Prudential Regulation Authority Rulebook

3.1

A firm may only include an own funds item in its Tier 1 own funds if:

1. (1) it is an item of basic own funds; and
2. (2) it substantially possesses the characteristics set out in 3.5(1) and 3.5(2), taking into consideration the features set out in 3.6.

[Note: Art. 94(1) of the Solvency II Directive]

3.2

A firm may only include an own funds item in its Tier 2 own funds if:

1. (1) where it is an item of basic own funds, it substantially possesses the characteristics set out in 3.5(2), taking into consideration the features set out in 3.6; or
2. (2) where it is an item of ancillary own funds, it substantially possesses the characteristics set out in 3.5(1) and 3.5(2), taking into consideration the features set out in 3.6.

[Note: Art. 94(2) of the Solvency II Directive]

3.3

A firm may only include in its Tier 3 own funds an item of:

1. (1) basic own funds that does not fall within 3.1 or 3.2(1); and
2. (2) ancillary own funds that does not fall within 3.2(2).

[Note: Art. 94(3) of the Solvency II Directive]

3.4

1. (1) In classifying its own funds items, a firm must refer to the lists of own funds items set out in the Solvency II Regulations.
2. (2) A firm must not include an own funds item in its Tier 1 own funds, Tier 2 own funds or Tier 3 own funds if that own funds item is not covered by the lists referred to in (1), unless it has received the PRA’ s approval.
3. (3) When seeking approval to classify an own funds item referred to in (2) in its Tier 1 own funds, Tier 2 own funds or Tier 3 own funds, a firm must demonstrate that the own funds item satisfies the criteria laid down in 3.1 to 3.3 for that classification.

[Note: Art. 95 of the Solvency II Directive]

3.5

The characteristics referred to in 3.1(2) and 3.2 are:

1. (1) the item is available, or can be called up on demand, to fully absorb losses on a going-concern basis as well as in the case of winding up (permanent availability); and
2. (2) in the case of winding up, the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations, including insurance and reinsurance obligations to policyholders, have been met (subordination).

[Note: Art. 93(1) of the Solvency II Directive]

3.6

When assessing the extent to which own funds items possess the characteristics set out in 3.5, currently and in the future, a firm must consider:

1. (1) the duration of the item, in particular whether the item is dated or not and, where an own funds item is dated, the relative duration of the item as compared to the duration of the insurance and reinsurance obligations of the firm (sufficient duration);
2. (2) whether the item is free from requirements or incentives to redeem the nominal sum (absence of incentives to redeem);
3. (3) whether the item is free from mandatory fixed charges (absence of mandatory servicing costs); and
4. (4) whether the item is clear of encumbrances (absence of encumbrances).

[Note: Art. 93(2) of the Solvency II Directive]

3.7

1. (1) A firm must not classify as Tier 1 own funds:
1. (a) paid-in ordinary share capital and related share premium account; or
2. (b) paid-in initial fund, member’s contribution or the equivalent basic own funds for a mutual
2. unless the firm has the right to cancel and withhold dividends or other distributions in respect of those items at any time prior to payment (and exercises that right) in the circumstances specified in the Solvency II Regulations.
3. (2) A firm must not classify as Tier 2 basic own funds:
1. (a) ordinary share capital and related share premium account; or
2. (b) initial fund, member’s contribution or the equivalent basic own funds for a mutual
4. unless the firm has the right to defer dividends or other distributions in respect of those items at any time prior to payment (and exercises that right) in the circumstances specified in the Solvency II Regulations.

[Note: Art. 93 and Art. 94 of the Solvency II Directive]