cumulative preference shares (insurer only)

GENPRU 2.2.109

handbook-rule

In the case of an insurer, a perpetual non-cumulative preference share may be included at stage B of the calculation in the capital resources table if (in addition to satisfying all the other requirements in relation to tier one capital) 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.

GENPRU 2.2.110

handbook-guidance
The other main provisions relevant to the eligibility of a perpetual non-cumulative preference share for inclusion by an insurer in tier one capital are GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64 R (General conditions for eligibility as tier one capital), GENPRU 2.2.65 R (Connected transactions), GENPRU 2.2.70 R to GENPRU 2.2.75 R (Redemption of tier one instruments) and GENPRU 2.2.80 R (Loss absorption). The rules about innovative tier one capital are also relevant as they may result in perpetual non-cumulative preference shares being treated as innovative tier one capital. Perpetual non-cumulative preference shares should be perpetual and redeemable only at the firm's option. Perpetual preference shares should be non-cumulative if they are to be included at stage B of the calculation in the capital resources table. Any feature that, in conjunction with a call, would make a firm more likely to redeem perpetual non-cumulative preference shares would normally result in classification as an innovative tier one instrument. Such features would include, but not be limited to, a step-up, bonus coupon on redemption or redemption at a premium to the original issue price of the share.

Other tier one capital: innovative tier one capital: general (insurer only)

GENPRU 2.2.113

handbook-rule
If, in the case of an insurer, an item of capital is stated to be an innovative tier one instrument by the rules in GENPRU 2.2, it cannot be included in stages A (Core tier one capital) or B (Perpetual non-cumulative preference shares) of the calculation in the capital resources table.

Other tier one capital: innovative tier one capital: redemption (insurer only)

GENPRU 2.2.114

handbook-rule

If, in the case of an insurer, a tier one instrument:

  1. (1) 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;

that tier one instrument is an innovative tier one instrument.

GENPRU 2.2.115

handbook-guidance
Any feature that in conjunction with a call would make an insurer more likely to redeem a tier one instrument would normally result in classification as innovative tier one capital resources. Innovative tier one instruments include but are not limited to those incorporating a step-up or principal stock settlement.

Other tier one capital: conditions for eligibility for hybrid capital to be included at the different stages B1, B2 and C of the calculation in the capital resources table (BIPRU firm only)

GENPRU 2.2.115A

handbook-rule

A BIPRU firm must not include a capital instrument at stage B1 of the calculation in the capital resources table unless (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) its contractual terms are such that:

  1. (1) it cannot be redeemed in cash but can only be converted into core tier one capital;
  2. (2) it must be converted into core tier one capital by the firm during emergency situations;
  3. (3) the emergency situations referred to in (2):
    1. (a) are clearly defined within the terms of the capital instrument, legally certain and transparent; and
    2. (b) occur at the latest, and include, when the BIPRU firm does not meet its capital resources requirement;
  4. (4) the FSA may require its conversion into core tier one capital when the FSA considers it necessary;
  5. (5) it may be converted into core tier one capital by the firm or the holder of the instrument at any time; and
  6. (6) the maximum number of capital instruments which are core tier one capital into which it may be converted must:
    1. (a) be determined at the date of its issue;
    2. (b) be determined on the basis of the market value of those other instruments at the date of its issue;
    3. (c) have an aggregate value equal to its par value; and
    4. (d) not increase if the price of those other instruments decreases.

GENPRU 2.2.115B

handbook-guidance
The intention of GENPRU 2.2.115A R is to ensure that capital instruments included in stage B1 of the calculation in the capital resources table have the same permanence as core tier one capital; the presence of a call option for these instruments may reduce their permanence.

GENPRU 2.2.115C

handbook-guidance
  1. (1) In respect of GENPRU 2.2.115AR (4), the FSA may require the firm to convert the instrument into core tier one capital based on its financial and solvency situation. The FSA will take into account, among other things, the factors identified at GENPRU 2.2.69FG (2), adjusted to take into account the effects of a conversion rather than payment of a coupon.
  2. (2) Even if a firm meets its capital resources requirement, the FSA may consider the amount or composition of the firm's tier one capital as inadequate to cover the financial and solvency risks of the firm in which event the FSA may require the firm to convert the instrument into core tier one capital.

GENPRU 2.2.115D

handbook-rule
A BIPRU firm may include a capital instrument at stage B2 of the calculation in the capital resources table if (while satisfying all the other requirements in relation to tier one capital and hybrid capital) it cannot be included at stage B1 of that calculation as it does not satisfy the requirements of GENPRU 2.2.115A R.

GENPRU 2.2.115E

handbook-guidance
  1. (1) The other main provisions relevant to the eligibility of a capital instrument to be included at stages B1 and B2 of the calculation in the capital resources table are GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64 R (General conditions for eligibility as tier one capital), GENPRU 2.2.65 R (Connected transactions), GENPRU 2.2.68A R (Dividend stoppers), GENPRU 2.2.70 R to GENPRU 2.2.75 R (Redemption of tier one instruments), GENPRU 2.2.80 R (Loss absorption) and GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption).
  2. (2) The rule about hybrid capital included at stage C of the calculation in the capital resources table in GENPRU 2.2.115F R is also relevant. Capital instruments that would otherwise qualify for inclusion at stages B1 or B2 of the calculation in the capital resources table may only be eligible for inclusion at stage C of that calculation.

GENPRU 2.2.115F

handbook-rule

A BIPRU firm may include a capital instrument at stage C of the calculation in the capital resources table, and must not include it in stage B1 or B2 of that calculation, if (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) it either:

  1. (1) is dated; or
  2. (2) provides an incentive for the firm to redeem it, as assessed at the date of its issue.

GENPRU 2.2.115G

handbook-guidance
An incentive to redeem is a feature of a capital instrument that would lead a reasonable market participant to have an expectation that the firm will redeem the instrument. The effect of GENPRU 2.2.115FR (2) is that the classification of an instrument that provides an incentive to redeem is always assessed at the date of its issue, and it cannot be reclassified.

Other tier one capital: loss absorption

GENPRU 2.2.116

handbook-rule

An insurer must not include a capital instrument that is not a share in its innovative tier one capital resources unless (in addition to satisfying all the other requirements in relation to tier one capital and innovative tier one 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).

GENPRU 2.2.116A

handbook-rule

A BIPRU firm must not include a capital instrument that is not a share at stage B1, B2 or C of the calculation in the capital resources table unless (in addition to satisfying all the other requirements in relation to tier one capital and hybrid 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).

GENPRU 2.2.117

handbook-guidance
The effect of GENPRU 2.2.116 R and GENPRU 2.2.116A R is that if a potential tier one instrument does constitute a liability, this should only be the case when the firm is able to pay that liability but chooses not to do so. As tier one capital resources for an insurer should be undated, this will generally only be relevant on a solvent winding up of the firm. The holder should agree that the firm has no liability (including any contingent or prospective liability) to pay any amount to the extent to which that liability would cause the firm to become insolvent if it made the payment or to the extent that its liabilities exceed its assets or would do if the payment were made. The terms of the capital instrument should be such that the directors can continue to trade in the best interests of the senior creditors even if this prejudices the interests of the holders of the instrument.

GENPRU 2.2.117A

handbook-rule

A BIPRU firm must not include a capital instrument at stage B1, B2 or C of the calculation in the capital resources table unless (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) its contractual terms provide for a mechanism within the instrument which:

  1. (1) is clearly defined and legally certain;
  2. (2) is disclosed and transparent to the market;
  3. (3) makes the recapitalisation of the firm more likely by adequately reducing the potential future outflows to a holder of the capital instrument at certain trigger points;
  4. (4) enables the firm, at and after the trigger points, to operate the mechanism; and
  5. (5) when initiated, operates in one of the following ways:
    1. (a) the principal of the instrument is written down permanently; or
    2. (b) the principal of the instrument is written down temporarily. During the write-down period any coupon payable on the instrument must be cancelled and any related dividend stoppers and pushers must operate in a way that does not hinder recapitalisation; or
    3. (c) the instrument is converted into core tier one capital. The maximum number of capital instruments which are core tier one capital into which it must be converted must;
      1. (i) be determined at the date of its issue;
      2. (ii) be determined on the basis of the market value of those other instruments at the date of its issue;
      3. (iii) have an aggregate value no more than 150% of its par value; and
      4. (iv) not increase if the share price decreases; or
    4. (d) an alternative process applies which has the same or greater effect on the likelihood of recapitalisation as (a), (b), and (c).

GENPRU 2.2.117B

handbook-rule

The trigger points required by GENPRU 2.2.117AR (3) must:

  1. (1) be clearly defined within the instrument and legally certain;
  2. (2) be disclosed and transparent to the market; and
  3. (3) be prudent and timely, and include trigger points which occur:
    1. (a) before a breach of the firm's capital resources requirement and both:
      1. (i) when the firm's losses lead to a significant reduction of the firm's retained earnings or other reserves which causes a significant deterioration of the firm's financial and solvency conditions; and
      2. (ii) when it is reasonably foreseeable that the events described in (i) will occur; and
    2. (b) when the firm is in breach of its capital resources requirement.

GENPRU 2.2.117C

handbook-guidance
  1. (1) The effects of the mechanisms described in GENPRU 2.2.117A R will be more meaningful if they happen immediately after losses cause a significant deterioration of the financial as well as the solvency situation and even before the reserves are exhausted.
  2. (2) If a firm does not operate the loss absorption mechanism in a prudent and timely way, then the FSA may consider using its powers under section 45 of the Act to, on its own initiative, vary the firm's Part IV permission to require it to operate the mechanism.

GENPRU 2.2.118

handbook-rule
  1. (1) An insurer may not include an innovative tier one instrument, unless it is a preference share, in its tier one capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.64R (6) (loss absorption) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.
  2. (2) A BIPRU firm may not include a capital instrument at stage B1, B2 or C of the calculation in the capital resources table unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64R (1) to GENPRU 2.2.64R (9) (General conditions for eligibility as tier one capital) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.

GENPRU 2.2.118A

handbook-guidance
For the purposes of GENPRU 2.2.118R (2), the focus of the legal opinion in considering GENPRU 2.2.64R (6)(b) should be on whether appropriate mechanisms exist and are designed to operate to ensure that the value of the hybrid capital instrument and the position of the hybrid capital holder are not enhanced by recapitalisation.

GENPRU 2.2.119

handbook-guidance
For the purpose of GENPRU 2.2.118 R, an independent legal opinion may be given by an employee of that firm, but if an employee does so he should not be part of the business unit responsible for the transaction (including the drafting of the issue documentation).

Other tier one capital: innovative tier one capital: coupons (insurer only)

GENPRU 2.2.120

handbook-rule
In the case of an insurer, a tier one instrument with a cumulative or mandatory coupon is an innovative tier one instrument.

Other tier one capital: innovative tier one capital: step-ups (insurer only)

GENPRU 2.2.121

handbook-rule

If, in the case of an insurer:

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

that potential tier one instrument is an innovative tier one instrument.

GENPRU 2.2.122

handbook-guidance

Other tier one capital: hybrid capital: indirectly issued tier one capital (BIPRU firm only)

GENPRU 2.2.123

handbook-rule

GENPRU 2.2.124

handbook-rule
  1. (1) GENPRU 2.2.123 R - GENPRU 2.2.137 R apply to capital of a firm if:
    1. (a) either or both of the conditions in (2) are satisfied; and
    2. (b) any of the SPVs referred to in (2) is a subsidiary undertaking of the firm.
  2. (2) The conditions referred to in (1) are:
    1. (a) that capital is issued to an SPV; or
    2. (b) the subscription for the capital issued by the firm is funded directly or indirectly by an SPV.
  3. (3) A BIPRU firm may not include capital coming within this rule in its capital resources unless the requirements in the following rules are satisfied:
    1. (a) (if (2)(a) applies and (2)(b) does not) GENPRU 2.2.127 R, GENPRU 2.2.129 R and GENPRU 2.2.132 R; or
    2. (b) (in any other case) GENPRU 2.2.133 R.

GENPRU 2.2.125

handbook-rule
A BIPRU firm may only count capital to which GENPRU 2.2.124 R applies at stage C of the calculation in the capital resources table.

GENPRU 2.2.126

handbook-rule
For the purpose of GENPRU 2.2, an SPV is, in relation to a BIPRU firm, any undertaking whose main activity is to raise funds for that firm or for a group to which that BIPRU firm belongs.

GENPRU 2.2.127

handbook-rule

The SPV referred to in GENPRU 2.2.124R (2)(a) must satisfy the following conditions:

  1. (1) it is controlled by the firm and may not operate independently of the firm;
  2. (2) the rights of investors in the SPV who do not belong to the group of the BIPRU firm in question are not such as to affect the ability of the firm to control the SPV;
  3. (3) all or virtually all of its exposures (calculated by reference to the amount) consist of exposures to the firm or to that firm's group; and
  4. (4) it is incorporated under, and governed by, the laws and jurisdiction of England and Wales, Scotland or Northern Ireland.

GENPRU 2.2.128

handbook-guidance
An SPV could take the form of a limited partnership. In such an arrangement, holders of a capital instrument issued by the SPV which do not belong to the group of the BIPRU firm in question should have no right to participate in the management of the partnership, whether under the partnership's constitutional documents or the transaction documents. In general, this means that they should be treated as limited partners. It is expected that the general partner, having control of the SPV, would be the firm.

GENPRU 2.2.128A

handbook-rule
GENPRU 2.2.127R (4) does not apply if the firm has conducted a properly reasoned analysis confirming that any potential risks, including legal and operational risks, associated with cross-border issues, which undermine the quality of the capital for the issuer, that arise from an SPV not being incorporated under or governed by the laws and jurisdiction of England and Wales, Scotland or Northern Ireland, are adequately mitigated.

GENPRU 2.2.128B

handbook-rule
The analysis must be set out in writing and dated before the date of issue of the capital instrument and the firm must be able to show that the analysis has been fully considered as part of its decision to proceed with the issue. The analysis must be conducted by a person or persons appropriately qualified to assess the relevant risks and that person may be an independent adviser or an employee of the firm who is not part of the business unit responsible for the transaction (including the drafting of the issue documentation).

GENPRU 2.2.129

handbook-rule
The SPV referred to in GENPRU 2.2.124R (2)(a) must fund its subscription for the capital issued by the firm by the issue of capital that satisfies the following conditions:
  1. (1) it must comply with the conditions for qualification as tier one capital, as amended by GENPRU 2.2.130 R, as if the SPV was itself a firm seeking to include that capital in its tier one capital resources;
  2. (2)
    1. (a) its terms must include an obligation on the firm that, in the event of a collapse of the SPV structure, and if the mechanism contained within the instrument under GENPRU 2.2.117A R is a conversion, the firm must substitute the capital instrument issued by the SPV with core tier one capital issued by the firm; and
    2. (b) there must be no obstacle to the firm's issue of new securities;
  3. (3) the conversion ratio in respect of the substitution described in (2) must be fixed when the SPV issues the capital instrument;
  4. (4) to the extent that investors have the benefit of an obligation by a person other than the SPV:
    1. (a) that obligation must be one owed by a member of the firm's group; and
    2. (b) the extent of that obligation must be no greater than would be permitted by GENPRU if that obligation formed part of the terms of a capital instrument issued by that member which complied with the rules in GENPRU relating to tier one capital included at stage C of the calculation in the capital resources table; and
  5. (5) if the SPV structure collapses, the holder of it has no better a claim against the firm than a holder of the same type of instrument directly issued by the firm.

GENPRU 2.2.130

handbook-rule
For the purpose of GENPRU 2.2.129 R and GENPRU 2.2.132 R, GENPRU 2.2.118 R (Requirement to obtain a legal opinion) does not apply.

GENPRU 2.2.131

handbook-rule
In relation to the obligation to substitute described in GENPRU 2.2.129R (2), a firm must take all reasonable steps to ensure that it has at all times authorised and unissued capital instruments which are core tier one capital (and the authority to issue them) sufficient to discharge its obligation to substitute.

GENPRU 2.2.131A

handbook-guidance
GENPRU 2.2.129R (2) and GENPRU 2.2.131 R allow a firm to replace the capital issued by the SPV with capital instrument which are core tier one capital.

GENPRU 2.2.132

handbook-rule

The capital which the firm seeks to include in its capital resources under GENPRU 2.2.124R (3)(a) must satisfy the following conditions:

  1. (1) it meets the conditions for inclusion in tier one capital (subject to GENPRU 2.2.130 R);
  2. (2) its first call date (if any) must not arise before that on the instrument issued by the SPV; and
  3. (3) its terms relating to repayment must be the same as those of the instrument issued by the SPV.

GENPRU 2.2.133

handbook-rule
  1. (1) This rule deals with any transaction:
    1. (a) under which an SPV directly or indirectly funds the subscription for capital issued by the firm as described in GENPRU 2.2.124 R; or
    2. (b) that is directly or indirectly funded by a transaction in (1)(a).
  2. (2) Each undertaking that is a party to a transaction to which this rule applies (other than the firm) must be a subsidiary undertaking of the firm.
  3. (3) Each SPV that is a party to a transaction to which this rule applies must comply with GENPRU 2.2.127 R.
  4. (4) Any capital to which (1) applies (other than the capital that is to be included in the firm's capital resources) must be in the form of capital that complies with GENPRU 2.2.129R (1) and GENPRU 2.2.129R (4), whether or not issued by an SPV.
  5. (5) The obligations in GENPRU 2.2.129R (2) and GENPRU 2.2.129R (3) only apply to capital issued by an SPV at the end of the chain of transactions beginning with the issue of capital by the firm referred to in GENPRU 2.2.124 R.
  6. (6) GENPRU 2.2.132 R applies to the capital issued by the firm as referred to in GENPRU 2.2.124 R. For these purposes references in GENPRU 2.2.132 R to the instrument issued by the SPV are to the instrument referred to in (5).

GENPRU 2.2.134

handbook-guidance

The purpose of GENPRU 2.2.133 R is to deal with a capital-raising under which the capital raised by a special purpose vehicle is passed through a number of undertakings before it is invested in the firm. If the capital resources of the firm fall below, or are likely to fall below, its capital resources requirement the firm should replace the capital issued by that first special purpose vehicle with a tier one instrument directly issued by the firm which complies with GENPRU 2.2.129R (2).

GENPRU 2.2.135

handbook-rule
A firm which satisfies the conditions for the inclusion of capital set out in GENPRU 2.2.124 R, must, in addition, if that transaction is in any respect unusual, notify the FSA at least one Month in advance of the date on which the firm intends to include that capital in its capital resources.

GENPRU 2.2.136

handbook-guidance
The FSA is likely to consider as unusual a transaction which involves the raising by the firm of tier one capital through a subsidiary undertaking of that firm that is not an SPV. The FSA would expect a firm to request individual guidance in such circumstances.

GENPRU 2.2.137

handbook-rule

A firm must ensure that, in relation to a transaction falling within GENPRU 2.2.124 R:

  1. (1) the marketing document for the transaction contains all the information which a reasonable third party would require to understand the transaction fully and its effect on the financial position of the firm and its group; and
  2. (2) the information in (1) and the transaction are easily comprehensible without the need for additional information about the firm and its group.

Tier one capital: Conversion ratio

GENPRU 2.2.138

handbook-rule
  1. (1) This rule applies to a potential tier one instrument if:
    1. (a) it is redeemable by the firm (ignoring GENPRU 2.2.77 R (Meaning of redemption));
    2. (b) it provides that if the issuer does not exercise that right or does not do so in specified circumstances the issuer must or may have to redeem it in whole or in part through the issue of shares eligible for inclusion in the firm's tier one capital resources or the instrument converts or may convert into such shares; and
    3. (c) GENPRU 2.2.77 R means that the obligation in (1)(b) is treated as not being inconsistent with GENPRU 2.2.70R (1) (Tier one capital should not be redeemable at the option of the holder).
  2. (2) A firm must not include a potential tier one instrument to which this rule applies in its tier one capital resources if:
    1. (a) the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than:
      1. (i) in the case of a BIPRU firm, 150%; and
      2. (ii) in the case of an insurer, 200%; or
    2. (b) the market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price of that original capital item.
  3. (3) All determinations under this rule are made as at the date of issue of the original capital item.

GENPRU 2.2.139

handbook-rule

In GENPRU 2.2.138 R to GENPRU 2.2.142 R:

  1. (1) the original capital item means the capital item that is being redeemed; and
  2. (2) the conversion instrument means the tier one capital to be issued on its redemption.

GENPRU 2.2.140

handbook-rule

In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio means the ratio of:

  1. (1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to
  2. (2) one unit of the original capital item.

GENPRU 2.2.141

handbook-rule
In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio as at the date of issue of the original capital item is calculated as if the original capital item were redeemable at that time.

GENPRU 2.2.142

handbook-rule
If the conversion instruments or the original capital item are subdivided or consolidated or subject to any other occurrence that would otherwise result in like not being compared with like, the conversion ratio calculation in GENPRU 2.2.138 R must be adjusted accordingly.

GENPRU 2.2.143

handbook-guidance
  1. (1) The significance of the limitations on conversion in GENPRU 2.2.138R (2) can be seen in the example in this paragraph, which uses the conversion ratio applicable to an insurer.
  2. (2) An insurer issues innovative notes with a par value of £100 each. The terms of the instrument provide that if the instrument is not called at par at the first call date the notes convert into a variable number of ordinary shares.
  3. (3) If the market price of the ordinary shares is 400 pence per share on the day of issue of the innovative notes then the maximum number of ordinary shares (M) that a single £100 par value innovative note can be converted into is calculated as follows:
    1. (a) M = Par value of innovative instrument * 200% / market value of ordinary share;
    2. (b) M = £100 * 2 / £4 = 50 shares.
  4. (4) The practical effect is that conversion will result in the holder of an innovative capital note receiving ordinary shares equal to the par value of that note only when the market price of the ordinary shares remains above half the market price of the shares at the date of issue of the notes.
  5. (5) If the market price of the ordinary shares fell by half to 200 pence, the maximum permitted number of shares (50) would have to be issued in order to give an investor in the innovative note ordinary shares with a market value equal to £100. If the market price of the ordinary shares fell below 200 pence, the issue of the maximum permitted number of ordinary shares would have a market value below £100.

GENPRU 2.2.144

handbook-guidance
  1. (1) In addition to the maximum conversion ratios of 200% for an insurer and 150% for a BIPRU firm, GENPRU 2.2.138R (2)(b) does not permit a firm to issue shares that would have a market value that exceeds the issue price of the instrument being redeemed.
  2. (2) In the example in GENPRU 2.2.143 G, if the market value of the ordinary shares was 250 pence at the conversion date, the maximum number of ordinary shares that may be issued to satisfy the redemption of one of the £100 par value innovative notes would be 40 (= £100 / £2.5).

Tier one capital: Requirement to have sufficient unissued stock

GENPRU 2.2.145

handbook-rule
  1. (1) This rule applies to a potential tier one instrument of a firm where either:
    1. (a) the redemption proceeds; or
    2. (b) any coupon on that capital item;
can be satisfied by the issue of another capital instrument.
  1. (2) A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued capital instruments of the kind in question (and the authority to issue them):
    1. (a) that are sufficient to satisfy all such payments then due; and
    2. (b) are of such amount as is prudent in respect of such payments that could become due in the future.

Step-ups: calculating the size of a step-up

GENPRU 2.2.146

handbook-rule
  1. (1) Where a rule in this section 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.
  2. (2) Where a step-up arises through a change from paying a coupon on a debt instrument to paying a dividend on a share issued in settlement of the coupon, any net cost to the firm arising from the different tax treatment of the dividend compared to the tax treatment of interest may be ignored for the purpose of assessing the effect of that step-up.

Step-ups: Limits on the amount of step-ups on tier one and two capital

GENPRU 2.2.147

handbook-rule
  1. (1) A firm may not include in its tier one capital resources a tier one instrument that is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision of 27th October 1998 called "Instruments eligible for inclusion in Tier 1 capital".
  2. (2) For the purpose of (1) the words in that press release "than, at national supervisory discretion, either" are replaced by "than the higher of the following two amounts".
  3. (3) The calculations required by this rule and GENPRU 2.2.151 R must be carried out as at the date of issue of the relevant instrument.
  4. (4) A BIPRU firm may not include a capital instrument in its tier one capital resources if it is redeemable and subject to more than one step-up.

GENPRU 2.2.148

handbook-guidance

The effect of GENPRU 2.2.147 R is that for inclusion in tier one capital resources, step-ups in instruments should be moderate. A moderate step-up for these purposes is one which results in an increase over the initial rate that is no greater than the higher of the following two amounts:

  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.

GENPRU 2.2.149

handbook-guidance
If a coupon paid on an item of capital is initially set at a specified spread above an index (the initial index basis), and the coupon moves to being set relative to another index (the stepped up index basis), there will be an implied step-up (positive or negative) even if the specified spread does not change. This is because each index may itself include a spread relative to the risk free rate and this spread may differ between the two indexes. The deduction of the swap spread in GENPRU 2.2.148G (1) and (2) above adjusts for this difference.

GENPRU 2.2.150

handbook-guidance

Where the step-up involves a conversion from fixed to floating (or vice versa), or a switch in basis index, the swap spread should be fixed at pricing date, reflecting the differential in pricing between indices at the time. The significance of deducting the swap spread can be seen by the following example:

  1. (1) the pricing date:
    1. (a) 10 year gilts (G) = 5.5% (the initial index basis);
    2. (b) 3 month LIBOR is the stepped up index basis and the 10 year mid swap rate (L) = 5.9%;
    3. (c) initial fixed coupon rate = G + 200bp;
    4. (d) swap spread = 0.4% (= 5.9% - 5.5%);
    5. (e) initial fixed coupon rate = 7.5%;
    6. (f) the swap spread shows that there is 40bps of spread in the stepped up index basis relative to the initial index basis; and
    7. (g) the initial fixed coupon rate of 7.5% is equivalent to the mid swap rate + 160bp, or L + 200bp - the swap spread;
  2. (2) pricing of stepped-up rate at year 10 with step-up of 100bp without deducting swap spread:
    1. (a) stepped-up floating rate = L + 200 + 100bp step-up = 8.9%; and
    2. (b) effective step-up from initial fixed rate of 140bp (= 8.9% - 7.5%); and
  3. (3) pricing of stepped-up rate at year 10 with step-up of 100bp with deduction of the swap spread:
    1. (a) stepped-up floating coupon rate = L + 200 less 40bp swap spread (difference between 5.5% and 5.9%) + 100bp step-up = 8.5%
    2. (b) effective step-up from initial rate of 100bp (= 8.5% - 7.5%).

GENPRU 2.2.151

handbook-rule
  1. (1) Subject to (2), if a tier two instrument is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision referred to in GENPRU 2.2.147R (1) as adjusted under GENPRU 2.2.147R (2), 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.
  2. (2) If a tier two instrument:
    1. (a) 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. (b) 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 (all these terms must be interpreted in accordance with GENPRU 2.2.147 R);
  3. 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.

GENPRU 2.2.152

handbook-rule

An instrument does not breach GENPRU 2.2.147 R or as the case may be, is not subject to a deemed maturity date under GENPRU 2.2.151 R, even though it is or may be subject to a step-up that exceeds the amount specified in those rules if:

  1. (1) the instrument is fungible with other instruments (the "existing stock") that are included in the firm's tier one capital resources (in the case of GENPRU 2.2.147 R) or tier two capital resources (in the case of GENPRU 2.2.151 R);
  2. (2) (if there has been no more than one previous issue of the existing stock) the existing stock complied with those limits on its date of issue;
  3. (3) (if there has been more than one previous issue of the existing stock) the first such issue of the existing stock complied with those limits on its date of issue; and
  4. (4) the result of the step-up on the instrument to which this rule applies is that the coupon on that instrument and the coupon on the existing stock is the same.

GENPRU 2.2.153

handbook-rule
  1. (1) 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.
  2. (2) 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.

GENPRU 2.2.154

handbook-guidance
Debt instruments containing embedded options, e.g. issues containing options for the interest rate after the step-up to be at a margin over the higher of two (or more) reference rates, or for the interest rate in the previous period to act as a floor, may affect the funding costs of the borrower and imply a step-up. In such circumstances, a firm may wish to seek individual guidance on the application of the rules relating to step-ups to the capital instrument in question. See SUP 9 (Individual guidance) for the process to be followed when seeking individual guidance.

Deductions from tier one: Intangible assets

GENPRU 2.2.155

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

GENPRU 2.2.156

handbook-guidance

Intangible assets include goodwill as defined in accordance with the requirements referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) applicable to the firm. The treatment of deferred acquisition cost assets for BIPRU investment firms is dealt with in GENPRU 1.3 (Valuation); they should not be deducted as an intangible asset.

Tier two capital: General

GENPRU 2.2.157

handbook-guidance
Tier two capital resources are split into upper and lower tiers. A major distinction between upper and lower tier two capital is that, except as provided by GENPRU 2.2.26A R for BIPRU firms, only perpetual instruments may be included in upper tier two capital whereas dated instruments, such as fixed term preference shares and dated subordinated debt, may be included in lower tier two capital.

GENPRU 2.2.158

handbook-guidance
Tier two instruments are capital instruments that combine the features of debt and equity in that they are structured like debt, but exhibit some of the loss absorption and funding flexibility features of equity.

General conditions for eligibility as tier two capital instruments

GENPRU 2.2.159

handbook-rule

A capital instrument must not form part of the tier two capital resources of a
firm unless it meets 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 GENPRU 2.2.161 R) 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 GENPRU 2.2.161 R; 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);
  6. (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 GENPRU 2.2.172 R (Repayment at the option of the issuer) or GENPRU 2.2.194R (2) (Repayment of lower tier two capital at the option of the holder) and any remedy described in (4)(a) to (c) must not prejudice this requirement;
  7. (6) 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;
  8. (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;
  9. (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);
  10. (9) the debt must be unsecured and fully paid up;
  11. (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, GENPRU 2.2.271 R (Other requirements: insurers carrying on with-profits business (Insurer only));
  12. (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; and
  13. (12) the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual stating that the requirements in (1) to (7) and (insofar as it relates to whether the capital instrument is unsecured) (9) have been met.

GENPRU 2.2.160

handbook-rule
A holder of a non-deferred share of a building society must be treated as a senior unsecured creditor of that building society for the purpose of GENPRU 2.2.159 R.

General conditions for eligibility as tier two capital instruments: Additional remedies

GENPRU 2.2.161

handbook-rule

A capital instrument may be included in a firm's tier two capital resources even though the remedies available to the subordinated creditor go beyond those referred to in GENPRU 2.2.159R (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).

GENPRU 2.2.162

handbook-guidance
If damages are a remedy that cannot be excluded as referred to in GENPRU 2.2.159R (3) those damages should be subordinated in accordance with GENPRU 2.2.159R (1). Damages permitted by GENPRU 2.2.161 R should also be subordinated in accordance with GENPRU 2.2.159R (1).

General conditions for eligibility as tier two capital instruments: Alternative governing laws

GENPRU 2.2.163

handbook-rule
GENPRU 2.2.159R (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, Scotland, or Northern Ireland.

General conditions for eligibility as tier two capital instruments: Standard form documentation

GENPRU 2.2.164

handbook-guidance
The FSA is more concerned that the subordination provisions listed in GENPRU 2.2.159 R should be effective than that they should follow a particular form. The FSA does not, therefore, prescribe that the loan agreement or capital instrument should be drawn up in a standard form.

Guidance on the general conditions for eligibility as tier two capital instruments

GENPRU 2.2.165

handbook-guidance
For the purposes of GENPRU 2.2.159R (5) the debt agreement or terms of the instrument should not contain any clause which might require early repayment of the debt (e.g. cross default clauses, negative pledges and restrictive covenants). A cross default clause is a clause which says that the loan goes into default if any of the borrower's other loans go into default. It is intended to prevent one creditor being repaid before other creditors, e.g. obtaining full repayment through the courts. A negative pledge is a clause which puts the loan into default if the borrower gives any further charge over its assets. A restrictive covenant is a term of contract that directly, or indirectly, could lead to early repayment of the debt. Some covenants, e.g. relating to the provision of management information or ownership restrictions, are likely to comply with GENPRU 2.2.159R (3) as long as monetary redress is ruled out, or any payments are covered by the subordination clauses.

GENPRU 2.2.166

handbook-guidance
GENPRU 2.2.159R (3) allows a capital instrument to form part of the tier two capital resources even though the laws of the relevant jurisdiction do not allow remedies to be limited in the way described there. For example it is not possible to limit certain remedies in the case of an issue in the United States that is SEC-registered and subject to the provisions of the Trust Indenture Act.

GENPRU 2.2.167

handbook-guidance
The purpose of GENPRU 2.2.159R (7) is to ensure that all of the firm's assets are available to consumers ahead of subordinated creditors. The waiver should apply both before and during liquidation or administration.

GENPRU 2.2.168

handbook-guidance
The guidance in GENPRU 2.2.119 G (Employee may give legal opinion) also applies for the purpose of GENPRU 2.2.159R (12) and GENPRU 2.2.163 R.

Tier two capital instruments: Connected transactions

GENPRU 2.2.169

handbook-rule
An item of capital does not comply with GENPRU 2.2.159 R (General conditions for eligibility as tier two capital instruments) or GENPRU 2.2.177 R (Upper tier two capital: General) if the issue of that item of capital by the firm is connected with one or more other transactions 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.

GENPRU 2.2.170

handbook-guidance
GENPRU 2.2.66 G (Guidance on GENPRU 2.2.65 R) applies to GENPRU 2.2.169 R in the same way as it does to GENPRU 2.2.65 R (The equivalent of GENPRU 2.2.169 R in relation to tier one capital).

Amendment of tier two instruments

GENPRU 2.2.171

handbook-rule

A firm must not amend the terms of the capital or the documents referred to in GENPRU 2.2.159R (8) unless:

  1. (1) at least one Month before the amendment is due to take effect, the firm has given the FSA notice in writing of the proposed amendment and the FSA has not objected; and
  2. (2) that notice includes confirmation that the legal opinions referred to in GENPRU 2.2.159R (12) and, if applicable, GENPRU 2.2.163 R (General conditions for eligibility as tier two capital instruments: Alternative governing laws) and GENPRU 2.2.181 R (Legal opinions for upper tier two instruments), continue in full force and effect in relation to the terms of the debt and documents after any proposed amendment.

Redemption of tier two instruments

GENPRU 2.2.172

handbook-rule
A tier two instrument may be redeemable at the option of the firm, but any term of the instrument providing for the firm to have the right to exercise such an option must not provide for that right to be exercisable earlier than the fifth anniversary of the date of issue of the instrument.

GENPRU 2.2.173

handbook-rule
GENPRU 2.2.71 R to GENPRU 2.2.73 G (Tier one instruments may be redeemed by the issuer before the fifth anniversary in limited circumstances) apply to GENPRU 2.2.172 R in the same way as they do to GENPRU 2.2.70 R (The issuer should not redeem tier one capital before the fifth anniversary).

GENPRU 2.2.174

handbook-rule

In relation to a tier two instrument, a firm must notify the FSA:

  1. (1) in the case of an insurer, six Months; and
  2. (2) in the case of a BIPRU firm, one Month;
  3. before it becomes committed to the proposed repayment (unless that firm intends to repay an instrument on its final maturity date). When giving notice, the firm must provide details of its position after such repayment in order to show how it will:
  4. (3) meet its capital resources requirement; and
  5. (4) have sufficient financial resources to meet the overall financial adequacy rule.

Tier two capital: step-ups

GENPRU 2.2.175

handbook-guidance

Upper tier two capital: General

GENPRU 2.2.176

handbook-guidance

Examples of capital instruments which may be eligible to count in upper tier two capital resources include the following:

  1. (1) perpetual cumulative preference shares;
  2. (2) perpetual subordinated debt; and
  3. (3) other instruments that have the same economic characteristics as (1) or (2).

GENPRU 2.2.177

handbook-rule

A capital instrument must (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) meet the following conditions before it can be included in a firm's upper tier two capital resources:

  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 on the debt, 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 GENPRU 2.2.169 R (Connected transactions) and GENPRU 2.2.180 R (Loss absorption); and
  5. (5) the terms of the instrument are such that either the instrument or debt is not redeemable or repayable or it is repayable or redeemable only at the option of the firm.

GENPRU 2.2.178

handbook-rule

If a firm gives notice of the redemption or repayment of an upper tier two instrument, the firm must no longer include it in its upper tier two capital resources.

GENPRU 2.2.179

handbook-guidance
  1. (1) The purpose of GENPRU 2.2.177R (2) is to ensure that a firm which issues an item of capital with a coupon retains flexibility over the payments of such coupon and can preserve cash in times of financial stress. However, a firm may include, as part of the capital instrument terms, a right to make payments of a coupon mandatory if an item of capital becomes ineligible to form part of its capital resources (for example, through a change in the relevant rules) and the firm has notified the FSA that the instrument is ineligible.
  2. (2) For the purpose of GENPRU 2.2.177R (2), GENPRU 2.2.68 G (Dividend pushers) applies equally in relation to the inclusion of an instrument in upper tier two capital resources.
  3. (3) GENPRU 2.2.26A R provides an exception, in the case of a BIPRU firm, to the rule that instruments must have no fixed maturity date to be eligible for upper tier two capital resources.

Upper tier two capital: Loss absorption

GENPRU 2.2.180

handbook-rule

A capital instrument may only be included in upper tier two capital resources if a 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).

Upper tier two capital: Legal opinions

GENPRU 2.2.181

handbook-rule
A firm may not include an upper tier two instrument in its upper tier two capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.177R (3) and GENPRU 2.2.180 R (Loss absorption) are met. This rule does not apply to a perpetual cumulative preference share.

Upper tier two capital: Guidance

GENPRU 2.2.182

handbook-guidance
GENPRU 2.2.180 R is an example of the general principle in GENPRU 2.2.177R (3).

GENPRU 2.2.183

handbook-guidance
The guidance in GENPRU 2.2.117 G (There should be no liability to the extent that the firm would become insolvent, etc) also applies for the purpose of GENPRU 2.2.180 R.

GENPRU 2.2.184

handbook-guidance
The guidance in GENPRU 2.2.119 G (Employee may give legal opinion) also applies for the purpose of GENPRU 2.2.181 R.

Upper tier two capital: Revaluation reserves (BIPRU firm only)

GENPRU 2.2.185

handbook-rule
  1. (1) This rule applies to a BIPRU firm.
  2. (2) A BIPRU firm must, in relation to equities held in the available-for-sale financial assets category:
    1. (a) deduct any net losses at stage E of the calculation in the capital resources table (Deductions from tier one capital); and
    2. (b) include any net gains (after deduction of deferred tax) in revaluation reserves at stage G of the calculation in the capital resources table (Upper tier two capital).
  3. (3) A BIPRU firm must include any net gains, after deduction of deferred tax, on revaluation reserves of investment properties at stage G of the calculation in the capital resources table. A firm must include any losses on such revaluation reserves in profit and loss account and other reserves.
  4. (4) A BIPRU firm must include any net gains, after deduction of deferred tax, on revaluation reserves of land and buildings at stage G of the calculation in the capital resources table. A firm must include any losses on such revaluation reserves in profit and loss account and other reserves.
  5. (5) (2) only applies to a firm to the extent that the category of asset referred to in that paragraph exists under the accounting framework that applies to the firm as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied).
  6. (6) (3) and (4) apply to a firm whatever the accounting treatment of those items is under the accounting framework that applies to the firm as referred to in GENPRU 1.3.4 R.

GENPRU 2.2.186

handbook-guidance
Subject to GENPRU 2.2.185 R, a BIPRU firm should value its revaluation reserves in accordance with the rules in GENPRU 1.3 (Valuation).

Upper tier two capital: General/collective provisions (BIPRU firm only)

GENPRU 2.2.187

handbook-rule

A BIPRU firm which adopts the standardised approach to credit risk may include general/collective provisions in its tier two capital resources only if:

  1. (1) they are freely available to the firm;
  2. (2) their existence is disclosed in internal accounting records; and
  3. (3) their amount is determined by the management of the firm, verified by independent auditors and notified to the FSA.

GENPRU 2.2.188

handbook-rule

The value of general/collective provisions which a firm may include in its tier two capital resources as referred to in GENPRU 2.2.187 R may not exceed 1.25% of the sum of the following:

  1. (1) the sum of the market risk capital requirement and the operational risk capital requirement (if applicable), multiplied by a factor of 12.5; and
  2. (2) the sum of risk weighted assets under the standardised approach for credit risk.

GENPRU 2.2.189

handbook-rule
Where a firm is unable to determine whether collective/general provisions relate only to exposures on either the standardised approach or the IRB approach, that firm must allocate them on a basis which is reasonable and consistent.

Upper tier two capital: Surplus provisions (BIPRU firm only)

GENPRU 2.2.190

handbook-rule
A BIPRU firm calculating risk weighted exposure amounts under the IRB approach may include in its upper tier two capital resources positive amounts resulting from the calculation in BIPRU 4.3.8 R (Treatment of expected loss amounts), up to 0.6% of the risk weighted exposure amounts calculated under that approach.

GENPRU 2.2.191

handbook-rule

A BIPRU firm calculating risk weighted exposure amounts under the IRB approach may not include in its capital resources value adjustments and provisions included in the calculation in BIPRU 4.3.8 R (Treatment of expected loss amounts under the IRB approach for trading book exposures) or value adjustments and provisions for exposures that would otherwise have been eligible for inclusion in general/collective provisions other than in accordance with GENPRU 2.2.190 R.

GENPRU 2.2.192

handbook-rule
For the purpose of GENPRU 2.2.190 R and GENPRU 2.2.191 R, risk weighted exposure amounts must not include those calculated in respect of securitisation positions which have a risk weight of 1250%.

GENPRU 2.2.193

handbook-rule
If a BIPRU firm calculates risk weighted exposure amounts under the IRB approach for the purposes of BIPRU 14 (Capital requirements for settlement and counterparty risk) it must not include valuation adjustments referred to in BIPRU 14.2.18 R (1) (Treatment of expected loss amounts) in its capital resources except in accordance with that rule.

Lower tier two capital

GENPRU 2.2.194

handbook-rule

A firm may 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.

GENPRU 2.2.195

handbook-guidance
A firm may include perpetual capital instruments that do not meet the conditions in GENPRU 2.2.177 R (Eligibility conditions for upper tier two capital) in lower tier two capital resources if they meet the general conditions described in GENPRU 2.2.159 R (General conditions for eligibility as tier two capital instruments).

GENPRU 2.2.196

handbook-rule
  1. (1) For the purposes of calculating the amount of a lower tier two instrument which may be included in a firm's capital resources:
    1. (a) in the case of an instrument with a fixed maturity date, in the final five years to maturity; and
    2. (b) 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;
  2. the principal amount must be amortised on a straight line basis.
  3. (2) If a firm gives notice of the redemption or repayment of a lower tier two instrument and (1) does not apply, the firm must no longer include it in its lower tier two capital resources.

GENPRU 2.2.197

handbook-guidance
If a firm wishes to include in lower tier two capital resources an instrument with or without a fixed maturity date but where less than five years' notice of redemption or repayment has been given, it should seek individual guidance from the FSA.

The effect of swaps on debt capital

GENPRU 2.2.198

handbook-rule
GENPRU 2.2.198 R to GENPRU 2.2.201 R apply to a tier one instrument, tier two instrument or tier three instrument of a firm that is treated as a liability under the accounting framework to which it is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) (a "debt instrument").

GENPRU 2.2.199

handbook-rule
A firm must recognise for the purpose of this section any effect that changes in exchange rates or interest rates have on a debt instrument (as defined in GENPRU 2.2.198 R) under the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied).

GENPRU 2.2.200

handbook-rule

A firm must recognise, in accordance with GENPRU 2.2.201 R, the effect of a foreign currency hedge on a debt instrument (as defined in GENPRU 2.2.198 R) denominated in a foreign currency or of an interest rate hedge on a fixed rate coupon debt instrument if:

  1. (1) the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) provides for a fair value hedge accounting relationship between a liability and its related hedge;
  2. (2) such a relationship exists under that accounting framework between that debt instrument and that hedge;
  3. (3) (if the debt instrument is a tier one instrument) the firm's obligations under that hedge comply with the conditions in GENPRU 2.2.64 R to GENPRU 2.2.65 R (General conditions for eligibility as tier one capital);
  4. (4) (if the debt instrument is a tier two instrument or an upper tier three instrument) the firm's obligations under that hedge comply with the conditions in GENPRU 2.2.159 R to GENPRU 2.2.169 R (General conditions for eligibility as tier two capital instruments) as modified, in the case of an upper tier three instrument, by GENPRU 2.2.244 R (Application of tier two capital rules to tier three capital debt) except as follows:
    1. (a) GENPRU 2.2.159R (9) only applies to the extent that it requires that hedge to be unsecured; and
    2. (b) GENPRU 2.2.159R (12) (legal opinion) does not apply.

GENPRU 2.2.201

handbook-rule
A firm must recognise the effect of a hedge as referred to in GENPRU 2.2.200 R by including the net accounting fair value of the hedging instrument in the valuation of the debt instrument (as defined in GENPRU 2.2.198 R).

Deductions from tiers one and two: Qualifying holdings (bank or building society only)

GENPRU 2.2.202

handbook-rule

GENPRU 2.2.203

handbook-rule
A qualifying holding is a direct or indirect holding of a bank or building society in a non-financial undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking.

GENPRU 2.2.204

handbook-rule

For the purpose of GENPRU 2.2.203 R, a non-financial undertaking is an undertaking other than:

  1. (1) a credit institution or financial institution;
  2. (2) an undertaking whose exclusive or main activities are a direct extension of banking or concern services ancillary to banking, such as leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity; or
  3. (3) an insurer.

GENPRU 2.2.205

handbook-rule

The amount of qualifying holdings that a bank or building society must deduct in the calculation in the capital resources table is:

  1. (1) (if the firm has one or more qualifying holdings that exceeds 15% of its relevant capital resources) the sum of such excesses; and
  2. (2) to the extent not already deducted in (1), the amount by which the sum of each of that firm's qualifying holdings exceeds 60% of its relevant capital resources.

GENPRU 2.2.206

handbook-rule

The relevant capital resources of a firm mean for the purposes of this rule the sum of the amount of capital resources calculated at stages L (Total tier one capital plus tier two capital) and Q (Total tier three capital) of the calculation in the capital resources table as adjusted in accordance with the following:

  1. (1) the firm must not take into account the items referred to in any of the following:
    1. (a) GENPRU 2.2.190 R to GENPRU 2.2.193 R (surplus provisions); or
    2. (b) GENPRU 2.2.236 R (expected loss amounts and other negative amounts); or
    3. (c) GENPRU 2.2.237 R (securitisation positions);
  2. (2) the firm must make the deductions to be made at stage S of the calculation in the capital resources table (Deductions from total capital); and
  3. (3) the firm need not deduct any excess trading book position under (2).

GENPRU 2.2.207

handbook-rule

The following are not included as qualifying holdings:

  1. (1) shares that are not held as investments; or
  2. (2) shares that are held temporarily during the normal course of underwriting; or
  3. (3) shares held in a firm's name on behalf of others.

Deductions from tiers one and two: Material holdings (BIPRU firm only)

GENPRU 2.2.208

handbook-rule

GENPRU 2.2.209

handbook-rule
A material holding is:
(1) a BIPRU firm's holdings of shares and any other interest in the capital of an individual credit institution or financial institution (held in the non-trading book or the trading book or both) exceeding 10% of the share capital of the issuer, and, where this is the case, any holdings of subordinated debt of the same issuer are also included as a material holding; the full amount of the holding is a material holding; or
(2) a BIPRU firm's holdings of shares, any other interest in the capital and subordinated debt in an individual credit institution or financial institution (held in the non-trading book or the trading book or both) not deducted under (1) if the total amount of such holdings exceeds 10% of that firm's capital resources at stage N (Total tier one capital plus tier two capital after deductions) of the calculation in the capital resources table (calculated before deduction of its material holdings); only the excess amount is a material holding; or
(3) a bank or building society's aggregate holdings in the non-trading book of shares, any other interest in the capital, and subordinated debt in all credit institutions or financial institutions not deducted under (1) or (2) if the total amount of such holdings exceeds 10% of that firm's capital resources at stage N of the calculation in the capital resources table (calculated before deduction of its material holdings); only the excess amount is a material holding; or
(4) a material insurance holding.

GENPRU 2.2.210

handbook-guidance
For the purpose of the definition of a material holding, share capital includes preference shares. Share premium should be taken into account when determining the amount of share capital.

GENPRU 2.2.211

handbook-rule
When calculating the size of its material holdings a firm must only include an actual holding (that is, a long cash position). A firm must not net such holdings with a short position.

GENPRU 2.2.212

handbook-rule

A material insurance holding means the holdings of a BIPRU firm of items of the type set out in GENPRU 2.2.213 R in any:

  1. (1) insurance undertaking; or
  2. (2) insurance holding company;
that fulfils one of the following conditions:
  1. (3) it is a subsidiary undertaking of that firm; or
  2. (4) that firm holds a participation in it.

GENPRU 2.2.213

handbook-rule

An item falls into this provision for the purpose of GENPRU 2.2.212 R if it is:

  1. (1) an ownership share; or
  2. (2) subordinated debt or another item of capital that falls into Article 16(3) of the First Non-Life Directive or, as applicable, Article 27(3) of the Consolidated Life Directive.

GENPRU 2.2.214

handbook-rule

The amount to be deducted with respect to each material insurance holding is the higher of:

  1. (1) the book value of the material insurance holding; and
  2. (2) the solo capital resources requirement for the insurance undertaking or insurance holding company in question calculated in accordance with Part 3 of GENPRU 3 Annex 1 (Method 3 of the capital adequacy calculations for financial conglomerates).

GENPRU 2.2.215

handbook-rule
For the purpose of the definition of a material holding, holdings must be valued using the valuation method which the holder uses for its external financial reporting purposes.

GENPRU 2.2.216

handbook-guidance
  1. (1) This paragraph gives guidance on how the calculation under GENPRU 2.2.214R (1) should be carried out where an insurance undertaking is accounted for using the embedded value method.
  2. (2) On acquisition, any "goodwill" element (that is, the difference between the acquisition value according to the embedded value method and the actual investment) should be deducted from tier one capital resources.
  3. (3) The embedded value should be deducted from the total of tier one capital resources and tier two capital resources.
  4. (4) Post-acquisition, where the embedded value of the undertaking increases, the increase should be added to reserves, while the new embedded value is deducted from total capital resources.
  5. (5) This means that the net impact on the level of total capital resources is zero, although tier two capital resources headroom will increase with any increase in tier one capital resources reserves.
  6. (6) Embedded value is the value of the undertaking taking into account the present value of the expected future inflows from existing life assurance business.

GENPRU 2.2.216A

handbook-guidance
  1. (1) This paragraph gives guidance as to the amount to be deducted at Part 2 of stage M (Deductions from the totals of tier one and two) of GENPRU 2 Annex 2 (Capital resources table for a bank) and GENPRU 2 Annex 3 (Capital resources table for a building society) in respect of investments in subsidiary undertakings and participations (excluding any amount which is already deducted as material holdings or qualifying holdings).
  2. (2) The effect of those rules is to achieve the deduction of all investments in subsidiary undertakings and participations for banks and building societies by ensuring that amounts not already deducted under other rules are accounted for at this stage of the calculation of capital resources.
  3. (3) The following investments in subsidiary undertakings and participations should be deducted at this stage:
    1. (a) those not deducted in Part 1 of stage M because of the operation of the thresholds in GENPRU 2.2.205 R (on qualifying holdings) and GENPRU 2.2.209 R (on material holdings); and
    2. (b) those which do not meet the definition of qualifying holding or material holding.
  4. (4) For example, an investment in an undertaking which is not a qualifying holding under GENPRU 2.2.204R (2) (on the definition of a non-financial undertaking), that is whose exclusive or main activities are a direct extension of banking or concern services ancillary to banking, such as leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity, should be deducted at this stage.

Deductions from tiers one and two: Reciprocal cross holdings (BIPRU firm only)

GENPRU 2.2.217

handbook-rule

GENPRU 2.2.218

handbook-rule
A BIPRU firm must deduct at stage M of the calculation in the capital resources table (Deductions from the totals of tier one and two) any reciprocal cross-holdings. However a BIPRU firm must not deduct such holdings to the extent that they fall to be deducted at Part 1 of stage M of the calculation in the capital resources table (Deductions for material holdings, qualifying holdings and certain other items).

GENPRU 2.2.219

handbook-rule

A reciprocal cross-holding means a holding of the BIPRU firm of shares, any other interest in the capital, and subordinated debt, whether in the trading or non-trading book, in:

  1. (1) a credit institution; or
  2. (2) a financial institution;
that satisfies the following conditions:
  1. (3) the holding is the subject of an agreement or arrangement between the BIPRU firm and either the issuer of the instrument in question or a member of a group to which the issuer belongs;
  2. (4) under the terms of the agreement or arrangement described in (3) the issuer invests in the BIPRU firm or in a member of the group to which that BIPRU firm belongs; and
  3. (5) the effect of that agreement or arrangement on the capital position of the BIPRU firm, the issuer, or any member of a group to which either belongs, under any relevant rules is significantly more beneficial than it is in economic terms, taking into account the agreement or arrangement as a whole.

GENPRU 2.2.220

handbook-rule
For the purpose of GENPRU 2.2.219 R, a relevant rule means a rule in GENPRU, BIPRU or INSPRU or any other capital adequacy or solvency requirements of the FSA or any other regulator, territory or country.

Deductions from tiers one and two: Connected lending of a capital nature (bank only)

GENPRU 2.2.221

handbook-rule

GENPRU 2.2.222

handbook-rule

GENPRU 2.2.223

handbook-rule
A bank must not deduct any item as connected lending of a capital nature to the extent that it falls to be deducted at Part 1 of stage M of the calculation in the capital resources table (Deductions for material holdings, qualifying holdings and certain other items) or as a reciprocal cross-holding.

GENPRU 2.2.224

handbook-rule

For the purpose of the rules in this section about connected lending of a capital nature and in relation to a bank, a connected party means another person ("P") who fulfils at least one of the following conditions and is not solo-consolidated with the bank under BIPRU 2.1 (Solo consolidation):

  1. (1) P is closely related to the bank; or
  2. (2) P is an associate of the bank; or
  3. (3) the same persons significantly influence the governing body of P and the bank.

GENPRU 2.2.225

handbook-rule
For the purpose of GENPRU 2.2.224 R, in relation to a person ("P") to which a bank has an exposure when P is acting on his own behalf and also an exposure to P when P acts in his capacity as a trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or similar fund (a "fund") the bank may choose to treat this latter exposure as an exposure to the fund, unless such treatment would be misleading.

GENPRU 2.2.226

handbook-guidance

BIPRU 10.3.13 G (Guidance on exposures to trustees) applies to GENPRU 2.2.225 R.

GENPRU 2.2.227

handbook-rule

A loan is connected lending of a capital nature if:

  1. (1) it is made by the bank to a connected party; and
  2. (2) it falls into GENPRU 2.2.228 R.

GENPRU 2.2.228

handbook-rule

A loan falls into this rule for the purposes of GENPRU 2.2.227R (2) if, whether through contractual, structural, reputational or other factors:

  1. (1) based on the terms of the loan and the other knowledge available to the bank, the borrower would be able to consider it from the point of view of its characteristics as capital as being similar to share capital or subordinated debt; or
  2. (2) the position of the lender from the point of view of maturity and repayment is inferior to that of the senior unsecured and unsubordinated creditors of the borrower.

GENPRU 2.2.229

handbook-rule

A loan is also connected lending of a capital nature if:

  1. (1) it funds directly or indirectly a loan to a connected party of the bank falling into GENPRU 2.2.228 R or an investment in the capital of a connected party of the bank; and
  2. (2) it falls into GENPRU 2.2.228 R.

GENPRU 2.2.230

handbook-guidance

It is likely that a loan is not connected lending of a capital nature if:

  1. (1) it is secured by collateral that is eligible for the purposes of credit risk mitigation under the standardised approach to credit risk as set out in BIPRU 5.4 (Financial collateral) and BIPRU 5.5 (Other funded credit risk mitigation); or
  2. (2) it is repayable on demand (and should be treated as such for accounting purposes by the borrower and lender) and the bank can demonstrate that there are no potential obstacles to exercising the right to repay, whether contractual or otherwise.

GENPRU 2.2.231

handbook-rule

A guarantee is connected lending of a capital nature if it is a guarantee by the bank of a loan from a third party to a connected party of the bank and:

  1. (1) the loan meets the requirements of GENPRU 2.2.228 R; or
  2. (2) the rights that the bank would have against the borrower with respect to the guarantee meet the requirements of GENPRU 2.2.228R (2).

GENPRU 2.2.232

handbook-rule

A guarantee is also connected lending of a capital nature if it is a guarantee by the bank of a loan falling into GENPRU 2.2.229R (1); and

  1. (1) the loan meets the conditions in GENPRU 2.2.228 R; or
  2. (2) the guarantee meets the conditions in GENPRU 2.2.231R (2).

GENPRU 2.2.233

handbook-rule
The amount of a guarantee that constitutes connected lending of a capital nature that a firm must deduct is the amount guaranteed.

GENPRU 2.2.234

handbook-guidance
A loan may initially fall outside the definition of connected lending of a capital nature but later fall into it. For example, if the initial lending to a connected party is subsequently downstreamed to another connected party the relationship between the bank and the ultimate borrower may be such that, looking at the arrangements as a whole, the undertaking to which the bank lends is able to regard the loan to it as being capable of absorbing losses.

GENPRU 2.2.235

handbook-guidance

Lending to a connected party will not normally be connected lending of a capital nature where that party:

  1. (1) is acting as a vehicle to pass funding to an unconnected party; and
  2. (2) has no other creditors whose claims could be senior to those of the lender.

Deductions from tiers one and two: Expected losses and other negative amounts (BIPRU firm only)

GENPRU 2.2.236

handbook-rule

A BIPRU firm calculating risk weighted exposure amounts under the IRB approach must deduct:

  1. (1) any negative amounts arising from the calculation in BIPRU 4.3.8 R (Treatment of expected loss amounts); and
  2. (2) any expected loss amounts calculated in accordance with BIPRU 4.7.12 R (Expected loss amounts under the simple risk weight approach to calculating risk weighted exposure amounts for exposures belonging to the equity exposure IRB exposure class) or BIPRU 4.7.17 R (Expected loss amounts under the PD/LGD approach).

Deductions from tiers one and two: Securitisation positions (BIPRU firm only)

GENPRU 2.2.237

handbook-rule
A BIPRU firm calculating risk weighted exposure amounts under the IRB approach or the standardised approach to credit risk must deduct from its capital resources the exposure amount of securitisation positions which receive a risk weight of 1250% under BIPRU 9 (Securitisation), unless the firm includes the securitisation positions in its calculation of risk weighted exposure amounts (see BIPRU 9.10 (Reduction in risk-weighted exposure amounts)).

Deductions from tiers one and two: Special treatment of material holdings and other items (BIPRU firm only)

GENPRU 2.2.238

handbook-rule

GENPRU 2.2.238 R to GENPRU 2.2.241 R apply to a BIPRU firm and relate to the deductions in respect of:

  1. (1) material holdings;
  2. (2) expected loss amounts and other negative amounts referred to in GENPRU 2.2.236 R; and
  3. (3) securitisation positions referred to in GENPRU 2.2.237 R.

GENPRU 2.2.239

handbook-rule
  1. (1) The treatment in the capital resources table of the deductions in GENPRU 2.2.238 R only has effect for the purpose of the capital resources gearing rules.
  2. (2) In other cases (3) and (4) apply.
  3. (3) A BIPRU firm making the deductions described in GENPRU 2.2.238 R must deduct 50% of the total amount of those deductions at stage E (Deductions from tier one capital) and 50% at stage J (Deductions from tier two capital) of the calculation in the capital resources table after the application of the capital resources gearing rules.
  4. (4) To the extent that half of the total of:
    1. (a) material holdings;
    2. (b) expected loss amounts and other negative amounts; and
    3. (c) securitisation positions;
  5. exceeds the amount calculated at stage I (Total tier two capital) of that calculation, a firm must deduct that excess from the amount calculated at stage F (Total tier one capital after deductions) of the capital resources table.

GENPRU 2.2.240

handbook-guidance
The alternative calculation in GENPRU 2.2.239R (3) to (4) is only relevant to BIPRU 11 (Pillar 3 disclosures) and certain reporting requirements under SUP. However the deduction of material holdings at Part 2 of stage E of the capital resources table in the case of a BIPRU investment firm with an investment firm consolidation waiver has effect for all purposes.

Tier three capital: upper tier three capital resources (BIPRU firm only)

GENPRU 2.2.241

handbook-rule

GENPRU 2.2.242

handbook-rule

A BIPRU firm may include subordinated debt in its upper tier three capital resources only if:

  1. (1) it has an original maturity of at least two years or is subject to at least two years' notice of repayment; and
  2. (2) payment of interest or principal is permitted only if, after that payment, the firm's capital resources would be not less than its capital resources requirement.

GENPRU 2.2.243

handbook-rule

A BIPRU firm which includes subordinated debt in its tier three capital resources must notify the FSA one month in advance of all payments of either interest or principal made when the firm's capital resources are less than 120% of its capital resources requirement.

GENPRU 2.2.244

handbook-rule

The rules in the table in GENPRU 2.2.245 R apply to short term subordinated debt that a BIPRU firm includes in its tier three capital resources in the same way that they apply to a firm's tier two capital resources with the adjustments in that table.

GENPRU 2.2.245

handbook-rule
Table: Application of tier two capital rules to tier three debt
This table belongs to GENPRU 2.2.244 R

Tier three capital: lower tier three capital resources (BIPRU firm only)

GENPRU 2.2.246

handbook-rule

GENPRU 2.2.247

handbook-rule

A BIPRU firm's net interim trading book profits mean its net trading book profits adjusted as follows:

  1. (1) they are net of any foreseeable charges or dividends and less net losses on its other business; and
  2. (2) a firm must not take into account items that have already been included in the calculation of capital resources as part of the calculation of the following items:
    1. (a) interim net profits (see stage (A) of the capital resources table); or
    2. (b) interim net losses or material interim net losses (see stage (A) of the capital resources table); or
    3. (c) profit and loss and other reserves (see stage (A) of the capital resources table).

GENPRU 2.2.248

handbook-rule
Trading book profits and losses, other than those losses to which GENPRU 2.2.86R (2) (Valuation adjustment and reserves) refers, originating from valuation adjustments or reserves as referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G (Valuation adjustments or reserves) must be included in the calculation of net interim trading book profits and be added to or deducted from tier three capital resources.

GENPRU 2.2.249

handbook-rule
Trading book valuation adjustments or reserves as referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G which exceed those made under the accounting framework to which a firm is subject must be treated in accordance with GENPRU 2.2.248 R if not required to be treated under GENPRU 2.2.86R (2).

Deductions from total capital: Inadmissible assets (insurers only)

GENPRU 2.2.250

handbook-rule

GENPRU 2.2.251

handbook-rule
For the purposes of the capital resources table, an insurer which is not a pure reinsurer must deduct from total capital resources the value of any asset which is not an admissible asset as listed in GENPRU 2 Annex 7 (Admissible assets in insurance), unless the asset is held to cover property-linked liabilities or index-linked liabilities under INSPRU 3.1.57 R or INSPRU 3.1.58 R (Covering linked liabilities).

GENPRU 2.2.252

handbook-guidance
GENPRU 2.2.251 R does not apply to intangible assets which should be deducted from tier one capital resources under GENPRU 2.2.155 R (Deductions from tier one: Intangible assets).

GENPRU 2.2.253

handbook-guidance

The list of admissible assets has been drawn with the aim of excluding assets:

  1. (1) for which a sufficiently objective and verifiable basis of valuation does not exist; or
  2. (2) whose realisability cannot be relied upon with sufficient confidence; or
  3. (3) whose nature presents an unacceptable custody risk; or
  4. (4) the holding of which may give rise to significant liabilities or onerous duties.

Deductions from total capital: Adjustments for related undertakings

GENPRU 2.2.254

handbook-rule

GENPRU 2.2.255

handbook-rule
An insurer must deduct from its capital resources the value of its investments in each of its related undertakings that is an ancillary services undertaking.

GENPRU 2.2.256

handbook-rule
In relation to each of its related undertakings that is a regulated related undertaking (other than an insurance undertaking) an insurer 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 GENPRU 1.3.47 R (Shares in and debts due from related undertakings).

GENPRU 2.2.257

handbook-guidance
For the purposes of GENPRU 2.2.255 R, investments must be valued at their accounting book value in accordance with GENPRU 1.3.4 R (General requirements: accounting principles to be applied).

GENPRU 2.2.258

handbook-guidance
Related undertakings which are also insurance undertakings are not included in GENPRU 2.2.256 R because an insurer that is a participating insurance undertaking is subject to the requirements of INSPRU 6.1 (Group Risk: Insurance Groups).

Deductions from total capital: Illiquid assets (BIPRU investment firm only)

GENPRU 2.2.259

handbook-rule

GENPRU 2.2.260

handbook-rule

Illiquid assets means illiquid assets including

  1. (1) tangible fixed assets (except land and buildings if they are used by a firm as security for loans, but this exclusion is only up to the value of the principal outstanding on the loans); or
  2. (2) any holdings in the capital resources of credit institutions or financial institutions, except to the extent that:
    1. (a) they have already been deducted as a material holding; or
    2. (b) they are shares which are included in a firm's trading book and included in the calculation of the firm's market risk capital requirement; or
  3. (3) holdings of other securities which are not readily realisable securities; or
  4. (4) deficiencies of net assets in subsidiary undertakings; or
  5. (5) deposits which are not repayable within 90 days (except for payments in connection with margined futures or options contracts); or
  6. (6) loans and other amounts owed to a firm except where they are due to be repaid within 90 days; or
  7. (7) physical stocks except for positions in physical commodities which are included in the calculation of a firm's commodity PRR.

GENPRU 2.2.261

handbook-guidance
If a loan or other amount owing to a firm was originally due to be paid more than 90 days from the date of the making of the loan or the incurring of the payment obligation, as the case may be, it may be treated as liquid for the purposes of GENPRU 2.2.260R (6) where through the passage of time the remaining time to the contractual repayment date falls below 90 days.

GENPRU 2.2.262

handbook-guidance
If a loan or other amount is due to be paid within 90 days (whether measured by reference to original or remaining maturity), a firm should consider whether it can reasonably expect the amount owing to be paid within that period. If the firm cannot reasonably expect it to be paid within that period the firm should treat it as illiquid.

Deductions from total capital: Excess trading book position (bank or building society only)

GENPRU 2.2.263

handbook-rule

GENPRU 2.2.264

handbook-rule
  1. (1) The excess trading book position is the excess of:
    1. (a) a bank or building society's aggregate net long (including notional) trading book positions in shares, subordinated debt or any other interest in the capital of credit institutions or financial institutions;
    2. over;
    3. (b) 25% of that firm's capital resources calculated at stage T (Total capital after deductions) of the capital resources table (calculated before deduction of the excess trading book position).
  2. (2) Only the excess amount calculated under (1) must be deducted.

GENPRU 2.2.265

handbook-rule

The standard market risk PRR rules apply for establishing what is a net position and the amount and value of that position for the purposes of GENPRU 2.2.264 R, ignoring rules which would otherwise exclude such positions from BIPRU 7.2 (Interest rate PRR) or BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives) on the basis that they are to be deducted from a bank or building society's capital resources, or for any other reason.

Other capital resources: Unpaid share capital or initial funds and calls for supplementary contributions (Insurer only)

GENPRU 2.2.266

handbook-guidance

GENPRU 2.2.267

handbook-guidance
Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions are excluded from the capital resources of a firm except to the extent allowed in a waiver under section 148 of the Act (Modification or waiver of rules).

GENPRU 2.2.268

handbook-guidance

Subject to a waiver, under the Insurance Directives a maximum of one half of unpaid share capital or, in the case of a mutual, one half of the unpaid initial fund may be included in an insurer's capital resources, once the paid-up part amounts to 25% of that share capital or fund, up to 50% of total capital resources.

GENPRU 2.2.269

handbook-guidance

In the case of a mutual carrying on general insurance business and subject to a waiver, calls for supplementary contributions within the financial year may only be included in a firm's capital resources up to a maximum of 50% of the difference between the maximum contributions and the contributions actually called in, subject to a limit of 50% of total capital resources. In the case of a mutual carrying on long-term insurance business, the Consolidated Life Directive does not permit calls for supplementary contributions to be included in a firm's capital resources.

Other requirements: insurers carrying on with-profits business (Insurer only)

GENPRU 2.2.270

handbook-rule

GENPRU 2.2.271

handbook-rule

An insurer carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in GENPRU 2.2, meet the following conditions before a capital instrument can be included in that insurer's capital resources:

  1. (1) the insurer must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;
  2. (2) the intention to manage the with-profits fund on the basis set out in (1) must be disclosed in the firm's Principles and Practices of Financial Management; and
  3. (3) no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under Principle 6 (Customers' interests).

GENPRU 2.2.272

handbook-guidance
The purpose of GENPRU 2.2.271 R is to achieve practical subordination of capital instruments if they are to qualify as capital resources to the liabilities an insurer has to with-profits policyholders, including liabilities which arise from the regulatory duty to treat customers fairly in setting discretionary benefits. (Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly.) It is not sufficient for a capital instrument to be subordinated to such liabilities only on winding up of the firm because such liabilities to policyholders may have been reduced by the inappropriate use of management discretion to enable funds to be applied in repaying subordinated capital instruments before winding up proceedings commence.

GENPRU 2.2.273

handbook-guidance

GENPRU 2.2.271 R is an additional requirement to all other rules in this section concerning the eligibility of a capital instrument to count as a component of an insurer's capital resources. Subordinated debt instruments will be the main type of capital instrument to which this rule is relevant, including both upper tier two (undated) and lower tier two (dated) subordinated debt instruments. Subordinated debt instruments which are issued by a related undertaking are not intended to be covered by this rule and may be included in group capital resources as appropriate if the other eligibility criteria are met.

GENPRU 2.2.274

handbook-guidance
GENPRU 2.2.64R (10) and GENPRU 2.2.159R (10) contain provisions concerning the marketing of a capital instrument. In relation to a firm to which GENPRU 2.2.271 R applies, in order to comply with GENPRU 2.2.64R (10) and GENPRU 2.2.159R (10), it should draw to the attention of subscribers the risk that payments may be deferred or cancelled in order to operate the with-profits fund so as to give priority to the payment of discretionary benefits to with-profits policyholders.

GENPRU 2.2.275

handbook-guidance
  1. (1) Upper tier two instruments should meet the requirements of GENPRU 2.2.177R (3) which goes beyond the requirement in GENPRU 2.2.271R (3) since it requires a firm to have the option to defer payments in all circumstances, not just if necessary to treat customers fairly. However, for lower tier two instruments, GENPRU 2.2.271R (3) represents an additional requirement since a failure to pay amounts of interest or principal on a due date must not constitute an event of default under GENPRU 2.2.159R (2) for firms carrying on with-profits insurance business.
  2. (2) For firms which are realistic basis life firms compliance with GENPRU 2.2.271R (3) would usually be achieved if the capital instrument provides that no amounts will be payable under it unless the firm's capital resources exceed its capital resources requirement. However, such firms should ensure that the terms of the capital instrument refer to FSA capital resources requirements in force from time to time, including the current realistic reserving requirements and are not restricted to former minimum capital requirements based only on the Insurance Directives' required minimum margin of solvency. For firms which are not realistic basis life firms, compliance with GENPRU 2.2.271R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.

Public sector guarantees

GENPRU 2.2.276

handbook-rule
A BIPRU firm may not include a guarantee from a state or public authority in its capital resources.

GENPRU 2.3

Application of GENPRU 2 to Lloyd's

  • 31/12/2006

Application of GENPRU 2.1

GENPRU 2.3.1

handbook-rule
GENPRU 2.1 applies to the Society in accordance with INSPRU 8.1.2 R.

GENPRU 2.3.2

handbook-rule

GENPRU 2.3.3

handbook-guidance

GENPRU 2.1.13 R requires the Society to ensure, in relation to each member's insurance business, that capital resources equal to or in excess of the member's capital resources requirement (CRR) are maintained. GENPRU 2.1 sets out the overall framework of the CRR. INSPRU 1.1 sets out the calculation of the components of the general insurance capital requirement and the long-term insurance capital requirement.

GENPRU 2.3.4

handbook-guidance
Managing agents are required to calculate the ECR for the purposes of carrying out syndicate ICAs under INSPRU 7.1. As with-profits insurance business is not carried on through any syndicate, the calculation of the with-profits insurance capital component will not be applicable. INSPRU 1.3 is not applied to Lloyd's.

Calculation of the MCR

GENPRU 2.3.5

handbook-rule

For the purposes of GENPRU 2.1.24 R, the Society must calculate the MCR in respect of the general insurance business of each member as the higher of:

  1. (1) the member's share of the base capital resources requirement in respect of general insurance business for the members in aggregate; and
  2. (2) the general insurance capital requirement for the members, calculated according to GENPRU 2.3.11 R.

GENPRU 2.3.6

handbook-rule
For the purposes of GENPRU 2.3.5R (1), the Society must determine the member's share by apportioning the base capital resources requirement in respect of general insurance business for the members in aggregate between members in proportion to the result for each member of GENPRU 2.3.11 R.

GENPRU 2.3.7

handbook-rule

For the purposes of GENPRU 2.1.25 R, the Society must calculate the MCR in respect of the long-term insurance business of each member as the higher of:

  1. (1) the member's share of the base capital resources requirement in respect of long-term insurance business for the members in aggregate; and
  2. (2) the sum of, for each member:
    1. (a) the long-term insurance capital requirement; and
    2. (b) the resilience capital requirement.

GENPRU 2.3.8

handbook-rule
For the purposes of GENPRU 2.3.7R (1), the Society must determine the member's share by applying to the aggregate long-term business base capital resources requirement the ratio of the result for the member of GENPRU 2.3.7R (2) to the aggregate of the results of GENPRU 2.3.7R (2) for all members.

Calculation of the base capital resources requirement

GENPRU 2.3.9

handbook-rule

The amount of the base capital resources requirement for the members in aggregate is:

  1. (1) for general insurance business, €3.2 million; and
  2. (2) for long-term insurance business, €3.2 million.

Calculation of the general insurance capital requirement

GENPRU 2.3.10

handbook-rule

For the purposes of GENPRU 2.1.34 R, the Society must calculate the general insurance capital requirement for the members in aggregate as the higher of:

  1. (1) the aggregate for all members of the higher of, for each member, the result of the premiums amount and the claims amount; and
  2. (2) the brought forward amount.

GENPRU 2.3.11

handbook-rule
The Society must determine the general insurance capital requirement for each member by apportioning the result of GENPRU 2.3.10 R between members on a fair and reasonable basis, provided that the general insurance capital requirement for a member must not be less than the higher of the result of the premiums amount and the claims amount for that member.

GENPRU 2.3.12

handbook-guidance
The Society should calculate the premiums amount and the claims amount for each member on the basis of the member's own general insurance business, including insurance business that attaches to the reinsuring member for the purposes of GENPRU following an approved reinsurance to close (see INSPRU 8.2.16 R).

GENPRU 2.3.13

handbook-rule
The Society must calculate the general insurance capital requirement it would have to determine under GENPRU 2.1.34 R if it were an insurer carrying on all the general insurance business carried on by its members, but eliminating inter-syndicate reinsurance (the Society GICR).

GENPRU 2.3.14

handbook-guidance
For the purpose of GENPRU 2.3.13 R the Society may make appropriate approximations, taking reasonable care to avoid underestimating the Society GICR.

GENPRU 2.3.15

handbook-rule
The Society must determine each member's share of the Society GICR by allocating the Society GICR between the members in proportion to the result for each member of GENPRU 2.3.11 R.

Application of GENPRU 2.2

GENPRU 2.3.16

handbook-rule

Subject to GENPRU 2.3.18 R, GENPRU 2.3.19 R and GENPRU 2.3.21 R, GENPRU 2.2 applies to managing agents and to the Society in accordance with:

  1. (1) for managing agents, INSPRU 8.1.4 R; and
  2. (2) for the Society, INSPRU 8.1.2 R.

GENPRU 2.3.17

handbook-guidance

GENPRU 2.1 sets out minimum capital resources requirements for a firm and for Lloyd's members. GENPRU 2.2 sets out how, for the purpose of these requirements, capital resources are defined and measured. GENPRU 2.2 applies:

  1. (1) to managing agents for their calculation of the capital resources managed by them in respect of each syndicate they manage (by reference, where there is a change in the underlying capital provision, to each open syndicate year); and
  2. (2) to the Society for its calculation of:
    1. (a) each member's capital resources; and
    2. (b) its own capital resources.

GENPRU 2.3.18

handbook-rule
GENPRU 2.2.32 R to GENPRU 2.2.41 R (Limits on the use of different forms of capital) do not apply to managing agents.

GENPRU 2.3.19

handbook-rule

GENPRU 2.2.32 R to GENPRU 2.2.41 R (Limits on the use of different forms of capital) do apply to the Society with respect to:

  1. (1) the capital resources requirements for the members in aggregate; and
  2. (2) the aggregate capital resources supporting the insurance business of all the members.

GENPRU 2.3.20

handbook-rule
GENPRU 2.2.74 R does not apply to the Society or to managing agents.

GENPRU 2.3.21

handbook-rule

In this section (GENPRU 2.3), "the aggregate capital resources supporting the insurance business of all the members" are:

  1. (1) the aggregate of all the members' capital resources calculated under GENPRU 2.3.25 R; and
  2. (2) the Society's capital resources excluding callable contributions.

Calculation of capital resources

GENPRU 2.3.22

handbook-rule

The capital resources table applies with the modifications that:

  1. (1) Core tier one capital includes Lloyd's members' contributions in accordance with GENPRU 2.3.34 R, subject, in the case of letters of credit, guarantees and verifiable sums arising out of life assurance policies, to compliance with GENPRU 1.5.8 G to GENPRU 1.5.12 R; and
  2. (2) the Society may also recognise and value callable contributions, pursuant to GENPRU 2.3.24 R.

GENPRU 2.3.23

handbook-guidance
Lloyd's member's contributions are admissible assets under GENPRU 2.3.34 R and include letters of credit, guarantees and verifiable sums arising out of life assurance policies held as funds at Lloyd's. Assets that may be valued as part of capital resources under PRU are not necessarily, however, permitted investments for members under the terms of any Lloyd's trust deed.

GENPRU 2.3.24

handbook-rule
In calculating its capital resources, the Society may, subject to GENPRU 1.5.13 R to GENPRU 1.5.14 R, recognise and value callable contributions.

GENPRU 2.3.25

handbook-rule

The Society must calculate each member's capital resources as the sum of:

  1. (1) a member's proportionate share of the capital resources held at syndicate level for each syndicate in which the member participates; and
  2. (2) the value of a member's funds at Lloyd's after deducting liabilities in compliance with GENPRU 1.5.18 R.

GENPRU 2.3.26

handbook-rule

In order to comply with GENPRU 2.1.13 R the Society must ensure at all times that:

  1. (1) each member's capital resources requirement is covered by:
    1. (a) that member's capital resources, calculated according to GENPRU 2.3.25 R; and
    2. (b) to the extent that (a) is insufficient, by the Society's own capital resources; and
  2. (2) the Society GICR is covered by the aggregate capital resources supporting the insurance business of all the members.

GENPRU 2.3.27

handbook-rule

For the purposes of GENPRU 2.3.26R (1)(b), the Society must maintain at all times capital resources sufficient to meet the aggregate of, for each member, the amount, if any, by which the member's capital resources fall short of the member's capital resources requirement.

GENPRU 2.3.28

handbook-rule

The Society must calculate each member's share of the amount of capital resources required to comply with GENPRU 2.2.33 R as the higher of:

  1. (1) 1/3 of the long-term insurance capital requirement for the members in aggregate; and
  2. (2) the base capital resources requirement;

allocated between the members in proportion to the result for each member of GENPRU 2.3.7R (2).

GENPRU 2.3.29

handbook-rule

For the purposes of GENPRU 2.2.34 R, the Society must ensure that the aggregate capital resources supporting the insurance business of all the members meet the higher of:

  1. (1) 1/3 of the general insurance capital requirement for the members in aggregate;
  2. (2) 1/3 of the Society GICR; and
  3. (3) the base capital resources requirement;

with the sum of the items listed in GENPRU 2.2.34 R.

GENPRU 2.3.30

handbook-rule

The Society must calculate each member's share of the amount of capital resources required to comply with GENPRU 2.2.34 R as the higher of:

  1. (1) 1/3 of the general insurance capital requirement for the members in aggregate;
  2. (2) 1/3 of the Society GICR; and
  3. (3) the base capital resources requirement;

allocated between the members in proportion to the result for each member of GENPRU 2.3.11 R.

Characteristics of tier one capital

GENPRU 2.3.31

handbook-rule

A Lloyd's member's contribution may be included in tier one capital resources to the extent that:

  1. (1) the proceeds are immediately and fully available in respect of the member's insurance business at Lloyd's;
  2. (2) (except in relation to letters of credit), it complies with GENPRU 2.2.64R (3) or cannot be repaid to a member until all of the member's liabilities in respect of its insurance business at Lloyd's have been extinguished, covered or reinsured by an approved reinsurance to close;
  3. (3) it otherwise complies with GENPRU 2.2.64R (5) to GENPRU 2.2.64R (10).

Adjustments for related undertakings

GENPRU 2.3.32

handbook-rule
GENPRU 2.2.256 R (Adjustment for regulated related undertakings other than insurance undertakings) applies to the Society with the modification that the Society must also value its insurance undertakings in accordance with GENPRU 2.2.256 R.

GENPRU 2.3.33

handbook-rule

If a related undertaking is an insurance undertaking which has a deficit in the capital resources available to cover its capital resources requirement, the Society must make provision for:

  1. (1) its proportionate share of that deficit; or
  2. (2) in the case of a subsidiary undertaking, the whole of that deficit.

Modification of GENPRU 2 Annex 7R for Lloyd's

GENPRU 2.3.34

handbook-rule

In the case of members, Lloyd's members' contributions are included in GENPRU 2 Annex 7 and include:

  1. (1) letters of credit;
  2. (2) guarantees; and
  3. (3) verifiable sums arising out of life assurance policies;

held as funds at Lloyd's.

GENPRU 2.3.35

handbook-guidance
The effect of GENPRU 2.3.34 R is that Lloyd's members' contributions, including letters of credit, guarantees and life assurance policies, are admissible assets.

GENPRU 2 Annex 1

Capital resources table for an insurer

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 2

Capital resources table for a bank

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 3

Capital resources table for a building society

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 4

Capital resources table for a BIPRU investment firm deducting material holdings

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 5

Capital resources table for a BIPRU investment firm deducting illiquid assets

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 6

Capital resources table for a BIPRU investment firm with a waiver from consolidated supervision

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 7

Admissible assets in insurance

  • 31/12/2006

handbook-rule

GENPRU 2 Annex 8

Guidance on applications for waivers relating to Implicit items

  • 31/12/2006

handbook-guidance

G Implicit items under the Act

Calculation of the variable capital requirement for a BIPRU firm

Export chapter as

GENPRU 3

Cross sector groups

GENPRU 3.1

Application

  • 01/01/2007

GENPRU 3.1.1

handbook-rule
  1. (1) GENPRU 3.1 applies to every firm that is a member of a financial conglomerate other than:
    1. (a) an incoming EEA firm;
    2. (b) an incoming Treaty firm;
    3. (c) a UCITS qualifier; and
    4. (d) an ICVC.
  2. (2) GENPRU 3.1 does not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation.
  3. (3) GENPRU 3.1.25 R (Capital adequacy requirements: high level requirement), GENPRU 3.1.26 R (Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive), GENPRU 3.1.29 R (Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive) and GENPRU 3.1.35 R (Risk concentration and intra group transactions: the main rule) do not apply with respect to a third-country financial conglomerate.

Purpose

GENPRU 3.1.2

handbook-guidance

GENPRU 3.1 implements the Financial Groups Directive. However, material on the following topics is to be found elsewhere in the Handbook as follows:

  1. (1) further material on third-country financial conglomerates can be found in GENPRU 3.2;
  2. (2) SUP 15.9 contains notification rules for members of financial conglomerates;
  3. (3) material on reporting obligations can be found in SUP 16.12.32 R and SUP 16.12.33 R; and
  4. (4) material on systems and controls in financial conglomerates can be found in SYSC 12.

Introduction: identifying a financial conglomerate

GENPRU 3.1.3

handbook-guidance
  1. (1) In general the process in (2) to (8) applies for identifying financial conglomerates.
  2. (2) Competent authorities that have authorised regulated entities should try to identify any consolidation group that is a financial conglomerate. If a competent authority is of the opinion that a regulated entity authorised by that competent authority is a member of a consolidation group which may be a financial conglomerate it should communicate its view to the other competent authorities concerned.
  3. (3) A competent authority may start (as described in (2)) the process of deciding whether a group is a financial conglomerate even if it would not be the coordinator.
  4. (4) A member of a group may also start that process by notifying one of the competent authorities that have authorised group members that its group may be a financial conglomerate, for example by notification under SUP 15.9.
  5. (5) If a group member gives a notification in accordance with (4), that does not automatically mean that the group should be treated as a financial conglomerate. The process described in (6) to (9) still applies.
  6. (6) The competent authority that would be coordinator will take the lead in establishing whether a group is a financial conglomerate once the process has been started as described in (2) and (3).
  7. (7) The process of establishing whether a group is a financial conglomerate will normally involve discussions between the financial conglomerate and the competent authorities concerned.
  8. (8) A financial conglomerate should be notified by its coordinator that it has been identified as a financial conglomerate and of the appointment of the coordinator. The notification should be given to the parent undertaking at the head of the group or, in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector. That notification does not of itself make a group into a financial conglomerate; whether or not a group is a financial conglomerate is governed by the definition of financial conglomerate as set out in GENPRU 3.1.
  9. (9) GENPRU 3 Annex 3 is a questionnaire (together with its explanatory notes) that the FSA asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.

Introduction: The role of other competent authorities

GENPRU 3.1.4

handbook-guidance
A lead supervisor (called the coordinator) is appointed for each financial conglomerate. Article 10 of the Financial Groups Directive describes the criteria for deciding which competent authority is appointed as coordinator. Article 11 of the Financial Groups Directive sets out the tasks of the coordinator.

Definition of financial conglomerate: basic definition

GENPRU 3.1.5

handbook-rule
A financial conglomerate means a consolidation group that is identified as a financial conglomerate in accordance with the decision tree in GENPRU 3 Annex 4.

Definition of financial conglomerate: sub-groups

GENPRU 3.1.6

handbook-rule

A consolidation group is not prevented from being a financial conglomerate because it is part of a wider:

  1. (1) consolidation group; or
  2. (2) financial conglomerate; or
  3. (3) group of persons linked in some other way.

Definition of financial conglomerate: the financial sectors: general

GENPRU 3.1.7

handbook-rule

For the purpose of the definition of financial conglomerate, there are two financial sectors as follows:

  1. (1) the banking sector and the investment services sector, taken together; and
  2. (2) the insurance sector.

GENPRU 3.1.8

handbook-rule
  1. (1) This rule applies for the purpose of the definition of financial conglomerate and the financial conglomerate definition decision tree.
  2. (2) Any mixed financial holding company is considered to be outside the overall financial sector for the purpose of the tests set out in the boxes titled Threshold Test 1, Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree.
  3. (3) Determining whether the tests set out in the boxes titled Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree are passed is based on considering the consolidated and/or aggregated activities of the members of the consolidation group within the insurance sector and the consolidated and/or aggregated activities of the members of the consolidation group within the banking sector and the investment services sector.

Definition of financial conglomerate: adjustment of the percentages

GENPRU 3.1.9

handbook-rule

Once a financial conglomerate has become a financial conglomerate and subject to supervision in accordance with the Financial Groups Directive, the figures in the financial conglomerate definition decision tree are altered as follows:

  1. (1) the figure of 40% in the box titled Threshold Test 1 is replaced by 35%;
  2. (2) the figure of 10% in the box titled Threshold Test 2 is replaced by 8%; and
  3. (3) the figure of six billion Euro in the box titled Threshold Test 3 is replaced by five billion Euro.

GENPRU 3.1.10

handbook-rule

The alteration in GENPRU 3.1.9 R only applies to a financial conglomerate during the period that:

  1. (1) begins when the financial conglomerate would otherwise have stopped being a financial conglomerate because it does not meet one of the unaltered thresholds referred to in GENPRU 3.1.9 R; and
  2. (2) covers the three years following that date.

Definition of financial conglomerate: balance sheet totals

GENPRU 3.1.11

handbook-rule
The calculations referred to in the financial conglomerate definition decision tree regarding the balance sheet must be made on the basis of the aggregated balance sheet total of the members of the consolidation group, according to their annual accounts. For the purposes of this calculation, undertakings in which a participation is held must be taken into account as regards the amount of their balance sheet total corresponding to the aggregated proportional share held by the consolidation group. However, where consolidated accounts are available, they must be used instead of aggregated accounts.

Definition of financial conglomerate: solvency requirement

GENPRU 3.1.12

handbook-rule
The solvency and capital adequacy requirements referred to in the financial conglomerate definition decision tree must be calculated in accordance with the provisions of the relevant sectoral rules.

Definition of financial conglomerate: discretionary changes to the definition

GENPRU 3.1.13

handbook-guidance

Articles 3(3) to 3(6), Article 5(4) and Article 6(5) of the Financial Groups Directive allow competent authorities, on a case by case basis, to:

  1. (1) change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate;
  2. (2) apply the scheme in the Financial Groups Directive to EEA regulated entities in specified kinds of group structures that do not come within the definition of financial conglomerate; and
  3. (3) exclude a particular entity in the scope of capital adequacy requirements that apply with respect to a financial conglomerate.

Capital adequacy requirements: introduction

GENPRU 3.1.14

handbook-guidance
The capital adequacy provisions of GENPRU 3.1 are designed to be applied to EEA-based financial conglomerates.

GENPRU 3.1.15

handbook-guidance
GENPRU 3.1.25 R is a high level capital adequacy rule. It applies whether or not the FSA is the coordinator of the financial conglomerate concerned.

GENPRU 3.1.16

handbook-guidance
GENPRU 3.1.26 R to GENPRU 3.1.31 R and GENPRU 3 Annex 1 implement the detailed capital adequacy requirements of the Financial Groups Directive. They only deal with a financial conglomerate for which the FSA is the coordinator. If another competent authority is coordinator of a financial conglomerate, those rules do not apply with respect to that financial conglomerate and instead that coordinator will be responsible for implementing those detailed requirements.

GENPRU 3.1.17

handbook-guidance

Annex I of the Financial Groups Directive lays down four methods for calculating capital adequacy at the level of a financial conglomerate. Those four methods are implemented as follows:

  1. (1) Method 1 calculates capital adequacy using accounting consolidation. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 1 of GENPRU 3 Annex 1.
  2. (2) Method 2 calculates capital adequacy using a deduction and aggregation approach. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 2 of GENPRU 3 Annex 1.
  3. (3) Method 3 calculates capital adequacy using book values and the deduction of capital requirements. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 3 of GENPRU 3 Annex 1
  4. (4) Method 4 consists of a combination of Methods 1, 2 and 3 from Annex I of the Financial Groups Directive, or a combination of two of those Methods. It is implemented by GENPRU 3.1.26 R to GENPRU 3.1.28 R, GENPRU 3.1.30 R and Part 4 of GENPRU 3 Annex 1.

GENPRU 3.1.18

handbook-guidance

Part 4 of GENPRU 3 Annex 1 (Use of Method 4 from Annex I of the Financial Groups Directive) applies the FSA's sectoral rules with respect to the financial conglomerate as a whole, with some adjustments. Where Part 4 of GENPRU 3 Annex 1 applies the FSA's sectoral rules for:

  1. (1) the insurance sector, that involves a combination of Methods 2 and 3; and
  2. (2) the banking sector and the investment services sector, that involves a combination of Methods 1 and 3.

GENPRU 3.1.19

handbook-guidance
Paragraph 5.7 of GENPRU 3 Annex 1 (Capital adequacy calculations for financial conglomerates) deals with a case in which there are no capital ties between entities in a financial conglomerate. In particular, the FSA, after consultation with the other relevant competent authorities and in accordance with Annex I of the Financial Groups Directive, will determine which proportional share of a solvency deficit in such an entity will have to be taken into account, bearing in mind the liability to which the existing relationship gives rise.

GENPRU 3.1.20

handbook-guidance
  1. (1) In the following cases, the FSA (acting as coordinator) may choose which of the four methods for calculating capital adequacy laid down in Annex I of the Financial Groups Directive should apply:
    1. (a) where a financial conglomerate is headed by a regulated entity that has been authorised by the FSA; or
    2. (b) the only relevant competent authority for the financial conglomerate is the FSA.
  2. (2) GENPRU 3.1.28 R automatically applies Method 4 from Annex I of the Financial Groups Directive in these circumstances except in the cases set out in GENPRU 3.1.28R (1)(e) and GENPRU 3.1.28R (1)(f). The process in GENPRU 3.1.22 G does not apply.

GENPRU 3.1.21

handbook-guidance

Where GENPRU 3.1.20 G does not apply, the Annex I method to be applied is decided by the coordinator after consultation with the relevant competent authorities and the financial conglomerate itself.

GENPRU 3.1.22

handbook-guidance
The method of calculating capital adequacy chosen in respect of a financial conglomerate as described in GENPRU 3.1.21 G will be applied with respect to that financial conglomerate by varying the Part IV permission of a firm in that financial conglomerate to include a requirement. That requirement will have the effect of obliging the firm to ensure that the financial conglomerate has capital resources of the type and amount needed to comply with whichever of the methods in GENPRU 3 Annex 1 is to be applied with respect to that financial conglomerate. The powers in the Act relating to waivers and varying a firm's Part IV permission can be used to implement one of the methods from Annex I of the Financial Groups Directive in a way that is different from that set out in GENPRU 3.1 and GENPRU 3 Annex 1 if that is necessary to reflect the consultations referred to in GENPRU 3.1.21 G.

GENPRU 3.1.23

handbook-guidance
If there is more than one firm in a financial conglomerate with a Part IV permission, the FSA would not normally expect to apply the requirement described in GENPRU 3.1.22 G to all of them. Normally it will only be necessary to apply it to one.

GENPRU 3.1.24

handbook-guidance
The FSA expects that in all or most cases falling into GENPRU 3.1.21 G, the rules in Part 4 of GENPRU 3 Annex 1 will be applied.

Capital adequacy requirements: high level requirement

GENPRU 3.1.25

handbook-rule
  1. (1) A firm that is a member of a financial conglomerate must at all times have capital resources of such an amount and type that results in the capital resources of the financial conglomerate taken as a whole being adequate.
  2. (2) This rule does not apply with respect to any financial conglomerate until notification has been made that it has been identified as a financial conglomerate as contemplated by Article 4(2) of the Financial Groups Directive.

Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive

GENPRU 3.1.26

handbook-rule

If this rule applies under GENPRU 3.1.27 R to a firm with respect to a financial conglomerate of which it is a member, the firm must at all times have capital resources of an amount and type:

  1. (1) that ensure that the financial conglomerate has capital resources of an amount and type that comply with the rules applicable with respect to that financial conglomerate under Part 4 of GENPRU 3 Annex 1 (as modified by that annex); and
  2. (2) that as a result ensure that the firm complies with those rules (as so modified) with respect to that financial conglomerate.

GENPRU 3.1.27

handbook-rule

GENPRU 3.1.26 R applies to a firm with respect to a financial conglomerate of which it is a member if one of the following conditions is satisfied:

  1. (1) the condition in GENPRU 3.1.28 R is satisfied; or
  2. (2) this rule is applied to the firm with respect to that financial conglomerate as described in GENPRU 3.1.30 R.

Capital adequacy requirements: compulsory application of Method 4 from Annex I of the Financial Groups Directive

GENPRU 3.1.28

handbook-rule
  1. (1) The condition in this rule is satisfied for the purpose of GENPRU 3.1.27R (1) with respect to a firm and a financial conglomerate of which it is a member (with the result that GENPRU 3.1.26 R automatically applies to that firm) if:
    1. (a) notification has been made in accordance with regulation 2 of the Financial Groups Directive Regulations that the financial conglomerate is a financial conglomerate and that the FSA is coordinator of that financial conglomerate;
    2. (b) the financial conglomerate is not part of a wider FSA regulated EEA financial conglomerate;
    3. (c) the financial conglomerate is not an FSA regulated EEA financial conglomerate under another rule or under paragraph (b) of the definition of FSA regulated EEA financial conglomerate (application of supplementary supervision through a firm's Part IV permission);
    4. (d) one of the following conditions is satisfied:
      1. (i) the financial conglomerate is headed by a regulated entity that is a UK domestic firm; or
      2. (ii) the only relevant competent authority for that financial conglomerate is the FSA;
    5. (e) this rule is not disapplied under paragraph 5.7 of GENPRU 3 Annex 1 (No capital ties); and
    6. (f) the financial conglomerate meets the condition set out in the box titled Threshold Test 2 (10% average of balance sheet and solvency requirements) in the financial conglomerate definition decision tree.
  2. (2) Once GENPRU 3.1.26 R applies to a firm with respect to a financial conglomerate of which it is a member under GENPRU 3.1.27R (1), (1)(f) ceases to apply with respect to that financial conglomerate. Therefore the fact that the financial conglomerate subsequently ceases to meet the condition in (1)(f) does not mean that the condition in this rule is not satisfied.

Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive

GENPRU 3.1.29

handbook-rule

If with respect to a firm and a financial conglomerate of which it is a member, this rule is applied to the firm with respect to that financial conglomerate as described in GENPRU 3.1.30 R, the firm must at all times have capital resources of an amount and type that ensures that the conglomerate capital resources of that financial conglomerate at all times equal or exceed its conglomerate capital resources requirement.

Capital adequacy requirements: use of Part IV permission to apply Annex I of the Financial Groups Directive

GENPRU 3.1.30

handbook-rule

With respect to a firm and a financial conglomerate of which it is a member:

  1. (1) GENPRU 3.1.26 R (Method 4 from Annex I of the Financial Groups Directive) is applied to the firm with respect to that financial conglomerate for the purposes of GENPRU 3.1.27R (2); or
  2. (2) GENPRU 3.1.29 R (Methods 1 to 3 from Annex I of the Financial Groups Directive) is applied to the firm with respect to that financial conglomerate;

if the firm's Part IV permission contains a requirement obliging the firm to comply with GENPRU 3.1.26 R or, as the case may be, GENPRU 3.1.29 R.

GENPRU 3.1.31

handbook-rule
If GENPRU 3.1.29 R (Methods 1-3 from Annex I of the Financial Groups Directive) applies to a firm with respect to a financial conglomerate of which it is a member, the definitions of conglomerate capital resources and conglomerate capital resources requirement that apply for the purposes of that rule are the ones from whichever of Part 1, Part 2 or Part 3 of GENPRU 3 Annex 1 is specified in the requirement referred to in GENPRU 3.1.30 R.

Risk concentration and intra-group transactions: introduction

GENPRU 3.1.32

handbook-guidance
GENPRU 3.1.35 R implements Article 7(4) and Article 8(4) of the Financial Groups Directive, which provide that where a financial conglomerate is headed by a mixed financial holding company, the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate, if any, shall apply to that sector as a whole, including the mixed financial holding company.

GENPRU 3.1.33

handbook-guidance
Articles 7(3) (Risk concentration) and 8(3) (Intra-group transactions) and Annex II (Technical application of the provisions on intra-group transactions and risk concentration) of the Financial Groups Directive say that Member States may apply at the level of the financial conglomerate the provisions of the sectoral rules on risk concentrations and intra-group transactions. GENPRU 3.1 does not take up that option, although the FSA may impose such obligations on a case by case basis.

Risk concentration and intra-group transactions: application

GENPRU 3.1.34

handbook-rule

GENPRU 3.1.35 R applies to a firm with respect to a financial conglomerate of which it is a member if:

  1. (1) the condition in Articles 7(4) and 8(4) of the Financial Groups Directive is satisfied (the financial conglomerate is headed by a mixed financial holding company); and
  2. (2) that financial conglomerate is an FSA regulated EEA financial conglomerate.

Risk concentration and intra group transactions: the main rule

GENPRU 3.1.35

handbook-rule
A firm must ensure that the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate referred to in GENPRU 3.1.34 R are complied with with respect to that financial sector as a whole, including the mixed financial holding company. The FSA's sectoral rules for these purposes are those identified in the table in GENPRU 3.1.36 R.

Risk concentration and intra-group transactions: Table of applicable sectoral rules

GENPRU 3.1.36

handbook-rule
Table: application of sectoral rules
This table belongs to GENPRU 3.1.35 R

GENPRU 3.1.37

handbook-rule
  1. (1) Where the rules for the banking and investment services sector are being applied, a mixed financial holding company must be treated as being a financial holding company.
  2. (2) Where the rules for the insurance sector are being applied, a mixed financial holding company must be treated as being an insurance holding company.

GENPRU 3.1.38

handbook-rule
(1) This rule applies for the purposes of the definitions of:
(a) a core concentration risk group counterparty; and
(b) a non-core concentration risk group counterparty;
as they apply for the purposes of the rules for the banking and investment services sector as applied by GENPRU 3.1.36 R.
(2) For the purposes of BIPRU 10.9A.4 R (1) and BIPRU 10.9A.4 R (2) (as they apply to the definitions in GENPRU 3.1.38R (1)), the conditions are also satisfied if the counterparty and the firm are included within the scope of consolidated supervision on a full basis with respect to the same financial conglomerate under GENPRU 3.1 or the relevant implementation measures in another EEA State for the Financial Groups Directive.
(3) [deleted]
(4) [deleted]

The financial sectors: asset management companies

GENPRU 3.1.39

handbook-rule
  1. (1) In accordance with Article 30 of the Financial Groups Directive (Asset management companies), this rule deals with the inclusion of an asset management company that is a member of a financial conglomerate in the scope of regulation of financial conglomerates. This rule does not apply to the definition of financial conglomerate.
  2. (2) An asset management company is in the overall financial sector and is a regulated entity for the purpose of:
    1. (a) GENPRU 3.1.26 R to GENPRU 3.1.36 R;
    2. (b) GENPRU 3 Annex 1 (Capital adequacy calculations for financial conglomerates) and GENPRU 3 Annex 2 (Prudential rules for third country groups); and
    3. (c) any other provision of the Handbook relating to the supervision of financial conglomerates.
  3. (3) In the case of a financial conglomerate for which the FSA is the coordinator, all asset management companies must be allocated to one financial sector for the purposes in (2), being either the investment services sector or the insurance sector. But if that choice has not been made in accordance with (4) and notified to the FSA in accordance with (4)(d), an asset management company must be allocated to the investment services sector.
  4. (4) The choice in (3):
    1. (a) must be made by the undertaking in the financial conglomerate holding the position referred to in Article 4(2) of the Financial Groups Directive (group member to whom notice must be given that the group has been found to be a financial conglomerate);
    2. (b) applies to all asset management companies that are members of the financial conglomerate from time to time;
    3. (c) cannot be changed; and
    4. (d) must be notified to the FSA as soon as reasonably practicable after the notification in (4)(a).
  5. (5) This rule applies even if:
    1. (a) a UCITS management company is a BIPRU investment firm; or
    2. (b) an asset management company is an investment firm.

GENPRU 3.2

Third-country groups

  • 01/01/2007

Application

GENPRU 3.2.1

handbook-rule

GENPRU 3.2 applies to every firm that is a member of a third-country group. But it does not apply to:

  1. (1) an incoming EEA firm; or
  2. (2) an incoming Treaty firm; or
  3. (3) a UCITS qualifier; or
  4. (4) an ICVC.

Purpose

GENPRU 3.2.2

handbook-guidance
GENPRU 3.2 implements in part Article 18 of the Financial Groups Directive and Article 143 of the Banking Consolidation Directive.

Equivalence

GENPRU 3.2.3

handbook-guidance
The first question that must be asked about a third-country financial group is whether the EEA regulated entities in that third-country group are subject to supervision by a third-country competent authority, which is equivalent to that provided for by the Financial Groups Directive (in the case of a financial conglomerate) or the EEA prudential sectoral legislation for the banking sector or the investment services sector (in the case of a banking and investment group). Article 18(1) of the Financial Groups Directive sets out the process for establishing equivalence with respect to third-country financial conglomerates and Article143 (1) and (2) of the Banking Consolidation Directive does so with respect to third-country banking and investment groups.

Other methods: General

GENPRU 3.2.4

handbook-guidance
If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in GENPRU 3.2.3 G, competent authorities may apply other methods that ensure appropriate supervision of the EEA regulated entities in that third-country group in accordance with the aims of supplementary supervision under the Financial Groups Directive or consolidated supervision under the applicable EEA prudential sectoral legislation.

Supervision by analogy: introduction

GENPRU 3.2.5

handbook-guidance
If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in GENPRU 3.2.3 G, a competent authority may, rather than take the measures described in GENPRU 3.2.4 G, apply, by analogy, the provisions concerning supplementary supervision under the Financial Groups Directive or, as applicable, consolidated supervision under the applicable EEA prudential sectoral legislation, to the EEA regulated entities in the banking sector, investment services sector and (in the case of a financial conglomerate) insurance sector.

GENPRU 3.2.6

handbook-guidance
The FSA believes that it will only be right to adopt the option in GENPRU 3.2.5 G in response to very unusual group structures.

GENPRU 3.2.7

handbook-guidance
GENPRU 3.2.8 R and GENPRU 3.2.9 R and GENPRU 3 Annex 2 set out rules to deal with the situation covered in GENPRU 3.2.5 G. Those rules do not apply automatically. Instead, they can only be applied with respect to a particular third-country group through the Part IV permission of a firm in that third-country group. Broadly speaking the procedure described in GENPRU 3.1.22 G also applies to this process.

Supervision by analogy: rules for third-country conglomerates

GENPRU 3.2.8

handbook-rule
If the Part IV permission of a firm contains a requirement obliging it to comply with this rule with respect to a third-country financial conglomerate of which it is a member, it must comply, with respect to that third-country financial conglomerate, with the rules in Part 1 of GENPRU 3 Annex 2, as adjusted by Part 3 of that annex.

Supervision by analogy: rules for third-country banking and investment groups

GENPRU 3.2.9

handbook-rule
If the Part IV permission of a firm contains a requirement obliging it to comply with this rule with respect to a third-country banking and investment group of which it is a member, it must comply, with respect to that third-country banking and investment group, with the rules in Part 2 of GENPRU 3 Annex 2, as adjusted by Part 3 of that annex.

GENPRU 3 Annex 1

Capital adequacy calculations for financial conglomerates (GENPRU 3.1.26R and GENPRU 3.1.29R)

handbook-rule
1 Table: PART 1: Method of Annex I of the Financial Groups Directive (Accounting Consolidation Method) 2 Table: PART 2: Method 2 of Annex I of the Financial Groups Directive(Deduction and aggregation Method) 3. Table: PART 3: Method 3 of Annex I of the Financial Groups Directive(Book value/Requirement Method) 4 Table: PART 4: Method 4 of Annex I of the Financial Groups Directive (Combination of Methods 1, 2 and 3) 5 Table: Paragraph 4.2: Application of sectoral consolidation rules
6 Table 7 Table 8 Table: PART 5: Principles applicable to all methods 9 Table: PART 6: Definitions used in this Annex 10 Table 11 Table: Paragraph 6.10: Application of sectoral consolidation rules 12 Table:

GENPRU 3 Annex 2

Prudential rules for third country groups (GENPRU 3.2.8R to GENPRU 3.2.9R)

  • 01/01/2007

handbook-rule
1 Table: PART 1: Third-country financial conglomerates 2 Table: PART 2: Third-country banking and investment groups 3 Table: PART 3: Adjustment of scope

GENPRU 3 Annex 3

Guidance Notes for Classification of Groups

  • 01/01/2007

handbook-guidance
This annex consists only of one or more forms. Forms are to be found through the following address:

Classification of Groups (GENPRU 3.1.3 G) - genpru_ch3_annex3G.pdf

Purpose and scope
The form is designed to identify groups and sub-groups that are likely to be financial conglomerates under the Financial Groups Directive. A group may be a financial conglomerate if it contains both insurance and banking/investment businesses and meets certain threshold tests. The FSA needs to identify conglomerates with their head offices in the EEA and those with their head offices outside the EEA, although this does not necessarily mean that the latter will be subject to EEA conglomerate supervision.
This form's purpose is to enable the FSA to obtain sufficient information so as to be able to determine how likely a group/sub-group is to be a financial conglomerate. In certain cases this can only be determined after consultation with the other EU relevant competent authorities. A second purpose of the form is therefore to identify any groups and sub-groups that may need such consultation so that this can be made as soon as possible. This should allow firms time to prepare to comply.
The third purpose of the form is to gain information from firms on the most efficient way to implement the threshold calculations in detail (consistently with the directive). We have, therefore, asked for some additional information in part 4 of the form.
A copy of this form will can be found on the FSA's Financial Groups Website with current contact details.
Please include workings showing the method employed to determine the percentages in part 2 (for the threshold conditions) and giving details of all important assumptions / approximations made in doing the calculations.
The definition of financial conglomerate includes not only conventional groups made up of parent-subsidiary relationships but groups linked by control and "consolidation Article 12(1) relationships". If this is the case for your group, please submit along with this form a statement that this is the case. Please include in that statement an explanation of how you have included group members not linked by capital ties in the questionnaire calculations.
A consolidation Article 12(1) relationship arises between undertakings in the circumstances set out in Article 12(1) of the Seventh Company Law Directive. These are set out in the Handbook Glossary (in the definition of consolidation Article 12(1) relationship). Broadly speaking, undertakings come within this definition if they do not form a conventional group but:
(a)are managed on a unified basis; or
(b)have common management.

General guidance
We would like this to be completed based on the most senior parent in the group, and, if applicable, for the company heading the most senior conglomerate group in the EEA. If appropriate, please also attach a list of all other likely conglomerate sub-groups.
Please use the most recent accounts for the top level company in the group together with the corresponding accounts for all subsidiaries and participations that are included in the consolidated accounts. Please indicate the names of any significant subsidiaries with a different year-end from the group's year-end.
Please note the following:
(a) Branches should be included as part of the parent entity.
(b) Include in the calculations overseas entities owned by the relevant group or sub-group.
(c) There are only two sectors for this purpose: banking/investment and insurance.
(d) You will need to assign non-regulated financial entities to one of these sectors:
• banking/investment activities are listed in - Annex 1 to the Banking Consolidation Directive
• insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2p 163-168.
• Any operator of a UCITS scheme, insurance intermediary, mortgage broker and mixed financial holding company does not fall into the directive definitions of either financial sector or insurance sector and should be treated for these purposes as being outside the financial sector. They should therefore be ignored for the purposes of these calculations.

Threshold tests
For the purpose of completing section 2 of the form relating to the threshold tests, the following guidance should be used. However, if you consider that for your group there is a more appropriate calculation then you may use this calculation so long as the method of computation is submitted with the form.
Calculating balance sheet totals
Generally, use total (gross) assets for the balance sheet total of a group/entity. However, investments in other entities that are part of the group will need to be deducted from the sector that has made the investment and the balance sheet total of the entity is added to the sector in which it operates.
Our expectation of how this may be achieved efficiently is as follows:
(i) Off-balance-sheet items should be excluded.
(ii) Where off-balance sheet treatment of funds under management and on-balance sheet treatment of policy holders' funds may distort the threshold calculation, groups should consult the FSA on the appropriateness of using other measures under article 3.5 of the Financial Groups Directive.
(iii) If consolidated accounts exist for a sub-group consisting of financial entities from only one of the two sectors, these consolidated accounts should be used to measure the balance-sheet total of the sub-group (i.e. total assets less investments in entities in the other sector). If consolidated accounts do not exist, intra-group balances should be netted out when calculating the balance sheet total of a single sector (but cross-sector intra-group balances should not be netted out).(iv) Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.
(v) Where accounting standards differ between entities, groups should consult the FSA if they believe this is likely materially to affect the threshold calculation.
(vi) Where there is a subsidiary or participation in the opposite sector from its parent (i.e. insurance sector for a banking/investment firm parent and vice versa), the balance sheet amount of the subsidiary or participation should be allocated to its sector using its individual accounts.
(vii) The balance-sheet total of the parent entity/sub-group is measured as total assets of the parent/sub-group less the book value of its subsidiaries or participations in the other sector (i.e. the value of the subsidiary or participation in the parent's consolidated accounts is deducted from the parent's consolidated assets).
(viii) The cross-sector subsidiaries or participations referred to above, valued according to their own accounts, are allocated pro-rata, according to the aggregated share owned by the parent/sub-group, to their own sector.
(ix) If the cross-sector entities above themselves own group entities in the first sector (i.e. that of the top parent/sub-group) these should (in accordance with the methods above) be excluded from the second sector and added to the first sector using individual accounts.

Solvency (capital adequacy) requirements
Generally, the solvency requirements should be according to sectoral rules of the FSA that would apply to the type of entity. However, you can use EEA rules or local rules in the circumstances set out in Part 6 of GENPRU 3 Annex 1. But if this choice makes a significant difference, either with respect to whether the group is a financial conglomerate or with respect to which sector is the biggest, you should consult with the FSA. Non-regulated financial entities should have proxy requirements calculated on the basis of the most appropriate sector. If sub-groups submit single sector consolidated returns then the solvency requirement may be taken from those returns.
Our expectation of how this may be achieved efficiently is as follows:
(i) If you complete a solvency return for a sub-group consisting of financial entities from only one of the two sectors, the total solvency requirement for the sub-group should be used.
(ii) Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.
(iii) Where there is a regulated subsidiary or participation in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be from its individual regulatory return. If there is an identifiable contribution to the parent's solvency requirement in respect of the cross-sector subsidiary or participation, the parent's solvency requirement may be adjusted to exclude this.
(iv) Where there is an unregulated financial undertaking in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be one of the following:
(a) as if the entity were regulated by the FSA under the appropriate sectoral rules;
(b) using EU minimum requirements for the appropriate sector; or
(c) using non-EU local requirements* for the appropriate sector.
Please note on the form which of these options you have used, according to the country and sector, and whether this is the same treatment as in your latest overall group solvency calculation.
(v) For banking/investment requirements, use the total amount of capital required.(vi)For insurance requirements, use the total amount of capital required.

Market share measures
These are not defined by the directive. The aim is to identify any standard industry approaches to measuring market share in individual EU countries by sector, or any data sources which are commonly used as a proxy.
Article I.
Article II. Threshold tests
Test F2
B/S of banking/investment + insurance sector = result %
B/S total
Test F3/F4/F5
B/S of insurance sector
B/S of banking/investment sector + insurance sector = A%
B/S of banking/investment sector
B/S of banking/investment sector + insurance sector = B%
Solvency requirement of insurance sector
Solvency requirement of banking/investment sector +insurance sector = C%
Solvency requirement of banking/investment sector
Solvency requirement of banking/investment sector +insurance sector = D%
The relevant percentage for the insurance sector is:
(A% + C%)/2 = I %
The relevant percentage for the banking/investment sector is:
(B% + D%)/2 = BI %
The smallest sector is the sector with the smallest relevant percentage.
Article III. If I% < BI% then F3 is insurance, F4 = A%, and F5 = C%
Article IV. If BI% < I% then F3 is banking/investment, F4 = B% and F5 = D%

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