Prudential Regulation Authority Rulebook

1.1

Unless otherwise stated, this Part applies to every firm that is a CRR firm.

1.2

In this Part the following definitions shall apply:

Small specialist bank

a bank that has capital resources equal to or in excess of the base capital resources requirement for a small specialist bank in 12.1 but less than the base capital resources requirement of a bank and that carries out one or more of the following activities:

1. (1) provides current and savings accounts;
2. (2) lending to small and medium-sized enterprises;
3. (3) lending secured by mortgages on residential property.

1.3

Unless otherwise defined, any italicised expression used in this Part and in the CRR has the same meaning as in the CRR.

2.1

For the purposes of calculating own funds on an individual basis and a sub-consolidated basis, firms subject to supervision on a consolidated basis must deduct at least the relevant percentage of holdings of own funds instruments issued by financial sector entities included in the scope of consolidated supervision in accordance with Part Two of the CRR, except where the exception in 2.3 or 2.7 applies.

2.2

For the purposes of 2.1 the relevant percentage is as follows:

1. (1) 50% for the period from 1 January 2014 to 31 December 2014;
2. (2) 60% for the period from 1 January 2015 to 31 December 2015;
3. (3) 70% for the period from 1 January 2016 to 31 December 2016;
4. (4) 80% for the period from 1 January 2017 to 31 December 2017;
5. (5) 90% for the period from 1 January 2018 to 31 December 2018; and
6. (6) 100% for the period after 31 December 2018.

2.3

A firm must not apply the deduction in 2.1 to its holdings of own funds instruments issued by a venture capital investor that is included in the scope of consolidated supervision of the firm.

2.4

For the purposes of this Chapter, a venture capital investor is a financial institution, in relation to which:

1. (1) the sole purpose is to make venture capital investments and carry out unregulated activities in relation to the administration of venture capital investments; and
2. (2) none of its venture capital investments is in a credit institution or a financial institution, the principal activity of which is to perform any activity other than the acquisition of holdings in other undertakings (within the meaning of section 1161(1) of the Companies Act 2006).

2.5

For the purposes of this Chapter, a venture capital investment is a designated investment which, at the time the investment is made, is:

1. (1) in a new or developing company or venture; or
2. (2) in a management buy-out or buy-in; or
3. (3) made as a means of financing the investee company or venture and accompanied by a right of consultation, or rights to information, or board representation, or management rights; or
4. (4) acquired with a view to, or in order to, facilitate a transaction falling within (1) to (3).

2.6

For the purposes of this Chapter, a designated investment is a security or contractually-based investment specified in Articles 76 to 85 and 89 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

2.7

A firm must not apply the deduction in 2.1 to that percentage of its holdings of own funds instruments issued by a venture capital holding company included in the scope of consolidated supervision of the firm that represents the value of the venture capital holding company’s investment in venture capital investors.

2.8

For the purposes of this Chapter, a venture capital holding company is a financial institution, in respect of which:

1. (1) it is a financial institution solely by reason of its principal activity being the acquiring of holdings;
2. (2) it holds shares (in the meaning of section 76 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001) in a venture capital investor; and
3. (3) the proportion of the value of the venture capital holding company attributable to investment in Venture Capital Investors and the proportion of the value of the venture capital holding company attributable to other investments can be identified and valued on a regular basis.

3.1

In respect of the qualifying holdings described in Article 89(1) and (2) of the CRR, a firm must, in accordance with Article 89(3), comply with the requirement in Article 89(3)(a).

[Note: Art 89(3) of the CRR]

4.1

This Chapter applies to every firm that is a UK bank.

4.2

A firm must not avoid the requirements of the CRR by structuring its investments as connected funding of a capital nature.

4.3

A firm must treat all connected funding of a capital nature as a holding of capital of the connected party and apply to it the treatment under the CRR and the PRA Rulebook applicable to such a holding, including any reporting or disclosure requirements in respect of such holding.

4.4

If the connected party is a financial sector entity, the firm must treat the connected funding of a capital nature as a holding of Common Equity Tier 1 instruments, Additional Tier 1 instruments or Tier 2 instruments of the connected party, as appropriate in light of the funding’s characteristics when compared to the characteristics of each type of own funds instruments.

4.5

A firm must report to the PRA all connected funding of a capital nature at least 30 days in advance of entry into the relevant funding transaction and identify each relevant transaction with sufficient detail to allow the PRA to evaluate it.

4.6

A loan or other funding transaction is connected funding of a capital nature if it is made by the firm to a connected party and:

1. (1) based on its terms and other factors of which the firm is aware, the connected party would be able to consider it from the point of view of its characteristics as capital as being similar to an own funds instrument; or
2. (2) the position of the firm from the point of view of maturity and repayment is inferior to that of the senior unsecured and unsubordinated creditors of the connected party.

4.7

A loan or other funding transaction is connected funding of a capital nature if it:

1. (1) funds directly or indirectly a loan to a connected party that has the characteristics described in 4.6 or of a capital investment in a connected party; or
2. (2) has itself the characteristics described in 4.6.

4.8

A guarantee is connected funding of a capital nature if it is a guarantee by the firm of a loan or other funding transaction from a third party to a connected party of the firm and:

1. (1) the loan or other funding transaction has the characteristics described in 4.6 or the characteristics described in 4.7; or
2. (2) the rights that the firm would have against the connected party have the characteristics described in 4.6(2).

4.9

For the purposes of this Chapter and in relation to a firm, a connected party means another person (“P”) in respect of whom the firm has not been permitted to apply the individual consolidation method under Article 9 of the CRR and one of the following applies:

1. (1) P is closely related to the firm;
2. (2) P is an associate of the firm; or
3. (3) the same persons significantly influence the management body of P and the firm.

4.10

For the purposes of 4.9(1), a firm and another person are closely related when:

4.11

For the purposes of 4.9(2), a person is an associate of a firm if it is:

1. (1) in the same group as the firm;
2. (2) an appointed representative (in the sense of section 39 of FSMA) or tied agent (as described in Article 4(1)(25) of MiFID) of the firm or a member of the firm’s group; or
3. (3) any other person whose relationship with the firm or a member of the firm’s group might reasonably be expected to give rise to a community of interest between them which may involve a conflict of interest in dealings with third parties.

5.1

In determining whether an item of capital qualifies as a Common Equity Tier 1 item, an Additional Tier 1 item or a Tier 2 item a firm must take into account any connected transaction which, when taken together with the item of capital, would cause it not to display the characteristics of a Common Equity Tier 1 item, an Additional Tier 1 item or a Tier 2 item.

5.2

A firm must report to the PRA all connected transactions described in 5.1 at least 30 days in advance of entry into the relevant transaction and identify each relevant transaction with sufficient detail to allow the PRA to evaluate it.

6.1

6.2

7.1

A firm must notify the PRA in writing of its intention, or the intention of another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm, to issue a capital instrument that it considers will qualify under the CRR as an own funds instrument, including a situation where the issuer intends to issue the instrument pursuant to a note issuance programme (NIP). This rule does not apply in the situation described in 7.5 below.

7.2

A firm must give the notice required by 7.1 at least one month before the intended date of issuance unless there are exceptional circumstances which make it impracticable to give such a period of notice, in which event the firm must give as much notice as is reasonably practicable in those circumstances.

7.3

When giving notice under 7.1, the firm must:

1. (1) complete and submit the form referred to in 7.9(1) (Pre-Issuance Notification (PIN) Form);
2. (2) provide a copy of the draft terms and conditions of the capital instrument;
3. (3) subject to 7.4, provide a properly reasoned independent draft legal opinion from an appropriately qualified individual confirming that the capital instrument meets the conditions for qualification as the relevant type of own funds instrument; and
4. (4) where it considers that the capital instrument in 7.1 will qualify as an Additional Tier 1 instrument, provide a properly reasoned draft opinion by its auditors as to that capital instrument’s treatment under the applicable accounting framework.

7.4

Where a firm considers that the capital instrument notified in accordance with 7.1 will qualify as a Common Equity Tier 1 instrument, the rule in 7.3(3) does not apply. In this case, a firm must instead complete and submit the form referred to in 7.9(2) (CET1 Compliance Template).

7.5

Where:

1. (1) a firm has, within the 12 months prior to submission of a notified issuance, previously issued an own funds instrument and has complied with 7.1 in respect of that previous issuance;
2. (2) that firm intends the notified issuance in (1) to be in the same tier of capital as those previously issued own funds instruments and to be issued on identical terms to them, excluding (i) the issue date, (ii) the maturity date, (iii) the amount of the issuance, (iv) the currency of the issuance, or (v) the rate of interest payable by the issuer; and
3. (3) the notified issuance in (1) is designed so that it will constitute a compliant own funds instrument, as evidenced either by the legal opinion referred to in 7.3(3) or, in the case of a Common Equity Tier 1 instrument, by the form referred to in 7.9(2) (CET1 Compliance Template);

that firm must notify the PRA in writing, no later than the date of issue, of its intention or the intention of another member of its group that is not a firm but is included in the supervision on a consolidated basis to issue a capital instrument.

7.6

The rule in 7.5 applies whether or not the notified issuance is pursuant to a NIP.

7.7

The firm shall notify the PRA in writing of any change to the intended date of issue,, type of investors, type of own funds instrument or any other feature of the capital instrument to that previously notified to the PRA under 7.1.

7.8

A firm shall provide the PRA with a copy of the final terms and conditions as referred to in 7.3(2), a copy of the final legal opinion referred to in 7.3(3) and, if applicable, a copy of the final accounting opinion referred to in 7.3(4) without delay after the capital instrument is issued.

7.9

1. (1) The Pre-Issuance Notification (PIN) Form can be found here:
   http://www.bankofengland.co.uk/pra/Documents/supervision/activities/pincrrfirms.pdf
2. (2) The CET1 Compliance Template can be found here:
   http://www.bankofengland.co.uk/pra/Documents/supervision/activities/cet1template.pdf

8.1

A firm shall notify the PRA in writing of its intention, or the intention of another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm, to amend or otherwise vary the terms of any own funds instrument included in its own funds or the own funds of its consolidated group at least thirty days before the intended date of such amendment or other variation.

9.1

A firm shall notify the PRA of its intention, or the intention of another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm, to carry out in respect of an own funds instrument any of the actions described in Article 77 of the CRR.

10.1

This Chapter applies to every firm that is a building society.

10.2

A firm must ensure that any Additional Tier 1 instrument or Tier 2 instrument issued by it is contractually subordinated to its non-deferred shares.

11.1

The Common Equity Tier 1 capital ratio which firms must under Article 465(1)(a) of the CRR meet or exceed for the period from 1 January 2014 until 31 December 2014 shall be 4.0%.

[Note: Art 465(1)(a) of the CRR]

11.2

The Tier 1 capital ratio which firms must under Article 465(1)(b) of the CRR meet or exceed for the period from 1 January 2014 until 31 December 2014 shall be 5.5%.

[Note: Art 465(1)(b) of the CRR]

11.3

The applicable percentage for the purposes of Article 467(1) of the CRR shall be:

1. (1) 100% during the period from 1 January 2014 to 31 December 2014;
2. (2) 100% during the period from 1 January 2015 to 31 December 2015;
3. (3) 100% during the period from 1 January 2016 to 31 December 2016; and
4. (4) 100% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 467 of the CRR]

11.4

The applicable percentage for the purposes of Article 468(1) of the CRR shall be:

1. (1) 0% during the period from 1 January 2015 to 31 December 2015;
2. (2) 0% during the period from 1 January 2016 to 31 December 2016; and
3. (3) 0% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 468(1)-(3) of the CRR]

11.5

The applicable percentage for the purposes of Article 468(4) of the CRR shall be:

1. (1) 100% for the period from 1 January 2014 to 31 December 2014;
2. (2) 100% for the period from 1 January 2015 to 31 December 2015;
3. (3) 100% for the period from 1 January 2016 to 31 December 2016; and
4. (4) 100% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 468(4), 478(1) of the CRR]

11.6

The applicable percentage for the purposes of Article 469(1)(a) of the CRR as it applies to the items referred to in points (a)-(b) and (d)-(h) of Article 36(1) shall be:

1. (1) 100% during the period from 1 January 2014 to 31 December 2014;
2. (2) 100% during the period from 1 January 2015 to 31 December 2015;
3. (3) 100% during the period from 1 January 2016 to 31 December 2016; and
4. (4) 100% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 469(1)(a), 478(1) of the CRR]

11.7

The applicable percentage for the purposes of Article 469(1)(c) of the CRR as it applies to the items referred to in point (c) of Article 36(1) that existed prior to 1 January 2014 shall be:

1. (1) 100% for the period from 1 January 2014 to 31 December 2014;
2. (2) 100% for the period from 1 January 2015 to 31 December 2015;
3. (3) 100% for the period from 1 January 2016 to 31 December 2016;
4. (4) 100% for the period from 1 January 2017 to 31 December 2017;
5. (5) 100% for the period from 1 January 2018 to 31 December 2018;
6. (6) 100% for the period from 1 January 2019 to 31 December 2019;
7. (7) 100% for the period from 1 January 2020 to 31 December 2020;
8. (8) 100% for the period from 1 January 2021 to 31 December 2021;
9. (9) 100% for the period from 1 January 2022 to 31 December 2022; and
10. (10) 100% for the period from 1 January 2023 to 31 December 2023.

[Note: Art 469(1)(c), 478(2) of the CRR]

11.8

The applicable percentage for the purposes of Article 469(1)(c) of the CRR as it applies to the items referred to in point (c) of Article 36(1) that did not exist prior to 1 January 2014 and the items referred to in point (i) of Article 36(1) shall be:

1. (1) 100% during the period from 1 January 2014 to 31 December 2014;
2. (2) 100% during the period from 1 January 2015 to 31 December 2015;
3. (3) 100% during the period from 1 January 2016 to 31 December 2016; and
4. (4) 100% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 469(1)(c), 478(1) of the CRR]

11.9

The applicable percentage for the purposes of Article 474(a) of the CRR shall be:

1. (1) 20% during the period from 1 January 2014 to 31 December 2014;
2. (2) 40% during the period from 1 January 2015 to 31 December 2015;
3. (3) 60% during the period from 1 January 2016 to 31 December 2016; and
4. (4) 80% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 474(a), 478(1) of the CRR]

11.10

The applicable percentage for the purposes of Article 476(a) of the CRR shall be:

1. (1) 20% during the period from 1 January 2014 to 31 December 2014;
2. (2) 40% during the period from 1 January 2015 to 31 December 2015;
3. (3) 60% during the period from 1 January 2016 to 31 December 2016; and
4. (4) 80% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 476(a), 478(1) of the CRR]

11.11

The applicable percentage for the purposes of Article 479(2) of the CRR shall be:

1. (1) 0% for the period from 1 January 2014 to 31 December 2014;
2. (2) 0% for the period from 1 January 2015 to 31 December 2015;
3. (3) 0% for the period from 1 January 2016 to 31 December 2016; and
4. (4) 0% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 479 of the CRR]

11.12

The applicable factor for the purposes of Article 480(1) of the CRR as it applies to point (b) of Article 84(1) shall be:

1. (1) 1 in the period from 1 January 2014 to 31 December 2014;
2. (2) 1 in the period from 1 January 2015 to 31 December 2015;
3. (3) 1 in the period from 1 January 2016 to 31 December 2016; and
4. (4) 1 in the period from 1 January 2017 to 31 December 2017.

[Note: Art 480 of the CRR]

11.13

The applicable factor for the purposes of Article 480(1) of the CRR as it applies to point (b) of Article 85(1) and point (b) of Article 87(1) shall be:

1. (1) 0.2 in the period from 1 January 2014 to 31 December 2014;
2. (2) 0.4 in the period from 1 January 2015 to 31 December 2015;
3. (3) 0.6 in the period from 1 January 2016 to 31 December 2016; and
4. (4) 0.8 in the period from 1 January 2017 to 31 December 2017.

[Note: Art 480 of the CRR]

11.14

The applicable percentage for the purposes of Article 481(1) of the CRR shall be:

1. (1) 0% for the period from 1 January 2014 to 31 December 2014;
2. (2) 0% for the period from 1 January 2015 to 31 December 2015;
3. (3) 0% for the period from 1 January 2016 to 31 December 2016; and
4. (4) 0% for the period from 1 January 2017 to 31 December 2017.

[Note: Art 481 of the CRR]

11.15

The applicable percentage for the purposes of Article 486(2), (3) and (4) of the CRR shall be:

1. (1) 80% for the period from 1 January 2014 to 31 December 2014;
2. (2) 70% for the period from 1 January 2015 to 31 December 2015;
3. (3) 60% for the period from 1 January 2016 to 31 December 2016;
4. (4) 50% for the period from 1 January 2017 to 31 December 2017;
5. (5) 40% for the period from 1 January 2018 to 31 December 2018;
6. (6) 30% for the period from 1 January 2019 to 31 December 2019;
7. (7) 20% for the period from 1 January 2020 to 31 December 2020; and
8. (8) 10% for the period from 1 January 2021 to 31 December 2021.

[Note: Art 486 of the CRR]

12.1

A CRR firm must maintain at all times capital resources equal to or in excess of the base capital resources requirement set out in the table below: