Prudential Regulation Authority Rulebook

1.1

Unless otherwise stated, this Part applies to:

1. (1) every firm that is a CRR firm; and
2. (2) a CRR consolidation entity.

1.1A

1. (1) A CRR firm must comply with this Part on an individual basis and as applicable on a sub-consolidated basis.
2. (2) A CRR consolidation entity must comply with this Part (other than Chapter 2) on a consolidated basis and for this purpose, references to a firm in this Part (other than in 1.1 and 1.1A) mean a CRR consolidation entity.

1.2

In this Part the following definitions shall apply:

Side agreement

means any document containing an agreement or other arrangement, including a proposed agreement or other arrangement, related to the capital instrument (whether or not explicitly referred to in the instrument) which could affect the assessment of compliance of the instrument with Part Two of CRR.

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 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

[Deleted.]

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

[Deleted.]

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 one month 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)(29) 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

[Deleted.]

5.2

[Deleted.]

5A.1

A firm must send to the PRA any side agreement not previously sent to the PRA and must do so at least one month in advance of entry into the side agreement together with sufficiently detailed information to allow the PRA to evaluate it.

6.1

6.2

7A.1

Where a firm, or another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm, intends to:

1. (1) issue a capital instrument that it considers will qualify under Part Two of CRR as a Common Equity Tier 1 instrument; or
2. (2) amend or otherwise vary the terms of such an instrument included in its own funds or the own funds of its consolidation group;

the firm shall, at least one month before the intended date of issuance or intended date of amendment or variation, as applicable, notify the PRA of that intention, except that where there are exceptional circumstances which make it impracticable to give such a period of notice, the firm must give as much notice as is reasonably practicable in those circumstances.

7A.2

When notifying PRA under 7A.1 the firm must:

1. (1) complete and submit the form referred to in 7D.3(1) (Pre/Post-Issuance Notification (PIN) Form);
2. (2) provide a copy of the draft terms and conditions of the capital instrument together with any side agreement;
3. (3) provide a properly reasoned draft independent legal opinion from an appropriately qualified individual confirming that the capital instrument qualifies as a Common Equity Tier 1 instrument under Part Two of CRR; and
4. (4) complete and submit the form referred to in 7D.3(2) (CET1 Compliance Template).

7A.3

Where a firm intends to make use of the derogation in the second subparagraph of Article 26(3) of the CRR, 7A.1 shall not apply. The firm must instead send to the PRA at the same time as it sends the notification under point (b) of the second paragraph of Article 26(3):

1. (1) written confirmation that the capital instrument:
1. (a) meets the condition in point (a) of the second subparagraph of Article 26(3) of CRR; and
2. (b) qualifies as a Common Equity Tier 1 instrument under Part Two of CRR;
2. (2) a completed form referred to in 7D.3(1) (Pre/Post-Issuance Notification (PIN) Form); and
3. (3) a copy of the terms and conditions of the instrument together with any side agreement.

7B.1

Where a firm, or another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm, intends to:

1. (1) issue a capital instrument that it considers will qualify under Part Two of CRR as an Additional Tier 1 instrument; or
2. (2) amend or otherwise vary the terms of such an instrument included in its own funds or the own funds of its consolidation group;

the firm shall, at least one month before the intended date of issuance or intended date of amendment or variation, as applicable, notify the PRA of that intention, except that where there are exceptional circumstances which make it impracticable to give such a period of notice, the firm must give as much notice as is reasonably practicable in those circumstances.

7B.2

When notifying the PRA under 7B.1 the firm must:

1. (1) complete and submit the form referred to in 7D.3(1) (Pre/Post-Issuance Notification (PIN) Form);
2. (2) provide a copy of the draft terms and conditions of the capital instrument together with any side agreement;
3. (3) provide a properly reasoned draft independent legal opinion from an appropriately qualified individual confirming that the capital instrument qualifies as an Additional Tier 1 instrument under Part Two of CRR; and
4. (4) provide a properly reasoned draft opinion by its auditors as to the capital instrument’s treatment under the applicable accounting framework.

7B.3

Where a firm has previously complied with these rules in respect of the issuance of an Additional Tier 1 instrument and that firm or another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm, intends to:

1. (1) issue a capital instrument on substantially the same terms as the previously notified issuance; or
2. (2) amend or otherwise vary the previously notified issuance in a way which will result in the instrument taking effect on substantially the same terms as that issuance;

7B.1 and 7B.2 shall not apply.

7B.4

Where 7B.1 and 7B.2 does not apply by virtue of 7B.3 the firm shall:

1. (1) give the notice of the issuance to the PRA sufficiently in advance of the capital instrument’s classification as an Additional Tier 1 instrument or, in the case of an amendment or variation, sufficiently in advance of that amendment or variation taking effect;
2. (2) send to the PRA written confirmation that the capital instrument will:
1. (a) be issued on substantially the same terms as the previously notified issuance or in the case of an amendment or variation, the instrument as so amended or varied, will take effect on substantially the same terms as the previously notified issuance; and
2. (b) qualify as an Additional Tier 1 instrument under Part Two of CRR;
3. (3) complete and submit the form referred to in 7D.3(1) (Pre/Post-Issuance Notification (PIN) Form); and
4. (4) send to the PRA a copy of the terms and conditions of the instrument or, in the case of an amendment or variation, the instrument as it is proposed to be amended or varied, together with any side agreement.

7C.1

Where a firm, or another member of its group that is not a firm but is included in the supervision on a consolidated basis of the firm:

1. (1) has issued a capital instrument that it considers will qualify under CRR as a Tier 2 instrument; or
2. (2) has amended or otherwise varied the terms of a Tier 2 instrument included in its own funds or the own funds of its consolidation group;

the firm shall on or immediately after the date of issuance or the date of amendment or other variation, as applicable, notify the PRA of that issuance, amendment or variation.

7C.2

When giving notice under 7C.1 the firm must:

1. (1) complete and submit the form referred to in 7D.3(1) (Pre/Post Issuance Notification (PIN) Form);
2. (2) provide a copy of the terms and conditions of the capital instrument together with any side agreement; and
3. (3) provide a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the capital instrument qualifies as a Tier 2 instrument under Part Two of CRR.

7C.3

The requirement in 7C.2(3) for the provision of a legal opinion shall not apply where the issuance of the instrument is on substantially the same terms as a previously issued instrument notified under these rules.

7D.1

The firm shall immediately 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 7A to 7B.

7D.2

The firm shall on, or immediately after, the date of issuance or the date of amendment or other variation, as applicable provide the PRA with a copy of the final terms and conditions, a copy of the final legal opinion referred to in 7A.2(3) and 7B.2(3) and if applicable the final accounting opinion referred to in 7B.2(4).

7D.3

1. (1) The Pre/Post Issuance Notification (PIN) Form can be found here Opens in a new window.
2. (2) The CET1 Compliance Template can be found here Opens in a new window.
3. (3) Where in compliance with this chapter a CRR consolidation entity provides the PRA with a notification or other information a firm shall not be required to provide the same notification or information on an individual basis.

8.1

[Deleted.]

9.1

[Deleted]

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

[Deleted.]

11.2

[Deleted.]

11.3

[Deleted.]

11.4

[Deleted.]

11.5

[Deleted.]

11.6

[Deleted.]

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

[Deleted.]

11.9

[Deleted.]

11.10

[Deleted.]

11.11

[Deleted.]

11.12

[Deleted.]

11.13

[Deleted.]

11.14

[Deleted.]

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: