Prudential Regulation Authority Rulebook

4.1

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

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

4.2

The categories referred to in 4.1(1) are:

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

4.3

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

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

4.4

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

4.5

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

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

4.6

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

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

4.7

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

4.8

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

4.9

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

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

4.10

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

4.11

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

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

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

4.12

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

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

4.13

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

4.14

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

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