PRA Consults on Treatment of Restricted Tier 1 Own Funds Instruments
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.
Related Links
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
Featured Experts
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
MAS Amends Regulation on Clearing of Derivatives ContractsRelated Articles
PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December
PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.
SRB Sets Out Work Program for 2021-2023
SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.
EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting
EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.
US Agencies Issue Statement on LIBOR Transition
US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.
GHOS Endorses Coordinated Approach to Mitigate COVID Risks for Banks
The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.
HM Treasury Extends Consultation Dates for FRF and Solvency II Reviews
HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.
ECB Publishes Guide on Management of Climate and Environmental Risks
ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.
BCBS Amends Capital Treatment of Non-Performing Loan Securitizations
BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.
PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk
PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.
BoE to Move Statistical Data Collection to BEEDs Portal
BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.
