Prudential Regulation Authority Rulebook

3E.1

The features referred to in 3D must be either those set out in 3E.1(1) to (10) or those set out in 3E.1(11):

1. (1) the basic own funds item ranks after the claims of all policyholders and non-subordinated creditors;
2. (2) the basic own funds item does not include features which may cause the insolvency of the firm or may accelerate the process of the firm becoming insolvent;
3. (3) the basic own funds item is undated or has an original maturity of at least 10 years or the first contractual opportunity to repay or redeem the basic own funds item does not occur before 5 years from the date of issuance;
4. (4) the basic own funds item is only repayable or redeemable at the option of the firm and provides that repayment or redemption of the basic own funds item is subject to the firm receiving prior permission from the PRA;
5. (5) the basic own funds item may include limited incentives to repay or redeem that basic own funds item, provided that these do not occur before 10 years from the date of issuance;
6. (6) the basic own funds item provides for the suspension of repayment or redemption of that item where there is non-compliance with the SCR or repayment or redemption would lead to such non-compliance until: 
   1. (a) the firm complies with the SCR; and 
   2. (b) the repayment or redemption would not lead to non-compliance with the SCR,
   3. other than in the circumstances set out in 3E.1(7); 
7. (7) notwithstanding 3E.1(6), the basic own funds item may allow for the repayment or redemption of that item where there is non-compliance with the SCR or repayment or redemption would lead to such non-compliance, where all of the following conditions are met:
   1. (a) the firm has received prior permission from the PRA to repay or redeem that item;
   2. (b) the item is to be exchanged for or converted into another Tier 1 own funds or Tier 2 basic own funds item of at least the same quality; and
   3. (c) the MCR will be complied with after the repayment or redemption;
9. (8) the basic own funds item meets one of the following criteria:
   1. (a) in the case of items referred to in 3D.1(1)(a) and (b), either the legal or contractual arrangements governing the basic own funds item or legislation applicable in the UK allow for the distributions in relation to that item to be deferred where there is non-compliance with the SCR or the distribution would lead to such non-compliance until: 
      1. (i) the firm complies with the SCR; and 
      2. (ii) the distribution would not lead to non-compliance with the SCR,
      3. other than in the circumstances set out in 3E.1(9); or
   2. (b) in the case of items referred to in 3D.1(1)(c), 3D.1(1)(d) and 3D.1(2), the terms of the contractual arrangement governing the basic own funds item provide for the distributions in relation to that item to be deferred where there is non-compliance with the SCR or the distribution would lead to such non-compliance until:
      1. (i) the firm complies with the SCR; and 
      2. (ii) the distribution would not lead to non-compliance with the SCR,
      3. other than in the circumstances set out in 3E.1(9);
10. (9) notwithstanding 3E.1(8), the basic own funds item may allow for a distribution to be made where there is non-compliance with the SCR or the distribution on a basic own funds item would lead to such non-compliance, only where this provision is subject to all of the following conditions:
    1. (a) the firm has received prior permission from the PRA;
    2. (b) the distribution would not further weaken the solvency position of the firm; and
    3. (c) the MCR will be complied with after the distribution is made;
11. (10) the basic own funds item is free from encumbrances and is not connected with any other transaction, which when considered with the basic own funds item, could result in that basic own funds item not complying with 3.2(1).
12. (11) the basic own funds item is a Tier 1 own funds item that displays the features set out in 3B that are relevant for a restricted Tier 1 own funds item, but exceeds the limit set out in 4A.3.

3E.2

For the purposes of 3E, the exchange or conversion of a basic own funds item into another Tier 1 own funds item or Tier 2 basic own funds item or the repayment or redemption of a Tier 2 basic own funds item out of the proceeds of a new basic own funds item of at least the same quality will not be deemed to be a repayment or redemption, provided that the exchange, conversion, repayment or redemption is subject to receiving prior permission from the PRA.

3E.3

For the purposes of 3E.1(6) and 3E.1(8), references to the SCR must be read as references to the MCR where non-compliance with the MCR occurs before non-compliance with the SCR.

3E.4

For the purposes of 3E.1(5), a firm may only treat incentives to redeem in the form of an interest rate step-up associated with a call option as limited where the step-up takes the form of a single increase in the coupon rate and results in an increase in the initial rate that is no greater than the higher of the following amounts:

1. (1) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; and
2. (2) 50% of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.

3E.5

Notwithstanding the requirement in 3E.1(3), the basic own funds item may allow for repayment or redemption before five years where the following conditions are met:

1. (1) the firm’s SCR, after the repayment or redemption, will be exceeded by an appropriate margin, taking into account the solvency position of the firm, including the firm’s medium-term capital management plan; and
2. (2) the circumstances are as described in (a) or (b), either; 
   1. (a) there is a change in the regulatory classification of the basic own funds item which would be likely to result in its exclusion from the own funds or reclassification as a lower tier of own funds; and 
      1. (i) the PRA considers such a change to be sufficiently certain; and 
      2. (ii) the firm demonstrates to the satisfaction of the PRA that the regulatory reclassification of the basic own funds item was not reasonably foreseeable at the time of its issuance; or
3. 1. (b) there is a change in the applicable tax treatment of the basic own funds item which the firm demonstrates to the satisfaction of the PRA:
4. 1. (i) is material; and
   2. (ii) was not reasonably foreseeable at the time of its issuance.

3E.6

A firm must not: 

1. (1) redeem or repay a Tier 2 basic own funds item; 
2. (2) redeem or repay a Tier 2 basic own funds item when redemption or repayment has been suspended in the circumstances referred to in 3E.1(6); 
3. (3) make a distribution under a Tier 2 basic own funds item in the circumstances referred to in 3E.1(8); or
4. (4) redeem or repay a basic own funds item in the circumstances set out in 3E.5,

unless, in each case, it is has received prior permission from the PRA pursuant to section 138BA of FSMA.

3E.7

For the purposes of 3E, a firm may only: 

1. (1) exchange or convert a basic own funds item into another Tier 1 own funds item or Tier 2 basic own funds item; or 
2. (2) repay or redeem a Tier 2 basic own funds item out of the proceeds of a new basic own funds item of at least the same quality, 

without it being deemed as a repayment or redemption, if the firm has received prior permission from the PRA pursuant to section 138BA of FSMA for the exchange, conversion, repayment or redemption (as applicable).