PRU 2
PRU 2
Purpose
PRU 2.2.2
See Notes
- 31/10/2004
PRU 2.2.3
See Notes
- 31/10/2004
PRU 2.2.4
See Notes
- 31/10/2004
PRU 2.2.5
See Notes
Tier one capital typically has the following characteristics:
- (1) it is able to absorb losses;
- (2) it is permanent;
- (3) it ranks for repayment upon winding up after all other debts and liabilities; and
- (4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.
- 31/10/2004
PRU 2.2.6
See Notes
- 31/10/2004
Upper and lower tier two capital
PRU 2.2.7
See Notes
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) 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); perpetual capital instruments may be included in upper tier two capital; and
- (2) capital which is not perpetual (that is, it has a fixed term) and which may have fixed servicing costs that cannot generally be either waived or deferred, for example 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.
- 31/10/2004
PRU 2.2.8
See Notes
- 31/10/2004
PRU 2.2.10
See Notes
- 31/10/2004
PRU 2.2.11
See Notes
Liabilities | Assets | ||
Borrowings | 100 | Admissible assets | 350 |
Ordinary shares | 200 | Intangible assets | 100 |
Profit and loss account and other reserves | 100 | Other inadmissible assets | 100 |
Perpetual subordinated debt | 150 | ||
Total | 550 | Total | 550 |
Calculation of capital resources: eligible assets less foreseeable liabilities | |||
Total assets | 550 | ||
less intangible assets | (100) | ||
less inadmissible assets | (100) | ||
less liabilities (borrowings) | (100) | ||
Capital resources | 250 | ||
Calculation of capital resources: components of capital | |||
Ordinary shares | 200 | ||
Profit and loss account and other reserves | 100 | ||
Perpetual subordinated debt | 150 | ||
less intangible assets | (100) | ||
less inadmissible assets | (100) | ||
Capital resources | 250 |
- 31/10/2004
PRU 2.2.12
See Notes
- 31/10/2004
PRU 2.2.13
See Notes
- 31/10/2004
PRU 2.2.14
See Notes
Related text | Included in the calculation of capital resources | |
A √ denotes that the item is included in the calculation of a firm's capital resources: a x denotes that the item is not included in the calculation of a firm's capital resources. | ||
(A) Core tier one capital: | ||
Permanent share capital | PRU 2.2.36 R | √ |
Profit and loss account and other reserves | PRU 2.2.76 R and PRU 2.2.77 R | √ |
Share premium account | None | √ |
Externally verified interim net profits | PRU 2.2.82 R | √ |
Positive valuation differences | PRU 2.2.78 R | √ |
Fund for future appropriations | None | √ |
(B) Perpetual non-cumulative preference shares | ||
Perpetual non-cumulative preference shares | PRU 2.2.50 R | √ |
(C) Innovative tier one capital | ||
Innovative tier one instruments | PRU 2.2.52 R to PRU 2.2.75 R | √ |
(D) Total tier one capital before deductions = A + B + C | ||
(E) Deductions from tier one capital: | ||
Investments in own shares | None | √ |
Intangible assets | PRU 2.2.84 R | √ |
Amounts deducted from technical provisions for discounting and other negative valuation differences | PRU 2.2.78 R to PRU 2.2.81 R | √ |
(F) Total tier one capital after deductions = D - E | ||
(G) Upper tier two capital: | ||
Perpetual cumulative preference shares | PRU 2.2.101 R | √ |
Perpetual subordinated debt | PRU 2.2.101 R | √ |
Perpetual subordinated securities | PRU 2.2.101 R | √ |
(H) Lower tier two capital | ||
Fixed term preference shares | PRU 2.2.108 R | √ |
Fixed term subordinated debt | PRU 2.2.108 R | √ |
Fixed term subordinated securities | PRU 2.2.108 R | √ |
(I) Total tier two capital = G + H | ||
(J) Positive adjustments for related undertakings | ||
Related undertakings that are regulated related undertakings (other than insurance undertakings) | PRU 2.2.90 R | √ |
(K) Total capital after positive adjustments for regulated related undertakings that are not insurance undertakings but before deductions = F + I + J | ||
(L) Deductions from total capital | ||
Inadmissible assets | PRU 2.2.86 R & PRU 2 Annex 1R | √ |
Assets in excess of market risk and counterparty limits | PRU 3.2.22 R | √ |
Related undertakings that are ancillary services undertakings | PRU 2.2.89 R | √ |
Negative adjustments for related undertakings that are regulated related undertakings (other than insurance undertakings) | PRU 2.2.90 R | √ |
(M) Total capital after deductions = K - L | ||
(N) Other capital resources*: | ||
Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions | PRU 2.2.126 G to PRU 2.2.128 G | × |
Implicit items | PRU 2 Annex 2 G | × |
(O) Total capital resources after deductions = M + N | ||
* Items in section (N) of the table can be included in capital resources if subject to a waiver under section 148 of the Act. |
- 31/10/2004
PRU 2.2.15
See Notes
- 31/10/2004
PRU 2.2.16
See Notes
At least 50% of a firm's MCR must be accounted for by the sum of:
- (1) the amount calculated at stage A of the calculation in PRU 2.2.14 R; and
- (2) notwithstanding PRU 2.2.20 R (1), the amount calculated at stage B of the calculation in PRU 2.2.14 R;
- 31/10/2004
PRU 2.2.17
See Notes
A firm carrying on long-term insurance business must meet the higher of:
- (1) 1/3 of the long-term insurance capital requirement; and
- (2) the base capital resources requirement;
with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.18
See Notes
A firm carrying on general insurance business must meet the higher of:
- (1) 1/3 of the general insurance capital requirement; and
- (2) the base capital resources requirement;
with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.19
See Notes
- 31/10/2004
PRU 2.2.20
See Notes
In relation to a firm's tier one capital resources calculated at stage F of the calculation in PRU 2.2.14 R:
- (1) at least 50% must be accounted for by core tier one capital; and
- (2) no more than 15% may be accounted for by innovative tier one capital.
- 31/10/2004
PRU 2.2.21
See Notes
- 31/10/2004
PRU 2.2.22
See Notes
- 31/10/2004
PRU 2.2.23
See Notes
Subject to PRU 2.2.24 R, a firm must exclude from the calculation of its capital resources the following:
- (1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F of the calculation in PRU 2.2.14 R; and
- (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 PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.24
See Notes
At least 75% of a firm's MCR must be accounted for by the sum of:
- (1) the amount calculated at stage A plus stage B less stage E of the calculation in PRU 2.2.14 R; and
- (2) the amount calculated at stage G of the calculation in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.25
See Notes
- 31/10/2004
PRU 2.2.26
See Notes
- 31/10/2004
PRU 2.2.27
See Notes
A firm may not include a share in, or another investment in, or external contribution to the capital of, that firm in its tier one capital resources unless it complies with the following conditions:
- (1) it is included in one of the categories in PRU 2.2.28 R;
- (2) it is not excluded by any of the rules in PRU 2.2; and
- (3) it complies with the conditions set out in PRU 2.2.29 R.
- 31/10/2004
PRU 2.2.28
See Notes
The categories referred to in PRU 2.2.27 R (1) are:
- (1) permanent share capital;
- (2) a perpetual non-cumulative preference share; and
- (3) an innovative tier one instrument.
- 31/10/2004
PRU 2.2.29
See Notes
Subject to PRU 2.2.30 R, an item of capital in a firm complies with PRU 2.2.27 R (3) if:
- (1) it is issued by the firm;
- (2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;
- (3) it:
- (a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or
- (b) complies with the conditions in PRU 2.2.38 R and PRU 2.2.39 R;
- (4) any coupon is either non-cumulative or, if it is cumulative, it complies with PRU 2.2.40 R;
- (5) it is able to absorb losses to allow the firm to continue trading and in the case of an innovative tier one instrument it complies with PRU 2.2.56 R to PRU 2.2.58 R;
- (6) it ranks for repayment upon winding up no higher than a share of a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share);
- (7) the firm has the right to choose whether or not to pay a coupon on it in cash at any time;
- (8) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy PRU 2.2.29 R (1) to PRU 2.2.29 R (7).
- 31/10/2004
PRU 2.2.30
See Notes
- (1) An item of capital does not comply with PRU 2.2.27 R (3) 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 produce the effect described in (2).
- (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.29 R (1) to (8).
- 31/10/2004
PRU 2.2.32
See Notes
- 31/10/2004
PRU 2.2.33
See Notes
- 31/10/2004
PRU 2.2.35
See Notes
A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in PRU 2.2):
- (1) (in the case of a firm that is a company as defined in the Companies Act 1985 or the Companies (Northern Ireland) Order 1986) it is "called-up share capital" within the meaning given to that term in that Act or, as the case may be, that Order; or
- (2) (in the case of any other firm) it is:
- (a) in economic terms; and
- (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).
- 31/10/2004
PRU 2.2.36
See Notes
Permanent share capital means an item of capital which (in addition to satisfying PRU 2.2.29 R) meets the following conditions:
- (1) it is:
- (a) an ordinary share; or
- (b) a members' contribution; or
- (c) part of the initial fund of a mutual;
- (2) any coupon on it is not cumulative, and the firm has both the right to choose whether or not to pay a coupon and the right to choose the amount of that coupon ; and
- (3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the degree of an ordinary share issued by a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).
- 31/10/2004
PRU 2.2.37
See Notes
- 31/10/2004
PRU 2.2.38
See Notes
In relation to a perpetual non-cumulative preference share which is redeemable, a firm may not include it in its tier one capital resources unless its contractual terms are such that:
- (1) it is redeemable only at the option of the firm; and
- (2) the firm cannot exercise that redemption right:
- (a) on or before the fifth anniversary of its date of issue;
- (b) unless it has given notice to the FSA in accordance with PRU 2.2.72 R; and
- (c) unless at the time of exercise of that right it complies with PRU 2.1.9 R and will continue to do so after redemption.
- 31/10/2004
PRU 2.2.39
See Notes
In relation to an innovative tier one instrument which is redeemable and which, either:
- (1) is or may become subject to a step-up; or
- (2) satisfies PRU 2.2.54 R (2);
a firm may not include it in its tier one capital resources unless it complies with the conditions in PRU 2.2.38 R, except that in PRU 2.2.38 R (2)(a) "fifth anniversary" is replaced by "tenth anniversary".
- 31/10/2004
PRU 2.2.40
See Notes
- 31/10/2004
PRU 2.2.42
See Notes
The rules in PRU 2.2 about redemption of potential tier one instruments fall into three classes:
- (1) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all;
- (2) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its permanent share capital; and
- (3) rules defining whether a firm's potential tier one instruments must be classified as innovative tier one instruments.
- 31/10/2004
PRU 2.2.43
See Notes
The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.
- (1) PRU 2.2.29 R (3) and PRU 2.2.39 R have the following provisions.
- (a) Any capital instrument that is redeemable at the option of the holder cannot form part of a firm's tier one capital resources. Instead, if it is redeemable at all, a capital instrument should only be redeemable at the option of the firm.
- (b) A redemption right should be exercisable no earlier than the fifth anniversary of the date of issue. However, if an instrument is an innovative tier one instrument which is subject to a step-up or any other economic incentive to redeem, any such redemption should be exercisable no earlier than the tenth anniversary.
- (c) Any redemption proceeds should be payable only in cash or in shares.
- (d) The terms of the capital instrument should provide that any redemption right should not be exercised unless and until the firm has given the notice to the FSA required under PRU 2.2.72 R.
- (e) Any redemption right should not be exercisable unless both before and after the redemption the firm complies with PRU 2.1.9 R (which requires that a firm has sufficient capital resources to meet its capital resources requirement).
- (2) Under PRU 2.2.70 R, a firm should not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources unless the firm has:
- (a) sufficient permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet any redemption obligations that have become due; and
- (b) a prudent reserve of permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet possible future redemption obligations.
- (3) PRU 2.2.65 R contains limits on the amount of permanent share capital that may be issued on a redemption of a potential tier one instrument redeemable in permanent share capital.
- 31/10/2004
PRU 2.2.44
See Notes
- 31/10/2004
PRU 2.2.45
See Notes
The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows.
- (1) Under PRU 2.2.53 R, a redeemable potential tier one instrument is always treated as an innovative tier one instrument if the redemption proceeds are payable otherwise than in cash.
- (2) Under PRU 2.2.54 R, any feature of a tier one instrument that in conjunction with a call would make a firm more likely to redeem it or to have an incentive to do so will make it an innovative tier one instrument.
- (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption results in a potential tier one instrument being treated as an innovative tier one instrument.
- 31/10/2004
PRU 2.2.46
See Notes
- 31/10/2004
PRU 2.2.47
See Notes
The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.
- (1) Under PRU 2.2.29 R (4) and PRU 2.2.40 R, any deferred cumulative coupon should only be payable in permanent share capital. If a cumulative coupon is payable on a potential tier one instrument in another form, it should not be included in the firm's tier one capital resources.
- (2) Under PRU 2.2.29 R (7), the firm has the right not to pay a coupon in cash at any time.
- (3) PRU 2.2.63 R says that a potential tier one instrument that may be subject to a step-up that potentially exceeds defined limits should not be included in the firm's tier one capital resources. PRU 2.2.64 R says that any step-up should not arise before the tenth anniversary of the date of issue if it is to be included in the firm's tier one capital resources.
- (4) The provisions of PRU 2.2.70 R summarised in PRU 2.2.43 G (2) also apply to the payment of coupons.
- 31/10/2004
PRU 2.2.48
See Notes
- 31/10/2004
PRU 2.2.49
See Notes
The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows:
- (1) Under PRU 2.2.60 R a potential tier one instrument with a cumulative coupon is an innovative tier one instrument.
- (2) Under PRU 2.2.40 R a potential tier one instrument with a coupon that if deferred must be paid in permanent share capital is an innovative tier one instrument.
- (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption by the firm results in a potential tier one instrument being treated as an innovative tier one instrument.
- 31/10/2004
PRU 2.2.50
See Notes
A perpetual non-cumulative preference share may be included at stage B of the calculation in PRU 2.2.14 R if:
- (1) it complies with PRU 2.2.29 R, PRU 2.2.35 R and PRU 2.2.38 R;
- (2) any coupon on it is not cumulative, and the firm has the right to choose whether or not to pay a coupon in all circumstances;
- (3) it is not excluded from tier one capital resources by any of the rules in PRU 2.2; and
- (4) it is not an innovative tier one instrument.
- 31/10/2004
PRU 2.2.51
See Notes
- 31/10/2004
PRU 2.2.52
See Notes
- 31/10/2004
PRU 2.2.53
See Notes
- 31/10/2004
PRU 2.2.54
See Notes
If a tier one instrument:
- (1) is redeemable; and
- (2) is issued on terms that are (or its terms are amended and the amended terms are) such that a reasonable person would (judging at or around the time of issue or amendment) think that:
- 31/10/2004
PRU 2.2.55
See Notes
- 31/10/2004
Innovative tier one instruments: loss absorbency
PRU 2.2.56
See Notes
A capital instrument may only be included in innovative tier one capital resources if a firm's obligations under the instrument either:
- (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
- (2) do constitute such a liability but the terms of the instrument are such that:
- (a) any such liability is not relevant for the purposes of deciding whether:
- (i) the firm is, or is likely to become, unable to pay its debts; or
- (ii) its liabilities exceed its assets;
- (b) a creditor (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
- (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).
- 31/10/2004
PRU 2.2.57
See Notes
- 31/10/2004
PRU 2.2.58
See Notes
- 31/10/2004
PRU 2.2.59
See Notes
- 31/10/2004
PRU 2.2.60
See Notes
- 31/10/2004
PRU 2.2.61
See Notes
- 31/10/2004
PRU 2.2.62
See Notes
If:
- (1) a potential tier one instrument is or may become subject to a step-up; and
- (2) that potential tier one instrument is redeemable at any time (whether before, at or after the time of the step-up);
- 31/10/2004
PRU 2.2.63
See Notes
If a potential tier one instrument is or may become subject to a step-up, a firm must not include it in its tier one capital resources if the amount of the step-up exceeds or may exceed;
- (1) 100 basis points; and
- (2) 50% of the initial credit spread.
- 31/10/2004
PRU 2.2.64
See Notes
- 31/10/2004
PRU 2.2.65
See Notes
A firm must not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources if:
- (1) 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 200%; or
- (2) the issue or 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 (or, as the case may be, market price) of that original capital item.
- 31/10/2004
PRU 2.2.66
See Notes
In PRU 2.2.65 R to PRU 2.2.69 R:
- (1) the original capital item means the capital item that is being redeemed; and
- (2) the conversion instrument means the permanent share capital issued on its redemption.
- 31/10/2004
PRU 2.2.67
See Notes
In PRU 2.2.65 R to PRU 2.2.69 R, the conversion ratio means the ratio of:
- (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) one unit of the original capital item.
- 31/10/2004
PRU 2.2.68
See Notes
- 31/10/2004
PRU 2.2.70
See Notes
- (1) This rule applies to a potential tier one instrument of a firm where either:
- (a) the redemption proceeds; or
- (b) any coupon on that capital item;
- can be satisfied by the issue of another tier one instrument.
- (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 tier one instruments of the kind in question (and the authority to issue them):
- (a) that are sufficient to satisfy all such payments then due; and
- (b) are of such amount as is prudent in respect of such payments that could become due in the future.
- 31/10/2004
PRU 2.2.71
See Notes
- 31/10/2004
PRU 2.2.73
See Notes
- 31/10/2004
PRU 2.2.74
See Notes
In relation to a tier one instrument, a step-up means any change in the coupon rate on that instrument that results in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments. A step-up:
- (1) includes (in the case of a fixed rate) an increase in that coupon rate;
- (2) includes (in the case of a floating rate calculated by adding a fixed amount to a fluctuating amount) an increase in that fixed amount;
- (3) includes (in the case of a floating rate) a change in the identity of the benchmark by reference to which the fluctuating element of the coupon is calculated that results in an increase in the absolute amount of the coupon;
- (4) does not include (in the case of a floating rate) an increase in the absolute amount of the coupon caused by fluctuations in the fluctuating figure by reference to which the absolute amount of the coupon floats.
- 31/10/2004
PRU 2.2.75
See Notes
- 31/10/2004
PRU 2.2.76
See Notes
- 31/10/2004
PRU 2.2.77
See Notes
- 31/10/2004
PRU 2.2.78
See Notes
- 31/10/2004
PRU 2.2.79
See Notes
- 31/10/2004
PRU 2.2.80
See Notes
- 31/10/2004
PRU 2.2.81
See Notes
- 31/10/2004
PRU 2.2.82
See Notes
- 31/10/2004
PRU 2.2.83
See Notes
- 31/10/2004
PRU 2.2.84
See Notes
- 31/10/2004
PRU 2.2.85
See Notes
- 31/10/2004
PRU 2.2.86
See Notes
- 31/10/2004
PRU 2.2.87
See Notes
- 31/10/2004
PRU 2.2.88
See Notes
The list of admissible assets has been drawn with the aim of excluding assets:
- (1) for which a sufficiently objective and verifiable basis of valuation does not exist; or
- (2) whose realisability cannot be relied upon with sufficient confidence; or
- (3) whose nature presents an unacceptable custody risk; or
- (4) the holding of which may give rise to significant liabilities or onerous duties.
- 31/10/2004
PRU 2.2.89
See Notes
- 31/10/2004
PRU 2.2.90
See Notes
- 31/10/2004
PRU 2.2.91
See Notes
- 31/10/2004
PRU 2.2.92
See Notes
- 31/10/2004
PRU 2.2.93
See Notes
A firm carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in PRU 2.2, meet the following conditions before a capital instrument can be included in the firm's capital resources:
- (1) the firm 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) the intention to manage the with-profits fund on the basis set out in PRU 2.2.93 R (1) must be disclosed in the firm's Principles and Practices of Financial Management; and
- (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.
- 31/10/2004
PRU 2.2.94
See Notes
- 31/10/2004
PRU 2.2.95
See Notes
- 31/10/2004
PRU 2.2.96
See Notes
- 31/10/2004
PRU 2.2.97
See Notes
- (1) Upper tier two instruments must meet the requirements of PRU 2.2.101 R (3) which goes beyond the requirement in PRU 2.2.93 R (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, PRU 2.2.93 R (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 PRU 2.2.108 R (2) for firms carrying on with-profits insurance business.
- (2) For firms which are realistic basis life firms compliance with PRU 2.2.93 R (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 PRU 2.2.93 R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.
- 31/10/2004
PRU 2.2.98
See Notes
- 31/10/2004
PRU 2.2.99
See Notes
- 31/10/2004
PRU 2.2.100
See Notes
Examples of capital instruments which may be eligible to count in upper tier two capital resources include the following:
- (1) perpetual cumulative preference shares;
- (2) perpetual subordinated debt; and
- (3) other instruments that have the same economic characteristics as (1) or (2).
- 31/10/2004
PRU 2.2.101
See Notes
A capital instrument must meet the following conditions before it can be included in a firm's upper tier two capital resources:
- (1) it must meet the general conditions described in PRU 2.2.108 R;
- (2) it must have no fixed maturity date;
- (3) the contractual terms of the instrument must provide for the firm to have the option to defer any interest payment in cash on the debt; and
- (4) the contractual terms of the instrument must provide for the loss-absorption capacity of the debt and unpaid interest, whilst enabling the firm to continue its business.
- 31/10/2004
PRU 2.2.102
See Notes
- 31/10/2004
PRU 2.2.103
See Notes
A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:
- (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
- (2) do constitute such a liability but the terms of the instrument are such that:
- (a) any such liability is not relevant for the purposes of deciding whether:
- (i) the firm is, or is likely to become, unable to pay its debts; or
- (ii) its liabilities exceed its assets;
- (b) a creditor (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
- (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).
- 31/10/2004
PRU 2.2.104
See Notes
- 31/10/2004
PRU 2.2.105
See Notes
- 31/10/2004
PRU 2.2.106
See Notes
- 31/10/2004
Lower tier two capital
PRU 2.2.107
See Notes
- 31/10/2004
General conditions for eligibility as tier two capital
PRU 2.2.108
See Notes
A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:
- (1) the claims of the creditors must rank behind those of all unsubordinated creditors;
- (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;
- (3) the remedies available to the subordinated creditor in the event of non-payment or other breach of the written agreement or instrument must be limited to petitioning for the winding-up of the firm or proving for the debt and claiming in the liquidation of the firm;
- (4) any events of default and any remedy described in (3) must not prejudice the matters in (1) and (2);
- (5) in addition to the requirement about repayment in (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)
- (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;
- (7) to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;
- (8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);
- (9) the debt must be unsecured and fully paid up;
- (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9); and
- (11) the firm has obtained a properly reasoned external legal opinion stating that the requirements in (1) to (10) have been met.
- 31/10/2004
PRU 2.2.109
See Notes
- 31/10/2004
PRU 2.2.110
See Notes
- 31/10/2004
PRU 2.2.111
See Notes
- 31/10/2004
PRU 2.2.112
See Notes
- 31/10/2004
PRU 2.2.113
See Notes
- (1) An item of capital does not comply with PRU 2.2.101 R or PRU 2.2.108 R 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 produce the effect described in (2).
- (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.101 R or PRU 2.2.108 R.
- 31/10/2004
PRU 2.2.114
See Notes
- 31/10/2004
PRU 2.2.116
See Notes
A firm must not amend the terms of the debt and the documents referred to in PRU 2.2.108 R (8) unless:
- (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) that notice includes confirmation that the legal opinions referred to in PRU 2.2.108 R (11) and, if applicable, PRU 2.2.105 R and PRU 2.2.111 R, continue in full force and effect in relation to the terms of the debt and documents, notwithstanding any proposed amendment.
- 31/10/2004
PRU 2.2.117
See Notes
- 31/10/2004
PRU 2.2.118
See Notes
In relation to a tier two instrument, a step-up in a coupon rate means:
- (1) (in the case of a fixed rate) an increase in that rate;
- (2) (in any other case) any change in the way that the interest or other payment is calculated that may result in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments.
- 31/10/2004
PRU 2.2.119
See Notes
Where a tier two instrument is subject to one or more step-ups, the first date that a step-up can take effect must be treated, for the purposes of this section, as the instrument's final maturity date if its actual maturity date occurs after that, unless the effect of the step-up or step-ups is to increase the coupon rate at which payments are to be made by no more than:
- (1) 50 basis points in the first ten years of the life of the debt; or
- (2) 100 basis points over the whole life of the debt.
- 31/10/2004
PRU 2.2.120
See Notes
- 31/10/2004
PRU 2.2.121
See Notes
- 31/10/2004
PRU 2.2.122
See Notes
- 31/10/2004
PRU 2.2.123
See Notes
- 31/10/2004
PRU 2.2.124
See Notes
- 31/10/2004
PRU 2.2.125
See Notes
- 31/10/2004
PRU 2.2.126
See Notes
- 31/10/2004
PRU 2.2.128
See Notes
- 31/10/2004