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    PRA Consults on Treatment of Restricted Tier 1 Own Funds Instruments

    October 11, 2019

    PRA, in the consultation paper CP26/19, proposed to amend expectations on the treatment of restricted Tier 1 own funds (rT1) instruments in light of the recent information from the HMRC. PRA also proposed to amend the supervisory statement SS3/15 on the quality of capital instruments under Solvency II (Appendix). SS3/15 currently sets out the PRA expectation that insurers will deduct the maximum tax charge generated on write-down, when including externally issued rT1 instruments in their own funds. This consultation proposes to expand this expectation to reflect the maximum tax charge that could be generated on conversion of such items into ordinary shares. The consultation closes on January 13, 2020. The intended implementation date for the final policy following CP26/19 is the date of publication of the final policy.

    The proposals in CP26/19 are intended to maintain the existing regulatory policy of only recognizing rT1 items to the extent that they provide loss-absorbency on trigger and to prevent the amount of loss-absorbency provided by rT1 instruments that convert into ordinary shares on trigger from being overstated. PRA proposed to update SS3/15 to add an expectation that the

    • Insurers would deduct the maximum tax charge generated on conversion when they include in their own funds external rT1 capital instruments that convert to ordinary shares on trigger
    • Instrument has a conversion share offer (CSO) mechanism in its terms

    PRA proposed to introduce the expectations for all new issuances of rT1 instruments that convert on trigger and have conversion share offer features after the date of publication of the final policy. Where firms have already issued external rT1 instruments that convert to ordinary shares on trigger and have a conversion share offer mechanism, their supervisory team would discuss appropriate arrangements with each firm on a case-by-case basis. To reflect any changes to SS3/15 following this consultation, PRA would also update the reporting clarification published as Appendix 2 to the policy statement PS4/19 on adjusting for the reduction of loss-absorbency where own fund instruments are taxed on write-down. 

    CP26/19 is relevant to the UK insurance firms within the scope of Solvency II, the Society of Lloyd’s, and the firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, together with their advisers. The proposals have been designed in context of the current UK and EU regulatory framework. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with EU take effect. In the event that UK leaves EU with no implementation period in place, PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.


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    Comment Due Date: January 13, 2020

    Effective Date: Publication Date of Final Policy (Proposed)

    Keywords: Europe, UK, Insurance, Solvency II, Own Funds, Loss Absorbency, PS4/19, SS 2/15, CP26/19, Restricted Tier 1, PRA

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