PRA published the policy statement PS7/20 that sets out the final policy on the PRA expectation that insurers would deduct, from their own funds, the maximum tax charge before the set-off of any prior-year losses generated on conversion of a restricted Tier 1 (rT1) capital. PS7/20 contains the updated supervisory statement SS3/15 (Appendix 2) on the quality of capital instruments. PS7/20 also provides feedback to responses to the consultation paper CP26/19 on adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion. PS7/20 takes effect on March 16, 2020.
The final policy presented in PS7/20 takes into account responses received to the consultation of proposals in CP26/19. PRA had received six responses to CP26/19. Respondents made requests for clarification on the tax opinion process, made technical observations on how the maximum tax impact was to be calculated, and suggested alternative means for PRA to achieve its policy objective. After considering the responses, PRA made minor changes to its proposals. PS7/20 also updates SS3/15, which 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 tier 1 instruments subject to limitation; and additional considerations for instruments intended to contribute to group own funds.
PS7/20 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, along with their advisers. The expectations introduced by PS7/20 only relate to firms that have ordinary share capital. That being the case, PRA is of the opinion that no mutuals will be impacted by this policy statement. The impact of the policy statement is the same for all firms that have ordinary shares, regardless of the form of their ultimate holding company.
The policy set out in PS7/20 has been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect. PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018 or EUWA.
Effective Date: March 16, 2020
Keywords: Europe, UK, Insurance, Solvency II, Own Funds, SS3/15, PS7/20, CP26/19, Restricted Tier 1, Regulatory Capital, PRA
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