Prudential Regulation Authority Rulebook

1.

For Common Equity Tier 1 instruments referred to in Article 28 of the CRR, a distribution on a Common Equity Tier 1 instrument shall be deemed to be preferential relative to other Common Equity Tier 1 instruments where there are differentiated levels of distributions, unless the conditions of Article 7a of this Part are met.

2.

For Common Equity Tier 1 instruments with fewer or no voting rights issued by institutions referred to in Article 27 of the CRR, where distribution is a multiple of the distribution on the voting instruments and that multiple distribution is set contractually or statutorily, distributions shall be deemed not to be preferential where all of the following conditions are met:

1. (a) the dividend multiple is a multiple of the distribution paid on the voting instruments and not a predetermined fixed amount;
2. (b) the dividend multiple is set contractually or under the statutes of the institution;
3. (c) the dividend multiple is not revisable;
4. (d) the same dividend multiple applies to all instruments with a dividend multiple;
5. (e) the amount of the distribution on one instrument with a dividend multiple does not represent more than 125% of the amount of the distribution on one voting Common Equity Tier 1 instrument.
6. In formulaic form this shall be expressed as:
1. l ≤ 1.25 x k
7. where:
8. k shall represent the amount of the distribution on one instrument without a dividend multiple;
9. l shall represent the amount of the distribution on one instrument with a dividend multiple;
10. (f) the total amount of the distributions paid on all Common Equity Tier 1 instruments during a one year period does not exceed 105% of the amount that would have been paid if instruments with fewer or no voting rights received the same distributions as voting instruments.
11. In formulaic form this shall be expressed as:
1. kX + lY ≤ (1.05) x k x (X + Y)
12. where:
13. k shall represent the amount of the distribution on one instrument without a dividend multiple;
14. l shall represent the amount of the distribution on one instrument with a dividend multiple;
15. X shall represent the number of voting instruments;
16. Y shall represent the number of non-voting instruments;
17. The formula shall be applied on a one-year basis.

3.

Where the condition of paragraph 2 point (f) is not met, only the amount of the instruments with a dividend multiple that exceeds the threshold defined therein shall be disqualified from Common Equity Tier 1.

4.

Where any of the conditions of points (a) to (e) of paragraph 2 are not met, all outstanding instruments with a dividend multiple shall be disqualified from Common Equity Tier 1 capital.

5.

For the purposes of paragraph 2, where the distributions of Common Equity Tier 1 instruments are expressed, for the voting or the non-voting instruments, with reference to the purchase price at issuance of the instrument, the formulas shall be adapted as follows, for the instrument or instruments that are expressed with reference to the purchase price at issuance:

1. (a) l shall represent the amount of the distribution on one instrument without a dividend multiple divided by the purchase price at issuance of that instrument;
2. (b) k shall represent the amount of the distribution on one instrument with a dividend multiple divided by the purchase price at issuance of that instrument.

6.

For Common Equity Tier 1 instruments with fewer or no voting rights issued by institutions referred to in Article 27 of the CRR, where the distribution is not a multiple of the distribution on the voting instruments, distributions shall be deemed not to be preferential where either of the conditions referred to in paragraph 7 and both conditions referred to in paragraph 8 are met.

7.

For the purposes of paragraph 6, either of the following conditions (a) or (b) shall apply:

1. (a) both of the following points (i) and (ii) are met:
1. (i) the instrument with fewer or no voting rights can only be subscribed and held by the holders of voting instruments; and
2. (ii) the number of the voting rights of any single holder is limited;
2. (b) the distributions on the voting instruments issued by the institutions are subject to a cap set out under the applicable law of the United Kingdom (or any part of it), or of a third country.

8.

For the purposes of paragraph 6 both of the following conditions shall apply:

1. (a) the institution demonstrates that the average of the distributions on voting instruments during the preceding five years, is low in relation to other comparable instruments;
2. (b) the institution demonstrates that the payout ratio is low, where a payout ratio is calculated in accordance with Article 7c. A payout ratio under 30% shall be deemed to be low.

9.

For the purposes of point (a) of paragraph 7, the voting rights of any single holder shall be deemed to be limited in the following cases:

1. (a) where each holder only receives one voting right irrespective of the number of voting instruments for any holder;
2. (b) where the number of voting rights is capped irrespective of the number of voting instruments held by any holder;
3. (c) where the number of voting instruments any holder may hold is limited under the statutes of the institution or under the applicable law of the United Kingdom (or any part of it), or of a third country.

10.

For the purposes of this Article, the one year period shall be deemed to end on the date of the last financial statements of the institution.

11.

Institutions shall assess compliance with the conditions referred to in paragraphs 7 and 8, and shall inform the PRA about the result of their assessment, at least in the following situations:

1. (a) every time a decision on the amount of distributions on Common Equity Tier 1 instruments is taken;
2. (b) every time a new class of Common Equity Tier 1 instruments with fewer or no voting rights is issued.

12.

Where the condition of point (b) of paragraph 8 is not met, only the amount of the non-voting instruments for which distributions exceed the threshold defined therein shall be deemed to entail preferential distributions.

13.

Where the condition of point (a) of paragraph 8 is not met, the distributions on all outstanding non-voting instruments shall be deemed to be preferential unless they meet the conditions of paragraph 2.

14.

Where neither of the conditions of paragraph 7 are met, the distributions on all outstanding non-voting instruments shall be deemed to be preferential unless they meet the conditions of paragraph 2.

15.

The requirement referred to in point (i) of paragraph 7(a) or point (b) of paragraph 8, or the requirements in both points, need not be met where both of the following conditions are met:

1. (a) an institution is in breach of or, due, inter alia, to a rapidly deteriorating financial condition, is likely in the near future to be in breach of any of the requirements of the CRR;
2. (b) the PRA has required the institution to urgently increase its Common Equity Tier 1 capital within a specified period and has assessed that the institution is not able to rectify or avoid the breach referred to in point (a) within that specified period, without resorting to the waiver referred to in this paragraph.

[Note: This rule corresponds to Article 7b of Part 2 of Regulation (EU) No 241/2014 as it applied immediately before revocation by the PRA.]