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October 31, 2018

PRA published the consultation paper CP27/18, which sets out proposals to amend the supervisory statement (SS3/15) on the quality of capital instruments under Solvency II. The consultation closes on January 02, 2019. The intended implementation date for the final policy, which has been proposed in CP27/18, is February 01, 2019. The purpose of the proposal is to prevent the amount of loss-absorbency provided by restricted Tier 1 own funds (rT1) from being overstated.

SS3/15 covers the prohibition on redemption of instruments within five years of the date of issue, liability management and capital reduction, principal loss-absorbency mechanism for the restricted Tier 1 instruments, and additional considerations for instruments intended to contribute to group own funds. PRA proposed to update SS3/15 to add an expectation that insurers would deduct the maximum tax charge generated on write-down, when including external rT1 capital instruments that write down on trigger in their own funds. PRA plans to introduce this expectation for the new issuance of rT1 instruments after January 31, 2019. For firms that have already issued external rT1 instruments that write down on trigger, the supervisory team would discuss appropriate arrangements with each firm on a case-by-case basis. 

This is in the light of the proposed tax changes introduced by HM Revenue and Customs (HMRC) in the Budget on October 29, 2018 pertaining to hybrid instruments. CP27/18 specifically addresses the implications of those proposed tax changes on rT1. CP27/18 is relevant to UK insurance firms within the scope of Solvency II, the Society of Lloyd’s, and firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, along with their advisers.

 

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Comment Due Date: January 02, 2019

Effective Date: February 01, 2019

Keywords: Europe, UK, Solvency II, Loss Absorbency, rT1, CP27/18, SS3/15, PRA

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