Application

(1) a BIPRU firm; and

(2) an insurer unless it is:

(a) a non-directive friendly society; or

(b) a Swiss general insurer; or

(c) an EEA-deposit insurer; or

(d) an incoming EEA firm; or

(e) an incoming Treaty firm.

Purpose

Contents guide

Table: Arrangement of GENPRU 2.2

Simple capital issuers

Principles underlying the definition of capital resources

Tier one capital

(1) it is able to absorb losses;

(2) it is permanent or (in the case of a BIPRU firm) available when required;1

(3)  it ranks for repayment upon winding up, administration or similar procedure after all other debts and liabilities; and

(4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.

(1) 1, in the case of an insurer, core tier one capital, perpetual non-cumulative preference shares and innovative tier one capital; and1

(2) in the case of a BIPRU firm, core tier one capital and hybrid capital. Hybrid capital is further divided into the different stages B1, B2 and C of the calculation in the capital resources table.1

Upper and lower tier two capital

(1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred - for example, cumulative preference shares); only perpetual capital instruments may be included in upper tier two capital;

(2)  capital which is not perpetual (that is, it has a fixed term) or which may have fixed servicing costs that cannot generally be either waived or deferred (for example, most subordinated debt); such capital should normally be of a medium to long-term maturity (that is, an original maturity of at least five years); dated capital instruments are included in lower tier two capital;

(3) (for BIPRU firms) certain revaluation reserves such as reserves arising from the revaluation of land and buildings, including any net unrealised gains for the fair valuation of equities held in the available-for-sale financial assets category; and

(4) (for BIPRU firms) general/collective provisions.

Tier three capital

Non-standard capital instruments

Deductions from capital

Which method of calculating capital resources applies to which type of firm

Table: Applicable capital resources calculation

Calculation of capital resources: Which rules apply to BIPRU investment firms

Calculation of capital resources: Insurers

Table: Approaches to calculating capital resources

Limits on the use of different forms of capital: General

Limits on the use of different forms of capital: Use of higher tier capital in lower tiers

(1) the capital resources gearing rules applicable to that lower stage of capital apply to higher stage of capital included in that lower stage of capital; and

(2) (subject to GENPRU 2.2.26 R and GENPRU 2.2.26A R)1 the rules in GENPRU governing the eligibility of capital in that lower stage of capital continue to apply.

11Limits on the use of different forms of capital: Limits relating to tier one capital applicable to insurers

1Limits on the use of different forms of capital: Limits relating to tier one capital applicable to BIPRU firms

(1) no more than 50% may be accounted for by hybrid capital;

(2) no more than 35% may be accounted for by hybrid capital included at stages B2 and C of the calculation in the capital resources table; and

(3) no more than 15% may be accounted for by hybrid capital included at stage C of the calculation in the capital resources table.

Limits on the use of different forms of capital: Limits relating to tier one capital: Purpose of the requirements

(1) 1GENPRU 2.2.30 R places a further sub-limit on the amount of innovative tier one capital that an insurer may include in its tier one capital resources; and

(2) 1GENPRU 2.2.30A R (2) and GENPRU 2.2.30A R (3) place further sub-limits on the amounts of hybrid capital included at stages B2 and C of the calculation in the capital resources table that a BIPRU firm may include in its tier one capital resources.

Limits on the use of different forms of capital: Insurers

(1) the amount calculated at stage A of the calculation in the capital resources table (Core tier one capital); and

(2) notwithstanding GENPRU 2.2.29 R, the amount calculated at stage B of the calculation in the capital resources table (Perpetual non-cumulative preference shares);

(1) 1/3 of the long-term insurance capital requirement; and

(2) the base capital resources requirement;

(1) 1/3 of the general insurance capital requirement; and

(2) the base capital resources requirement;

(1) 1/3 of the sum of the long-term insurance capital requirement and the general insurance capital requirement; and

(2) the base capital resources requirement;

(1)  items listed at stage B (Perpetual non-cumulative preference shares) in the capital resources table may be included notwithstanding GENPRU 2.2.29 R;

(2) innovative tier one capital that meets the conditions (other than GENPRU 2.2.159 R (12) (Requirement for a legal opinion)) for it to be included as upper tier two capital at stage G (Upper tier two capital) in the capital resources table may be treated as an item listed at stage G; and

(3)  an insurer must exclude from the calculation the higher of the following:

(a) the amount (if any) by which the sum of the items listed at stages G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table exceeds the total (net of deductions) of the remaining constituents of adjusted stage M; and

(b) the amount (if any) by which the sum of the items listed at stage H in the capital resources table exceeds one-third of the total (net of deductions) of the remaining constituents of adjusted stage M;

(1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F (Total tier one capital after deductions) of the calculation in the capital resources table; and

(2) the amount (if any) by which lower tier two capital resources exceed 50% of the amount calculated at stage F of the calculation in the capital resources table.

(1) the amount calculated at stage A (Core tier one capital) plus, notwithstanding GENPRU 2.2.29 R, the amount calculated at stage B (Perpetual non-cumulative preference shares) less the amount calculated at stage E (Deductions from tier one capital) of the calculation in the capital resources table; and

(2)  the amount calculated at stage G (Upper tier two capital) of the calculation in the capital resources table.

Limits on the use of different kinds of capital: Purposes for which tier three capital may not be used (BIPRU firm only)

(1)  the credit risk capital component;

(2) the operational risk capital requirement;

(3) the counterparty risk capital component; and

(4) the base capital resources requirement.

Limits on the use of different kinds of capital: Tier two limits (BIPRU firm only)

(1) the amount of the items which may be included in a BIPRU firm's tier two capital resources must not exceed the amount calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions); and

(2) the amount of the items which may be included in a BIPRU firm's lower tier two capital resources must not exceed 50% of the amount calculated at stage F of the calculation in the capital resources table.

Limits on the use of different kinds of capital: Purposes for which tier three capital may be used (BIPRU firm only)

(1) the market risk capital requirement;

(2) the concentration risk capital component; and

(3) the fixed overheads requirement (where applicable);

(4) tier one capital to the extent that it is not required to meet the requirements in GENPRU 2.2.44 R (GENPRU 2.2.48 R explains how to calculate how much tier one capital is required to meet the requirements in GENPRU 2.2.44 R);

(5) tier two capital to the extent that it:

(a) comes within the limits in GENPRU 2.2.46 R (100% limit for tier two capital resources and 50% limit for lower tier two capital resources); and

(b) it is not required to meet the requirements in GENPRU 2.2.44 R;

(6) tier two capital that cannot be used for the purposes in GENPRU 2.2.44 R because it falls outside the limits in GENPRU 2.2.46 R; and

(7) tier three capital.

Limits on the use of different kinds of capital: Combined tier two and tier three limits (BIPRU firm only)

(1) its tier two capital resources falling within GENPRU 2.2.47 R (6) (excess tier two capital); or

(2) its upper tier three capital resources;

(3) calculate the amount at stage F of the calculation in the capital resources table (Total tier one capital after deductions); and

(4) deduct from (3) those parts of the firm's tier one capital used to meet the requirements in GENPRU 2.2.44 R (1) and (2)6 as established by GENPRU 2.2.48 R.

Example of how the capital resources calculation for BIPRU firms works

Table: Example of the calculation of the capital resources of a BIPRU firm

Table: Example of how capital resources of a BIPRU firm are measured against its capital resources requirement

(1)  the relevant6,  tier one capital for the gearing calculation is £506;

(2) 250% of the relevant tier one capital is £1256; and

(3) the upper tier three capital used to meet market risk is £50.

Capital used to meet the base capital resources requirement (BIPRU firm only)

Notification of issuance of capital instruments

(1) provide details of the amount of capital the firm is seeking to raise through the intended issue and whether the capital is intended to be issued to external investors or within its group;

(2) identify the stage of the capital resources table the capital instrument is intended to fall within;

(3) include confirmation from a senior manager of the firm responsible for authorising the intended issue that the capital instrument complies with the rules applicable to instruments included in the stage of the capital resources table identified in (2); and

(4) provide a copy of the term sheet and details of any features of the capital instrument which are novel, unusual or different from a capital instrument of a similar nature previously issued by the firm or widely available in the market or not specifically contemplated by GENPRU 2.2.

(1) notify the FSA of the establishment of the program; and

(2) provide the information required by GENPRU 2.2.61BR (1) to (4)

(1) ordinary shares which:

(a) are the most deeply subordinated capital instrument issued by the firm;

(b) meet the criteria set out in GENPRU 2.2.83R (2) and (3) and, for a BIPRU firm, GENPRU 2.2.83A R; and

(c) are the same as ordinary shares previously issued by the firm;

(2) debt instruments issued from a debt securities program, provided that program was notified to the FSA prior to its first drawdown, in accordance with GENPRU 2.2.61D R; and

(3) capital instruments which are not materially different in terms of their characteristics and eligibility for inclusion in a particular tier of capital to capital instruments previously issued by the firm.

(1) provide the information set out at GENPRU 2.2.61BR (1) to (3); and

(2) confirm that the terms of the capital instrument have not changed since the previous issue by the firm of that type of capital instrument.

Tier one capital: General

(1) it is included in one of the categories in GENPRU 2.2.63 R;

(2) it complies with the conditions set out in GENPRU 2.2.64 R;

(3) i t is not excluded under GENPRU 2.2.65 R (Connected transactions); and

(4) it is not excluded by any of the rules in GENPRU 2.2.

(1)  permanent share capital;

(2) eligible partnership capital;

(3) eligible LLP members' capital;

(4) sole trader capital;

(5) (in the case of an insurer)1 a perpetual non-cumulative preference share;

(6) 1[deleted]1

(7) (in the case of an insurer)1 an innovative tier one instrument; and1

(8) 1(in the case of a BIPRU firm) hybrid capital.

General conditions for eligibility as tier one capital

(1) it is issued by the firm;

(2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;

(3) it:

(a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or

(b) complies with the conditions in GENPRU 2.2.70 R (Basic requirements for redeemability) and GENPRU 2.2.76 R (Redeemable instrument subject to a step-up);

(4) the item of capital meets the following conditions in relation to any coupon:

(a) the firm is under no obligation to pay a coupon; or

(b) (if the firm is obliged to pay the coupon) the coupon is payable in the form of an item of capital that is:1

(i) 1in the case of a BIPRU firm, core tier one capital; and

(ii) in the case of an insurer,1 included in a higher stage of capital or the same stage of capital as that first item of capital;

(5) any coupon is either:

(a) non-cumulative; or

(b) (if it is cumulative) it must, if deferred, be paid by the firm in the form of tier one capital complying with (4)(b);

(6) it is able to absorb losses to allow the firm to continue trading and:1

(a) 1in the case of an insurer, in particular it complies with GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) and, in the case of an innovative tier one instrument, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption); and

(b) 1in the case of a BIPRU firm, it does not, through appropriate mechanisms, hinder the recapitalisation of the firm, and in particular it complies with:

(i) GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption);3

(ii) in the case of core tier one capital, GENPRU 2.2.83A R (9) to GENPRU 2.2.83A R (10) (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)); and3

(iii) 3in the case of hybrid capital, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption);

(7) the amount of the item included must be net of any foreseeable tax charge at the moment of its calculation or must be suitably adjusted in so far as such tax charges reduce the amount up to which that item may be applied to cover risks or losses;

(8) it is available to the firm for unrestricted and immediate use to cover risks and losses as soon as these occur;

(9) it ranks for repayment upon winding up, administration or any other similar process:1771

(a) 1in the case of an insurer, no higher than a share of a company incorporated under the Companies Act 2006 (whether or not it is such a share); or

(b) in the case of a BIPRU firm, lower than any items of capital that are:

(i) eligible for inclusion within the firm's tier two capital resources; and

(ii) not eligible for inclusion within the firm's tier one capital resources; and

(10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, GENPRU 2.2.271 R (Other requirements: insurers carrying on with-profits business (Insurer only)).

Guidance on certain of the general conditions for eligibility as tier one capital

(1) the capital instrument is affected by a dividend stopper; and

(2) the dividend stopper operates in a way that hinders recapitalisation.

1Tier one capital: payment of coupons (BIPRU firm only)

(1) the firm meets its capital resources requirement; and

(2) such a substituted payment preserves the firm's financial resources.

(1) there is no decrease in the amount of the firm's core tier one capital;

(2) the deferred coupon is satisfied without delay using newly issued core tier one capital that has an aggregate fair value no more than the amount of the coupon;

(3) the firm is not obliged to find new investors for the newly issued instruments; and

(4) if the holder of the newly issued instruments subsequently sells the instruments and the sale proceeds are less than the value of the coupon, the firm is not obliged to issue further new instruments to cover the loss incurred by the holder of the instruments.

(1) 1In relation to the cancellation or deferral of the payment of a coupon in accordance with GENPRU 2.2.64 R (4) and GENPRU 2.2.64 R (5), GENPRU 2.2.68A R, or GENPRU 2.2.69B R, the FSA expects that situations where a coupon may need to be cancelled or deferred will be resolved through analysis and discussion between the firm and the FSA. If the FSA and the firm do not agree on the cancellation or deferral of the payment of a coupon, then the FSA may consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's Part IV permission to require it to cancel or defer a coupon in accordance with the FSA's view of the financial and solvency situation of the firm.

(2) In considering a firm's financial and solvency situation, the FSA will normally take into account, among other things, the following:

(a) the firm's financial and solvency position before and after the payment of the coupon, in particular whether that payment, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement or the overall financial adequacy rule;

(b) an appropriately stressed capital plan, covering 3-5 years, which includes the effect of the proposed payment of the coupon; and

(c) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of those risks, including stress tests on the main risks showing potential loss under different scenarios.

(3) If the BIPRU firm is required to cancel or defer the payment of a coupon by the FSA, it may still be able to pay the coupon by way of newly issued core tier one capital in accordance with GENPRU 2.2.64 R (4)(b) and GENPRU 2.2.69C R. The FSA may consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's Part IV permission to impose conditions on the use of such a mechanism or to require its cancellation, based on the factors outlined in this guidance.

Redemption of tier one instruments

(1) (if it is redeemable other than in circumstances set out in GENPRU 2.2.64 R (3)(a) (redemption on a winding up)) it is redeemable only at the option of the firm1 or, in the case of a BIPRU firm, on the date of maturity;1

(2) the firm cannot exercise that redemption right:

(a) before the fifth anniversary of its date of issue;

(b) unless it has given notice to the FSA in accordance with GENPRU 2.2.74 R; and

(c) unless at the time of exercise of that right it complies with GENPRU 2.1.13 R (the main capital adequacy rule for insurers) or4 the main BIPRU firm Pillar 1 rules and will continue to do so after redemption;1

(3) 1(in the case of a BIPRU firm and if it is undated) if it provides for a moderate incentive for the BIPRU firm to redeem it, that incentive does not occur before the tenth anniversary of its date of issue; and

(4) 1(in the case of a BIPRU firm and if it is dated):

(a) it has an original maturity date of at least 30 years after its date of issue; and

(b) it does not provide an incentive to redeem on any date other than its maturity date.

(1) the other conditions in GENPRU 2.2.70 R are met;

(2) the circumstance that entitles the firm to exercise that right is1:

(a) 1(in the case of an insurer) a change in law or regulation in any relevant jurisdiction or in the interpretation of such law or regulation by any court or authority entitled to do so; and

(b) 1(in the case of a BIPRU firm) a change in the applicable tax treatment or regulatory classification of those instruments;

(3) 1

(a) 1(in the case of an insurer) it would be reasonable for the firm to conclude that it is unlikely that that circumstance will occur, judged at the time of issue or, if later, at the time that the term is first included in the terms of the tier one instrument; and

(b) 1(in the case of a BIPRU firm) the circumstance that entitles the firm to exercise that right was not reasonably foreseeable at the date of issue of the tier one instrument; and

(4) the firm's right is conditional on it obtaining the FSA's consent in the form of a waiver of GENPRU 2.2.72 R.

(1) meet its capital resources requirement;91

(2) 9have sufficient financial resources to meet the overall financial adequacy rule; and1

(3) 1in the case of a BIPRU firm, not otherwise suffer any undue effects to its financial or solvency conditions.

(1) a comprehensive explanation of the rationale for the redemption;

(2) the firm's financial and solvency position before and after the redemption, in particular whether that redemption, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement;

(3) an appropriately stressed capital plan covering 3-5 years, which includes the effect of the proposed redemption; and

(4) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of such risks including stress tests on the main risks showing potential loss under different scenarios.

Step-ups and redeemable tier one instruments: Insurer only1

(1) it is or may become subject to a step-up; and6

(2) a reasonable person would think that:

(a) the firm is likely to redeem it before the tenth anniversary of its date of issue; or

(b) the firm is likely to have an economic incentive to redeem it before the tenth anniversary of its date of issue;

Meaning of redemption

(1) This rule applies to a tier one instrument, tier two instrument or tier three instrument (instrument A) that under its terms is exchanged for or converted into another instrument or is subject to a similar process.

(2) This rule also applies to instrument A if under its terms it is redeemed out of the proceeds of the issue of new securities.

(3)  If the instrument with which instrument A is replaced is included in the same stage of capital or a higher stage of capital as instrument A, instrument A is treated as not having been redeemed or repaid for the purposes of GENPRU 2.2.

(4) (3) does not apply to GENPRU 2.2.114 R (Redeemable instrument likely to be repaid etc), GENPRU 2.2.74 R (Notice of redemption of tier one instruments), GENPRU 2.2.174 R (Notice of redemption of tier two instruments) or GENPRU 2.2.245 R (so far as it relates to notice of redemption of tier three instruments).

(5) (3) only applies if it would be reasonable (taking into account the economic substance) to treat the original instruments as continuing in issue on the same or a more favourable basis. The question of whether that basis is more or less favourable must be judged from the point of view of the adequacy of the firm's capital resources.

(1) A share is not redeemable for the purposes of this section merely because the Companies Act 19857,7 the Companies (Northern Ireland) Order 1986 or the Companies Act 20067 allows the firm that issued it to purchase it.

(2) A capital instrument is not redeemable for the purposes of this section merely because the firm that issued it has a right to purchase it similar to the right in (1).

Purchases of tier one instruments: BIPRU firm only1

(1) the firm initiates the purchase;

(2) 3, [deleted]3

(3) the firm has given notice to the FSA in accordance with GENPRU 2.2.79G R; and3

(4) 3(in the case of hybrid capital) it is on or after the fifth anniversary of the date of issue of the instrument.

(1) the firm replaces the capital instrument it intends to purchase with a capital instrument that is included in a higher stage of capital or the same stage of capital; and

(2) the replacement capital instrument has already been issued.

(1) the firm intends to hold the purchased instrument for a temporary period as market maker; and

(2) the purchased instruments held by the firm do not exceed the lower of:

(a) 10% of the relevant issuance; or

(b) 3% of the firm's total issued hybrid capital.

(1) meet its capital resources requirement; and

(2) have sufficient financial resources to meet the overall financial adequacy rule.

(1) in order to comply with GENPRU 2.2.79G R, the firm should, at a minimum, provide the FSA with the following information:

(a) a comprehensive explanation of the rationale for the purchase;

(b) the firm's financial and solvency position before and after the purchase, in particular whether the purchase, or other foreseeable internal and external events or circumstances, may increase the risk of the firm breaching its capital resources requirement or the overall financial adequacy rule;

(c) an appropriately stressed capital plan covering 3-5 years, which includes the effect of the proposed purchase; and

(d) an evaluation of the risks to which the firm is or might be exposed and whether the level of tier one capital ensures the coverage of such risks including stress tests on the main risks showing potential loss under different scenarios; and

(2) 1the proposed purchase should not be on the basis that the firm reduces capital on the date of the purchase and then plans to raise new external capital during the following 3-5 years to replace the purchased capital.

Loss absorption

(1) (in the case of a firm that is a company as defined in the Companies Act 720067 it is "called-up share capital" within the meaning given to that term in that Act7; or

(2) (in the case of a building society) it is a 1deferred share;1 or

(3) (in the case of any other firm) it is:

(a) in economic terms; and

(b) in its characteristics as capital (including loss absorbency, permanency, ranking for repayment and fixed costs);

Core tier one capital: permanent share capital

(1) it is:

(a) an ordinary share; or

(b) a members' contribution; or

(c) part of the initial fund of a mutual; or1

(d) a deferred share;1

(2) any coupon on it is not cumulative, the firm is under no obligation to pay a coupon in any circumstances and the firm has the right to choose the amount of any coupon that it pays;3

(3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the same degree as an ordinary share issued by a company incorporated under the Companies Act 720067 (whether or not it is such a share)3; and3

(4) 3(in the case of a BIPRU firm) it meets the conditions set out in GENPRU 2.2.83A R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)).

3General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)

(1) it is undated;

(2) the terms upon which it is issued do not give the holder a preferential right to the payment of a coupon;

(3) the terms upon which it is issued do not indicate the amount of any coupon that may be payable nor impose an upper limit on the amount of any coupon that may be payable;

(4) the firm's obligations under the instrument do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986 and the holder has no right to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm arising from the non-payment of a coupon or any other sums payable under the instrument;

(5) there is no contractual or other obligation arising out of the terms upon which it is issued that requires the firm to repay capital to the holders other than on a liquidation of the firm;

(6) the terms upon which it is issued do not include a dividend pusher or a dividend stopper;

(7) the firm is under no obligation to issue core tier one capital or to make a payment in kind in lieu of making a coupon payment and non-payment of a coupon is not an event of default on the part of the firm;

(8) it is simple and the terms upon which it is issued are clearly defined;

(9) it is able to fully and unconditionally absorb losses on a non-discretionary basis as soon as they arise to allow the firm to continue trading, and it absorbs losses before all capital instruments that are not eligible for inclusion in stage A of the capital resources table and equally and proportionately with all capital instruments that are eligible for inclusion in stage A of the capital resources table;

(10) it ranks for repayment on winding up, administration or any other similar process lower than all other items of capital, and on a liquidation of the firm the holders have a claim on the residual assets remaining after satisfaction of all prior claims that is proportional to their holding and do not have a priority claim or a fixed claim for the nominal amount of their holding;

(11) the firm has not provided the holder with a direct or indirect financial contribution specifically to pay for the whole or a part of its subscription or purchase;

(12) a reasonable person would not think that the firm is likely to redeem or purchase it because of the description of its characteristics used in its marketing and in its contractual terms of issue; and

(13) its issue is not connected with one or more other transactions which, when taken together with its issue, could result in it no longer displaying all of the characteristics set out in GENPRU 2.2.83R (2), GENPRU 2.2.83AR (1) to (12) and (in the case of permanent share capital) GENPRU 2.2.83R (3).

3Core tier one capital: exception to eligibility criteria (building societies only)

(1) the capital instrument satisfies all other conditions for eligibility as core tier one capital set out in GENPRU 2.2.83 R to GENPRU 2.2.83A R;

(2) the coupon limit has been imposed by law or the constitutional documents of the firm;

(3) the objective of the limit is to protect the capital reserves of the firm;

(4) the firm continues to have the effective right to choose the amount of any coupon that it pays;

(5) all other capital instruments issued by the firm and included in stage A of the capital resources table:

(a) meet the conditions set out in GENPRU 2.2.83 R (2), GENPRU 2.2.83 R (3) and GENPRU 2.2.83A R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)); and

(b) if subject to a coupon limit, are subject to the same coupon limit; and

(6) any preferential coupon on a capital instrument included in stage A of the capital resources table, arising as a result of the inclusion of a coupon limit on another capital instrument, must be restricted to a fixed multiple of the coupon payment on the capital instrument that is subject to the coupon limit. GENPRU 2.2.83A R (2) to (3) do not prevent a capital instrument from being included in stage A of the capital resources table if the only reason for those prohibitions not being met is that a preferential coupon arises, and is restricted, in the manner referred to in this paragraph (6).

(1) a coupon arising on a capital instrument which is not subject to an explicit coupon limit within its terms of issue is likely to be preferential to a coupon on a capital instrument included in the same stage of capital which is subject to a coupon limit; and

(2) the preference so arising should be restricted so that it is not an unlimited preference.

3Core tier one capital: additional information

Core tier one capital: profit and loss account and other reserves: Losses

(1) Negative amounts, including any interim net losses (but in the case of a BIPRU investment firm, only material interim net losses), must be deducted from profit and loss account and other reserves.

(2) For these purposes material interim net losses mean unaudited interim losses arising from a firm's trading book and non-trading book business which exceed 10% of the sum of its capital resources calculated at 1stage A (Core tier one capital)1 in the capital resources table.

(3) If interim losses as referred to in (2) exceed the 10% figure in (2) then a BIPRU investment firm must deduct the whole amount of those losses and not just the excess.

Core tier one capital: profit and loss account and other reserves: Losses arising from valuation adjustments (BIPRU firm only)

(1) This rule applies to trading book valuation adjustments or reserves referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G10, 10 (Valuation adjustments and reserves). It applies to a BIPRU firm.

(2) When valuation adjustments or reserves give rise to losses of the current financial year, a firm must treat them in accordance with GENPRU 2.2.85 R.

(3) Valuation adjustments or reserves which exceed those made under the accounting framework to which a firm is subject must be treated in accordance with (2) if they give rise to losses and under GENPRU 2.2.248 R (Net interim trading book profits) otherwise.

Core tier one capital: profit and loss account and other reserves: Dividends

(1) in the case of an interim dividend, when it is declared by the directors; or

(2) in the case of a final dividend, when the directors approve the dividend to be proposed at the annual general meeting.

Core tier one capital: profit and loss account and other reserves: Capital contributions

Core tier one capital: profit and loss account and other reserves: Securitisation (BIPRU firm only)

Core tier one capital: profit and loss account and other reserves: Valuation

Core tier one capital: profit and loss account and other reserves: Revaluation reserves (BIPRU firm only)

Core tier one capital: partnership capital account (BIPRU firm only)

(1) into which capital contributed by the partners is paid; and

(2) from which under the terms of the partnership agreement an amount representing capital may be withdrawn by a partner only if:

(a) he ceases to be a partner and an equal amount is transferred to another such account by his former partners or any person replacing him as their partner;4

(b) the partnership is wound up or4 otherwise dissolved; or44

(c) the BIPRU firm has ceased to be authorised or no longer has a Part IV permission.4

Core tier one capital: Eligible LLP members' capital (BIPRU firm only)

(1) into which capital contributed by the members is paid; and

(2) from which under the terms of the limited liability partnership agreement an amount representing capital may be withdrawn by a member only if:

(a) he ceases to be a member and an equal amount is transferred to another such account by his former fellow members or any person replacing him as a member; 4

(b) the limited liability partnership is wound up or4 otherwise dissolved; or44

(c) the BIPRU firm has ceased to be authorised or no longer has a Part IV permission.4

Core tier one capital: Eligible LLP members' and partnership capital accounts (BIPRU firm only)

(1) a demonstration that the firm would have sufficient capital resources to meet its capital resources requirement immediately after the repayment;

(2) a demonstration that the firm would have sufficient financial resources to meet any individual capital guidance and the firm's latest assessment under the overall Pillar 2 rule immediately after the repayment; and

(3) a two to three year capital plan demonstrating that the firm would be able to meet the requirements in (1) and (2) at all times without needing further capital injections.

Core tier one capital: Other capital items for limited liability partnerships and partnerships (BIPRU firm only)

Core tier one capital: partnership and limited liability partnership excess drawings (BIPRU firm only)

Core tier one capital: Share premium account

(1) A firm must include share premium account relating to the issue of a share forming part of its core tier one capital in its core tier one capital.

(2) A firm must include share premium account relating to the issue of a share forming part of another tier of capital in that other tier.

(3) A firm that is incorporated under the Companies Act 720067 may include its share premium account as core tier one capital notwithstanding (2) to the extent that the terms of issue of the share concerned provide that any premium is not repayable on redemption.

(4) Paragraph7 (3) applies to a firm that is not incorporated under the Companies Act 720067 if its share premium account is subject to substantially the same or greater restraints on use than a share premium account falling into (3).

Core tier one capital: externally verified interim net profits

Core tier one capital: valuation differences (insurer only)

(1) Subject to (3), this rule applies to an insurer that carries on general insurance business and which discounts or reduces its technical provisions for claims outstanding.

(2) An insurer of a kind referred to in (1) must deduct from its capital resources the difference between the undiscounted technical provisions or technical provisions before deductions, and the discounted technical provisions or technical provisions after deductions. This adjustment must be made for all general insurance business classes, except for risks listed under classes 1 and 2. For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions. For classes 1 and 2 (other than annuities), if the expected average interval between the settlement date of the claims being discounted and the accounting date is not at least four years, the insurer must deduct:

(a) the difference between the undiscounted technical provisions and the discounted technical provisions; or

(b) where it can identify a subset of claims such that the expected average interval between the settlement date of the claims and the accounting date is at least four years, the difference between the undiscounted technical provisions and the discounted technical provisions for the other claims.

(3) This rule does not apply to a pure reinsurer which became a firm in run-off before 31 December 2006 and whose Part IV permission has not subsequently been varied to add back the regulated activity of effecting contracts of insurance.

Core tier one capital: fund for future appropriations (insurer only)

Core tier one capital: deferred shares (building society only)1

Other tier one capital: perpetual non-cumulative preference shares (insurer only)1

(1) any coupon on it is not cumulative, and the firm is under no obligation to pay a coupon in any circumstances; and

(2) it is not an innovative tier one instrument.

Other tier one capital: innovative tier one capital: general (insurer only)1

Other tier one capital: innovative tier one capital: redemption (insurer only)1

(1) is redeemable; and

(2) a reasonable person would think that:

(a) the firm is likely to redeem it; or

(b) the firm is likely to have an economic incentive to redeem it;

Other tier one capital: conditions for eligibility for hybrid capital to be included at the different stages B1, B2 and C of the calculation in the capital resources table (BIPRU firm only)1

(1) it cannot be redeemed in cash but can only be converted into core tier one capital;

(2) it must be converted into core tier one capital by the firm during emergency situations;

(3) the emergency situations referred to in (2):

(a) are clearly defined within the terms of the capital instrument, legally certain and transparent; and

(b) occur at the latest, and include, when the BIPRU firm does not meet its capital resources requirement;

(4) the FSA may require its conversion into core tier one capital when the FSA considers it necessary;

(5) it may be converted into core tier one capital by the firm or the holder of the instrument at any time; and

(6) the maximum number of capital instruments which are core tier one capital into which it may be converted must:

(a) be determined at the date of its issue;

(b) be determined on the basis of the market value of those other instruments at the date of its issue;

(c) have an aggregate value equal to its par value; and

(d) not increase if the price of those other instruments decreases.

(1) 1In respect of GENPRU 2.2.115A R (4), the FSA may require the firm to convert the instrument into core tier one capital based on its financial and solvency situation. The FSA will take into account, among other things, the factors identified at GENPRU 2.2.69F G (2), adjusted to take into account the effects of a conversion rather than payment of a coupon.

(2) Even if a firm meets its capital resources requirement, the FSA may consider the amount or composition of the firm's tier one capital as inadequate to cover the financial and solvency risks of the firm in which event the FSA may require the firm to convert the instrument into core tier one capital.

(1) 1The other main provisions relevant to the eligibility of a capital instrument to be included at stages B1 and B2 of the calculation in the capital resources table are GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64 R (General conditions for eligibility as tier one capital), GENPRU 2.2.65 R (Connected transactions), GENPRU 2.2.68A R (Dividend stoppers), GENPRU 2.2.70 R to GENPRU 2.2.75 R (Redemption of tier one instruments), GENPRU 2.2.80 R (Loss absorption) and GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption).

(2) The rule about hybrid capital included at stage C of the calculation in the capital resources table in GENPRU 2.2.115F R is also relevant. Capital instruments that would otherwise qualify for inclusion at stages B1 or B2 of the calculation in the capital resources table may only be eligible for inclusion at stage C of that calculation.

(1) is dated; or

(2) provides an incentive for the firm to redeem it, as assessed at the date of its issue.

1Other tier one capital: loss absorption1

(1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or

(2) do constitute such a liability but the terms of the instrument are such that:

(a) any such liability is not relevant for the purposes of deciding whether:

(i) the firm is, or is likely to become, unable to pay its debts; or

(ii) its liabilities exceed its assets;

(b) a person (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and

(c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

(1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or

(2) do constitute such a liability but the terms of the instrument are such that:

(a) any such liability is not relevant for the purposes of deciding whether:

(i) the firm is, or is likely to become, unable to pay its debts; or

(ii) its liabilities exceed its assets;

(b) a person (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and

(c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (Wrongful trading).

(1) is clearly defined and legally certain;

(2) is disclosed and transparent to the market;

(3) makes the recapitalisation of the firm more likely by adequately reducing the potential future outflows to a holder of the capital instrument at certain trigger points;

(4) enables the firm, at and after the trigger points, to operate the mechanism; and

(5) when initiated, operates in one of the following ways:

(a) the principal of the instrument is written down permanently; or

(b) the principal of the instrument is written down temporarily. During the write-down period any coupon payable on the instrument must be cancelled and any related dividend stoppers and pushers must operate in a way that does not hinder recapitalisation; or

(c) the instrument is converted into core tier one capital. The maximum number of capital instruments which are core tier one capital into which it must be converted must;

(i) be determined at the date of its issue;

(ii) be determined on the basis of the market value of those other instruments at the date of its issue;

(iii) have an aggregate value no more than 150% of its par value; and

(iv) not increase if the share price decreases; or

(d) an alternative process applies which has the same or greater effect on the likelihood of recapitalisation as (a), (b), and (c).

(1) be clearly defined within the instrument and legally certain;

(2) be disclosed and transparent to the market; and

(3) be prudent and timely, and include trigger points which occur:

(a) before a breach of the firm's capital resources requirement and both:

(i) when the firm's losses lead to a significant reduction of the firm's retained earnings or other reserves which causes a significant deterioration of the firm's financial and solvency conditions; and

(ii) when it is reasonably foreseeable that the events described in (i) will occur; and

(b) when the firm is in breach of its capital resources requirement.

(1) 1The effects of the mechanisms described in GENPRU 2.2.117A R will be more meaningful if they happen immediately after losses cause a significant deterioration of the financial as well as the solvency situation and even before the reserves are exhausted.

(2) If a firm does not operate the loss absorption mechanism in a prudent and timely way, then the FSA may consider using its powers under section 45 of the Act to, on its own initiative, vary the firm's Part IV permission to require it to operate the mechanism.

(1) 1An insurer may not include an innovative tier one instrument, unless it is a preference share, in its tier one capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.64R (6) (loss absorption) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.

(2) A BIPRU firm may not include a capital instrument at stage B1, B2 or C of the calculation in the capital resources table unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.62 R (Tier one capital: General), GENPRU 2.2.64 R (1) to GENPRU 2.2.64 R (9) (General conditions for eligibility as tier one capital) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.

Other tier one capital: innovative tier one capital: coupons (insurer only)1

Other tier one capital: innovative tier one capital: step-ups (insurer only)1

(1) a potential tier one instrument1 is or may become subject to a step-up; and

(2) that potential tier one instrument is redeemable at any time (whether before, at or after the time of the step-up);

1Other tier one capital: hybrid capital: indirectly issued tier one capital (BIPRU firm only)1

(1) GENPRU 2.2.123 R - GENPRU 2.2.137 R apply to capital of a firm if:

(a) either or both of the conditions in (2) are satisfied; and

(b) any of the SPVs referred to in (2) is a subsidiary undertaking of the firm.

(2) The conditions referred to in (1) are:

(a) that capital is issued to an SPV; or

(b) the subscription for the capital issued by the firm is funded directly or indirectly by an SPV.

(3) A BIPRU firm may not include capital coming within this rule in its capital resources unless the requirements in the following rules are satisfied:

(a) (if (2)(a) applies and (2)(b) does not) GENPRU 2.2.127 R, GENPRU 2.2.129 R and GENPRU 2.2.132 R; or

(b) (in any other case) GENPRU 2.2.133 R.

(1) it is controlled by the firm and may not operate independently of the firm;

(2) the rights of investors in the SPV who do not belong to the group of the BIPRU firm in question are not such as to affect the ability of the firm to control the SPV;1

(3) all or virtually all of its exposures (calculated by reference to the amount) consist of exposures to the firm or to that firm's group; and1

(4) 1it is incorporated under, and governed by, the laws and jurisdiction of England and Wales, Scotland or Northern Ireland.

(1) it must comply with the conditions for qualification as tier one capital, as amended by GENPRU 2.2.130 R, as if the SPV was itself a firm seeking to include that capital in its tier one capital resources;

(2) 888, 1

(a) 8, 1its terms must include an obligation on the firm that, in the event of a collapse of the SPV structure, and if the mechanism contained within the instrument under GENPRU 2.2.117A R is a conversion, the firm must substitute the capital instrument issued by the SPV with core tier one capital issued by the firm; and1

(b) 8, 1there must be no obstacle to the firm's issue of new securities;18, 18, 1

(3) the conversion ratio in respect of the substitution described in (2) must be fixed when the SPV issues the capital instrument;1

(4) to the extent that investors have the benefit of an obligation by a person other than the SPV:

(a) that obligation must be one owed by a member of the firm's group; and

(b) the extent of that obligation must be no greater than would be permitted by GENPRU if that obligation formed part of the terms of a capital instrument issued by that member which complied with the rules in GENPRU relating to 11tier one capital included at stage C of the calculation in the capital resources table; and

(5) 1if the SPV structure collapses, the holder of it has no better a claim against the firm than a holder of the same type of instrument directly issued by the firm.

(1) it meets the conditions for inclusion in tier one capital (subject to GENPRU 2.2.130 R);

(2) its first call date (if any) must not arise before that on the instrument issued by the SPV; and

(3) its terms relating to repayment must be the same as those of the instrument issued by the SPV.

(1) This rule deals with any transaction:

(a) under which an SPV directly or indirectly funds the subscription for capital issued by the firm as described in GENPRU 2.2.124 R; or

(b) that is directly or indirectly funded by a transaction in (1)(a).

(2) Each undertaking that is a party to a transaction to which this rule applies (other than the firm) must be a subsidiary undertaking of the firm.

(3) Each SPV that is a party to a transaction to which this rule applies must comply with GENPRU 2.2.127 R.

(4) Any capital to which (1) applies (other than the capital that is to be included in the firm's capital resources) must be in the form of capital that complies with GENPRU 2.2.129 R (1) and GENPRU 2.2.129 R (4), whether or not issued by an SPV.

(5) The obligations in GENPRU 2.2.129 R (2) and GENPRU 2.2.129 R (3) only apply to capital issued by an SPV at the end of the chain of transactions beginning with the issue of capital by the firm referred to in GENPRU 2.2.124 R.

(6) GENPRU 2.2.132 R applies to the capital issued by the firm as referred to in GENPRU 2.2.124 R. For these purposes references in GENPRU 2.2.132 R to the instrument issued by the SPV are to the instrument referred to in (5).

(1) the marketing document for the transaction contains all the information which a reasonable third party would require to understand the transaction fully and its effect on the financial position of the firm and its group; and

(2) the information in (1) and the transaction are easily comprehensible without the need for additional information about the firm and its group.

Tier one capital: Conversion ratio

(1) This rule applies to a potential tier one instrument if:

(a) it is redeemable by the firm (ignoring GENPRU 2.2.77 R (Meaning of redemption));

(b) it provides that if the issuer does not exercise that right or does not do so in specified circumstances the issuer must or may have to redeem it in whole or in part through the issue of shares eligible for inclusion in the firm's tier one capital resources or the instrument converts or may convert into such shares; and

(c) GENPRU 2.2.77 R means that the obligation in (1)(b) is treated as not being inconsistent with GENPRU 2.2.70 R (1) (Tier one capital should not be redeemable at the option of the holder).

(2) A firm must not include a potential tier one instrument to which this rule applies in its tier one capital resources if:

(a) the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than:11

(i) in the case of a BIPRU firm, 150%; and1

(ii) in the case of an insurer, 200%; or1

(b) the market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price of that original capital item.

(3) All determinations under this rule are made as at the date of issue of the original capital item.

(1) the original capital item means the capital item that is being redeemed; and

(2) the conversion instrument means the tier one capital to be issued on its redemption.

(1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to

(2) one unit of the original capital item.

(1) The significance of the limitations on conversion in GENPRU 2.2.138 R (2) can be seen in the example in this paragraph, which uses the conversion ratio applicable to an insurer. 1

(2) 1An insurer1 issues innovative notes with a par value of £100 each. The terms of the instrument provide that if the instrument is not called at par at the first call date the notes convert into a variable number of ordinary shares.

(3) If the market price of the ordinary shares is 400 pence per share on the day of issue of the innovative notes then the maximum number of ordinary shares (M) that a single £100 par value innovative note can be converted into is calculated as follows:

(a) M = Par value of innovative instrument * 200% / market value of ordinary share;

(b) M = £100 * 2 / £4 = 50 shares.

(4) The practical effect is that conversion will result in the holder of an innovative capital note receiving ordinary shares equal to the par value of that note only when the market price of the ordinary shares remains above half the market price of the shares at the date of issue of the notes.

(5) If the market price of the ordinary shares fell by half to 200 pence, the maximum permitted number of shares (50) would have to be issued in order to give an investor in the innovative note ordinary shares with a market value equal to £100. If the market price of the ordinary shares fell below 200 pence, the issue of the maximum permitted number of ordinary shares would have a market value below £100.

(1) In addition to the maximum conversion 1ratios of 200% for an insurer and 150% for a BIPRU firm,1GENPRU 2.2.138 R (2)(b) does not permit a firm to issue shares that would have a market value that exceeds the issue price of the instrument being redeemed.

(2) In the example in GENPRU 2.2.143 G, if the market value of the ordinary shares was 250 pence at the conversion date, the maximum number of ordinary shares that may be issued to satisfy the redemption of one of the £100 par value innovative notes would be 40 (= £100 / £2.5).

Tier one capital: Requirement to have sufficient unissued stock

(1) This rule applies to a potential tier one instrument of a firm where either:

(a) the redemption proceeds; or

(b) any coupon on that capital item;

(2) A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued capital instruments of the kind in question (and the authority to issue them):

(a) that are sufficient to satisfy all such payments then due; and

(b) are of such amount as is prudent in respect of such payments that could become due in the future.

Step-ups: calculating the size of a step-up

(1) Where a rule in this section says that a particular treatment applies to an item of capital that is subject to a step-up of a specified amount, the question of whether that rule is satisfied must be judged by reference to the cumulative amount of all step-ups since the issue of that item of capital rather than just by reference to a particular step-up.

(2) Where a step-up arises through a change from paying a coupon on a debt instrument to paying a dividend on a share issued in settlement of the coupon, any net cost to the firm arising from the different tax treatment of the dividend compared to the tax treatment of interest may be ignored for the purpose of assessing the effect of that step-up.

Step-ups: Limits on the amount of step-ups on tier one and two capital

(1) A firm may not include in its tier one capital resources a tier one instrument that is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision of 27th October 1998 called "Instruments eligible for inclusion in Tier 1 capital".

(2) For the purpose of (1) the words in that press release "than, at national supervisory discretion, either" are replaced by "than the higher of the following two amounts".

(3) The calculations required by this rule and GENPRU 2.2.151 R must be carried out as at the date of issue of the relevant instrument.

(4) 1A BIPRU firm may not include a capital instrument in its tier one capital resources if it is redeemable and subject to more than one step-up.

(1) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or

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

(1) the pricing date:

(a) 10 year gilts (G) = 5.5% (the initial index basis);

(b) 3 month LIBOR is the stepped up index basis and the 10 year mid swap rate (L) = 5.9%;

(c) initial fixed coupon rate = G + 200bp;

(d) swap spread = 0.4% (= 5.9% - 5.5%);

(e) initial fixed coupon rate = 7.5%;

(f) the swap spread shows that there is 40bps of spread in the stepped up index basis relative to the initial index basis; and

(g)  the initial fixed coupon rate of 7.5% is equivalent to the mid swap rate + 160bp, or L + 200bp - the swap spread;

(2) pricing of stepped-up rate at year 10 with step-up of 100bp without deducting swap spread:

(a) stepped-up floating rate = L + 200 + 100bp step-up = 8.9%; and

(b) effective step-up from initial fixed rate of 140bp (= 8.9% - 7.5%); and

(3) pricing of stepped-up rate at year 10 with step-up of 100bp with deduction of the swap spread:

(a) stepped-up floating coupon rate = L + 200 less 40bp swap spread (difference between 5.5% and 5.9%) + 100bp step-up = 8.5%

(b) effective step-up from initial rate of 100bp (= 8.5% - 7.5%).

(1) Subject to (2), if a tier two instrument is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision referred to in GENPRU 2.2.147 R (1) as adjusted under GENPRU 2.2.147 R (2), the first date that a step-up can take effect is deemed to be its final maturity date if that date is before its actual maturity date.

(2) If a tier two instrument:

(a) is or may be subject to a step-up during the period beginning on the fifth anniversary of the date of issue of that item and ending immediately before the tenth anniversary of the date of issue; and

(b) the step-up or possible step-up is one which may result in an increase over the initial rate that is greater than 50 basis points, less the swap spread between the initial index basis and the stepped-up index basis (all these terms must be interpreted in accordance with GENPRU 2.2.147 R);

(1) the instrument is fungible with other instruments (the "existing stock") that are included in the firm's tier one capital resources (in the case of GENPRU 2.2.147 R) or tier two capital resources (in the case of GENPRU 2.2.151 R);

(2) (if there has been no more than one previous issue of the existing stock) the existing stock complied with those limits on its date of issue;

(3) (if there has been more than one previous issue of the existing stock) the first such issue of the existing stock complied with those limits on its date of issue; and

(4) the result of the step-up on the instrument to which this rule applies is that the coupon on that instrument and the coupon on the existing stock is the same.

(1) A firm must not include in its tier one capital resources a potential tier one instrument that is or may become subject to a step-up if that step-up can arise earlier than the tenth anniversary of the date of issue of that item of capital.

(2) A firm must not include in its tier two capital resources a capital instrument that is or may become subject to a step-up if that step-up can arise earlier than the fifth anniversary of the date of issue of that item of capital.

Deductions from tier one: Intangible assets

Tier two capital: General

General conditions for eligibility as tier two capital instruments

(1) the claims of the creditors must rank behind those of all unsubordinated creditors;

(2)  the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm and any such event of default must not prejudice the subordination in (1);

(3) to the fullest extent permitted under the laws of the relevant jurisdictions, the remedies available to the subordinated creditor in the event of non-payment or other breach of the terms of the capital instrument must (subject to GENPRU 2.2.161 R) be limited to petitioning for the winding-up of the firm or proving for the debt in the liquidation or administration;

(4) any:

(a) remedy permitted by (3);

(b) remedy that cannot be excluded under the laws of the relevant jurisdictions as referred to in (3);

(c) remedy permitted by GENPRU 2.2.161 R; and

(d) terms about repayment as referred to in (5);

(5) without prejudice to (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2) or as permitted by GENPRU 2.2.172 R (Repayment at the option of the issuer) or GENPRU 2.2.194 R (2) (Repayment of lower tier two capital at the option of the holder) and any remedy described in (4)(a) to (c) must not prejudice this requirement;

(6) the debt agreement or terms of the capital instrument are governed by the law of England and Wales, or of Scotland or of Northern Ireland;

(7) to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;

(8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);

(9) the debt must be unsecured and fully paid up;

(10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, GENPRU 2.2.271 R (Other requirements: insurers carrying on with-profits business (Insurer only));

(11) the amount of the item included must be net of any foreseeable tax charge at the moment of its calculation or must be suitably adjusted in so far as such tax charges reduce the amount up to which that item may be applied to cover risks or losses; and

(12) the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual stating that the requirements in (1) to (7) and (insofar as it relates to whether the capital instrument is unsecured) (9) have been met.

General conditions for eligibility as tier two capital instruments: Additional remedies

(1) those remedies are not available for failure to pay any amount of principal, interest or expenses or in respect of any other payment obligation; and

(2) those remedies do not in substance amount to remedies to recover payment of the amounts in (1).

General conditions for eligibility as tier two capital instruments: Alternative governing laws

General conditions for eligibility as tier two capital instruments: Standard form documentation

Guidance on the general conditions for eligibility as tier two capital instruments

Tier two capital instruments: Connected transactions

Amendment of tier two instruments

(1) at least one Month before the amendment is due to take effect, the firm has given the FSA notice in writing of the proposed amendment and the FSA has not objected; and

(2) that notice includes confirmation that the legal opinions referred to in GENPRU 2.2.159 R (12) and, if applicable, GENPRU 2.2.163 R (General conditions for eligibility as tier two capital instruments: Alternative governing laws) and GENPRU 2.2.181 R (Legal opinions for upper tier two instruments), continue in full force and effect in relation to the terms of the debt and documents after any proposed amendment.

Redemption of tier two instruments

(1) in the case of an insurer, six Months; and

(2) in the case of a BIPRU firm, one Month;

(3) meet its capital resources requirement; and9

(4) have sufficient financial resources to meet the overall financial adequacy rule.9

Tier two capital: step-ups

Upper tier two capital: General

(1) perpetual cumulative preference shares;

(2) perpetual subordinated debt; and

(3) other instruments that have the same economic characteristics as (1) or (2).

(1) it must have no fixed maturity date;

(2) the terms of the instrument must provide for the firm to have the option to defer any coupon on the debt, except that the firm need not have that right in the case of a coupon payable in the form of an item of capital that is included in the same stage of capital or a higher stage of capital as that first item of capital;

(3) the terms of the instrument must provide for the loss-absorption capacity of the capital instrument and unpaid coupons, whilst enabling the firm to continue its business;

(4) it meets the conditions in GENPRU 2.2.169 R (Connected transactions) and GENPRU 2.2.180 R (Loss absorption); and

(5) the terms of the instrument are such that either the instrument or debt is not redeemable or repayable or it is repayable or redeemable only at the option of the firm.

(1) The purpose of GENPRU 2.2.177 R (2) is to ensure that a firm which issues an item of capital with a coupon retains flexibility over the payments of such coupon and can preserve cash in times of financial stress. However, a firm may include, as part of the capital instrument terms, a right to make payments of a coupon mandatory if an item of capital becomes ineligible to form part of its capital resources (for example, through a change in the relevant rules) and the firm has notified the FSA that the instrument is ineligible.8

(2) For the purpose of GENPRU 2.2.177 R (2), GENPRU 2.2.68 G (Dividend pushers) applies equally in relation to the inclusion of an instrument in upper tier two capital resources.8

(3) 1GENPRU 2.2.26A R provides an exception, in the case of a BIPRU firm, to the rule that instruments must have no fixed maturity date to be eligible for upper tier two capital resources.

Upper tier two capital: Loss absorption

(1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or

(2) do constitute such a liability but the terms of the instrument are such that:

(a) any such liability is not relevant for the purposes of deciding whether:

(i) the firm is, or is likely to become, unable to pay its debts; or

(ii) its liabilities exceed its assets;

(b) a person (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm or for any similar procedure in relation to the firm on the grounds that the firm is or may become unable to pay any such liability; and

(c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

Upper tier two capital: Legal opinions

Upper tier two capital: Guidance

Upper tier two capital: Revaluation reserves (BIPRU firm only)

(1) This rule applies to a BIPRU firm.

(2) A BIPRU firm must, in relation to equities held in the available-for-sale financial assets category:

(a) deduct any net losses at stage E of the calculation in the capital resources table (Deductions from tier one capital); and

(b) include any net gains (after deduction of deferred tax) in revaluation reserves at stage G of the calculation in the capital resources table (Upper tier two capital).

(3) A BIPRU firm must include any net gains, after deduction of deferred tax, on revaluation reserves of investment properties at stage G of the calculation in the capital resources table. A firm must include any losses on such revaluation reserves in profit and loss account and other reserves.

(4) A BIPRU firm must include any net gains, after deduction of deferred tax, on revaluation reserves of land and buildings at stage G of the calculation in the capital resources table. A firm must include any losses on such revaluation reserves in profit and loss account and other reserves.

(5) (2) only applies to a firm to the extent that the category of asset referred to in that paragraph exists under the accounting framework that applies to the firm as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied).

(6) (3) and (4) apply to a firm whatever the accounting treatment of those items is under the accounting framework that applies to the firm as referred to in GENPRU 1.3.4 R.

Upper tier two capital: General/collective provisions (BIPRU firm only)

(1) they are freely available to the firm;

(2) their existence is disclosed in internal accounting records; and

(3) their amount is determined by the management of the firm, verified by independent auditors and notified to the FSA.

(1) the sum of the market risk capital requirement and the operational risk capital requirement (if applicable), multiplied by a factor of 12.5; and

(2) the sum of risk weighted assets under the standardised approach for credit risk.

Upper tier two capital: Surplus provisions (BIPRU firm only)

Lower tier two capital

(1) it has an original maturity of at least five years; or

(2) it is redeemable on notice from the holder, but the period of notice of repayment required to be given by the holder is five years or more.

(1) For the purposes of calculating the amount of a lower tier two instrument which may be included in a firm's capital resources:

(a) in the case of an instrument with a fixed maturity date, in the final five years to maturity; and

(b) in the case of an instrument with or without a fixed maturity date but where five years' or more notice of redemption or repayment has been given, in the final five years to the date of redemption or repayment;

(2) If a firm gives notice of the redemption or repayment of a lower tier two instrument and (1) does not apply, the firm must no longer include it in its lower tier two capital resources.

The effect of swaps on debt capital

(1) the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) provides for a fair value hedge accounting relationship between a liability and its related hedge;

(2) such a relationship exists under that accounting framework between that debt instrument and that hedge;

(3) (if the debt instrument is a tier one instrument) the firm's obligations under that hedge comply with the conditions in GENPRU 2.2.64 R to GENPRU 2.2.65 R (General conditions for eligibility as tier one capital);

(4) (if the debt instrument is a tier two instrument or an upper tier three instrument) the firm's obligations under that hedge comply with the conditions in GENPRU 2.2.159 R to GENPRU 2.2.169 R (General conditions for eligibility as tier two capital instruments) as modified, in the case of an upper tier three instrument, by GENPRU 2.2.244 R (Application of tier two capital rules to tier three capital debt) except as follows:

(a) GENPRU 2.2.159 R (9) only applies to the extent that it requires that hedge to be unsecured; and

(b) GENPRU 2.2.159 R (12) (legal opinion) does not apply.

Deductions from tiers one and two: Qualifying holdings (bank or building society only)

(1) a credit institution or financial institution;

(2) an undertaking whose exclusive or main activities are a direct extension of banking or concern services ancillary to banking, such as leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity; or

(3) an insurer.

(1) (if the firm has one or more qualifying holdings that exceeds 15% of its relevant capital resources) the sum of such excesses; and

(2) to the extent not already deducted in (1), the amount by which the sum of each of that firm's qualifying holdings exceeds 60% of its relevant capital resources.

(1) the firm must not take into account the items referred to in any of the following:

(a) GENPRU 2.2.190 R to GENPRU 2.2.193 R (surplus provisions); or

(b) GENPRU 2.2.236 R (expected loss amounts and other negative amounts); or

(c) GENPRU 2.2.237 R (securitisation positions);

(2) the firm must make the deductions to be made at stage S of the calculation in the capital resources table (Deductions from total capital); and

(3) the firm need not deduct any excess trading book position under (2).

(1)  shares that are not held as investments; or

(2) shares that are held temporarily during the normal course of underwriting; or

(3) shares held in a firm's name on behalf of others.

Deductions from tiers one and two: Material holdings (BIPRU firm only)

(1) Subject to (2) and (3), a material holding is:12

(a) a BIPRU firm's holdings of shares and any other interest in the capital of an individual credit institution or financial institution (held in the non-trading book or the trading book or both) exceeding 10% of the share capital of the issuer, and, where this is the case, any holdings of subordinated debt of the same issuer are also included as a material holding; the full amount of the holding is a material holding; or12

(b) a BIPRU firm's holdings of shares, any other interest in the capital and subordinated debt in an individual credit institution or financial institution (held in the non-trading book or the trading book or both) not deducted under (a) if the total amount of such holdings exceeds 10% of that firm's capital resources at stage N (Total tier one capital plus tier two capital after deductions) of the calculation in the capital resources table (calculated before deduction of its material holdings); only the excess amount is a material holding; or12

(c) a bank or building society's aggregate holdings in the non-trading book of shares, any other interest in the capital, and subordinated debt in all credit institutions or financial institutions not deducted under (a) or (b) if the total amount of such holdings exceeds 10% of that firm's capital resources at stage N of the calculation in the capital resources table (calculated before deduction of its material holdings); only the excess amount is a material holding; or12

(d) a material insurance holding.12

(2) If a BIPRU firm holds shares in the capital of Business Growth Fund plc or another financial institution which makes venture capital investments (in this section and its related annexes, a "Venture Capital Investor") and the following conditions are met:12

(a) the sole business of the Venture Capital Investor is the making of venture capital investments together with the performance of ancillary activities in relation to the administration of the venture capital investments;12

(b) none of the venture capital investments made by the Venture Capital Investor is an investment (direct or indirect) in:

(i) a credit institution; or

(ii) a financial institution the principal activity of which is to perform any activity other than the acquisition of holdings in other undertakings;12

(c) the relevant proportion of the Venture Capital Investor is included in the firm's UK consolidation group in accordance with BIPRU 8.5; and12

(d) the firm assigns a risk weight to its exposure to the Venture Capital Investor as if it were an equity exposure to which the simple risk weight approach is applied as set out in BIPRU 4.7.9 R to BIPRU 4.7.12 R (and in calculating its capital resources requirement the firm must assign a risk weight to that exposure in accordance with those rules and notwithstanding that those rules would not otherwise apply to that calculation);12

(3) If a BIPRU firm holds shares in the capital of a subsidiary undertaking which is a financial institution solely by reason of its principal activity being the acquiring of holdings and which in turn holds (directly or indirectly) shares in the capital of a Venture Capital Investor (in this section and its related annexes, a "Venture Capital Holding Company") and the following conditions are met:12

(a) the Venture Capital Investor meets the conditions in (2)(a) and (b);12

(b) the Venture Capital Holding Company is included in the firm's UK consolidation group in accordance with BIPRU 8.5;12

(c) 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 investment in other investments can be identified and valued on a regular basis; and12

(d) the firm assigns a risk weight to its exposure to the proportion of the Venture Capital Holding Company that represents the value of its investment in Venture Capital Investors as if it were an equity exposure to which the simple risk weight approach is applied as set out in BIPRU 4.7.9 R to BIPRU 4.7.12 R (and in calculating its capital resources requirement the firm must assign a risk weight to that exposure in accordance with those rules and notwithstanding that those rules would not otherwise apply to that calculation);12

(1) insurance undertaking; or

(2) insurance holding company;

(3) it is a subsidiary undertaking of that firm; or

(4) that firm holds a participation in it.

(1) an ownership share; or

(2) subordinated debt or another item of capital that falls into Article 16(3) of the First Non-Life Directive or, as applicable, Article 27(3) of the Consolidated Life Directive.

(1) the book value of the material insurance holding; and

(2) the solo capital resources requirement for the insurance undertaking or insurance holding company in question calculated in accordance with Part 3 of GENPRU 3 Annex 1 R (Method 3 of the capital adequacy calculations for financial conglomerates).

(1) This paragraph gives guidance on how the calculation under GENPRU 2.2.214 R (1) should be carried out where an insurance undertaking is accounted for using the embedded value method.

(2) On acquisition, any "goodwill" element (that is, the difference between the acquisition value according to the embedded value method and the actual investment) should be deducted from tier one capital resources.

(3) The embedded value should be deducted from the total of tier one capital resources and tier two capital resources.

(4) Post-acquisition, where the embedded value of the undertaking increases, the increase should be added to reserves, while the new embedded value is deducted from total capital resources.

(5) This means that the net impact on the level of total capital resources is zero, although tier two capital resources headroom will increase with any increase in tier one capital resources reserves.

(6) Embedded value is the value of the undertaking taking into account the present value of the expected future inflows from existing life assurance business.

(1) 11This paragraph gives guidance as to the amount to be deducted at Part 2 of stage M (Deductions from the totals of tier one and two) of GENPRU 2 Annex 2 R (Capital resources table for a bank) and GENPRU 2 Annex 3 R (Capital resources table for a building society) in respect of investments in subsidiary undertakings and participations (excluding any amount which is already deducted as material holdings or qualifying holdings).

(2) The effect of those rules is to achieve the deduction of all investments in subsidiary undertakings and participations for banks and building societies by ensuring that amounts not already deducted under other rules are accounted for at this stage of the calculation of capital resources, except where the investment has been made in:12

(a) a Venture Capital Investor and the conditions in GENPRU 2.2.209R (2) are met; or12

(b) a Venture Capital Holding Company and the conditions in GENPRU 2.2.209R (3) are met;12

(3) The following investments in subsidiary undertakings and participations should be deducted at this stage:

(a) those not deducted in Part 1 of stage M because of the operation of the thresholds in GENPRU 2.2.205 R (on qualifying holdings) and GENPRU 2.2.209 R (on material holdings); and

(b) those which do not meet the definition of qualifying holding or material holding, but excluding investments in Venture Capital Investors which are ignored in accordance with GENPRU 2.2.209R (2) and investments in Venture Capital Holding Companies which are ignored in accordance with GENPRU 2.2.209R (3), for the purposes of determining whether there is a material holding.12

(4) For example, an investment in an undertaking which is not a qualifying holding under GENPRU 2.2.204 R (2) (on the definition of a non-financial undertaking), that is whose exclusive or main activities are a direct extension of banking or concern services ancillary to banking, such as leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity, should be deducted at this stage.

Deductions from tiers one and two: Reciprocal cross holdings (BIPRU firm only)

(1) a credit institution; or

(2) a financial institution;

(3) the holding is the subject of an agreement or arrangement between the BIPRU firm and either the issuer of the instrument in question or a member of a group to which the issuer belongs;

(4) under the terms of the agreement or arrangement described in (3) the issuer invests in the BIPRU firm or in a member of the group to which that BIPRU firm belongs; and

(5) the effect of that agreement or arrangement on the capital position of the BIPRU firm, the issuer, or any member of a group to which either belongs, under any relevant rules is significantly more beneficial than it is in economic terms, taking into account the agreement or arrangement as a whole.

Deductions from tiers one and two: Connected lending of a capital nature (bank only)

(1) GENPRU 2.2.221 R to GENPRU 2.2.235 G only apply to a bank.12

(2) If a firm has elected to ignore an investment in a Venture Capital Investor or a Venture Capital Holding Company in accordance with GENPRU 2.2.209R (2) or (3), for the purposes of determining whether there is a material holding, GENPRU 2.2.221 R to GENPRU 2.2.233 R do not apply to any lending by the firm to that Venture Capital Investor or Venture Capital Holding Company, provided that any lending to the Venture Capital Holding Company is made to and deployed by the firm solely in connection with the Venture Capital Investor.12

(1) P is closely related to the bank; or

(2) P is an associate of the bank; or

(3) the same persons significantly influence the governing body of P and the bank.

(1) it is made by the bank to a connected party; and

(2) it falls into GENPRU 2.2.228 R.

(1) based on the terms of the loan and the other knowledge available to the bank, the borrower would be able to consider it from the point of view of its characteristics as capital as being similar to share capital or subordinated debt; or

(2) the position of the lender from the point of view of maturity and repayment is inferior to that of the senior unsecured and unsubordinated creditors of the borrower.

(1) it funds directly or indirectly a loan to a connected party of the bank falling into GENPRU 2.2.228 R6 or an investment in the capital of a connected party of the bank; and

(2) it falls into GENPRU 2.2.228 R.

(1) it is secured by collateral that is eligible for the purposes of credit risk mitigation under the standardised approach to credit risk as set out in BIPRU 5.4 (Financial collateral) and BIPRU 5.5 (Other funded credit risk mitigation); or

(2) it is repayable on demand (and should be treated as such for accounting purposes by the borrower and lender) and the bank can demonstrate that there are no potential obstacles to exercising the right to repay, whether contractual or otherwise.

(1) the loan meets the requirements of GENPRU 2.2.228 R; or

(2) the rights that the bank would have against the borrower with respect to the guarantee meet the requirements of GENPRU 2.2.228 R (2).

(1) the loan meets the conditions in GENPRU 2.2.228 R; or

(2) the guarantee meets the conditions in GENPRU 2.2.231 R (2).

(1) is acting as a vehicle to pass funding to an unconnected party; and

(2) has no other creditors whose claims could be senior to those of the lender.

Deductions from tiers one and two: Expected losses and other negative amounts (BIPRU firm only)

(1) any negative amounts arising from the calculation in BIPRU 4.3.8 R (Treatment of expected loss amounts); and

(2) any expected loss amounts4 calculated in accordance with BIPRU 4.7.12 R (Expected loss amounts under the simple risk weight approach to calculating risk weighted exposure amounts for exposures belonging to the equity exposure IRB exposure class) or BIPRU 4.7.17 R (Expected loss amounts under the PD/LGD approach).

Deductions from tiers one and two: Securitisation positions (BIPRU firm only)

(1) the exposure amount of securitisation positions which receive a risk weight of 1250% under BIPRU 9 (Securitisation), unless the firm includes the securitisation positions in its calculation of risk weighted exposure amounts (see BIPRU 9.10 (Reduction in risk-weighted exposure amounts)); and14

(2) the exposure amount of securitisation positions in the trading book that would receive a risk weight of 1250% if they were in the firm's non-trading book.14

Deductions from tiers one and two: Special treatment of material holdings and other items (BIPRU firm only)

(1) material holdings;

(2) expected loss amounts and other negative amounts referred to in GENPRU 2.2.236 R; and

(3)  securitisation positions referred to in GENPRU 2.2.237 R.

(1) The treatment in the capital resources table of the deductions in GENPRU 2.2.238 R only has effect for the purpose of the capital resources gearing rules.

(2) In other cases (3) and (4) apply.

(3) A BIPRU firm making the deductions described in GENPRU 2.2.238 R must deduct 50% of the total amount of those deductions at stage E (Deductions from tier one capital) and 50% at stage J (Deductions from tier two capital) of the calculation in the capital resources table after the application of the capital resources gearing rules.

(4) To the extent that half of the total of:

(a) material holdings;

(b) expected loss amounts and other negative amounts; and

(c) securitisation positions;

Tier three capital: upper tier three capital resources (BIPRU firm only)

(1) it has an original maturity of at least two years or is subject to at least two years' notice of repayment; and

(2) payment of interest or principal is permitted only if, after that payment, the firm's capital resources would be not less than its capital resources requirement.

Tier three capital: lower tier three capital resources (BIPRU firm only)

(1) they are net of any foreseeable charges or dividends and less net losses on its other business; and

(2) a firm must not take into account items that have already been included in the calculation of capital resources as part of the calculation of the following items:

(a) interim net profits (see stage (A) of the capital resources table); or

(b) interim net losses or material interim net losses (see stage (A) of the capital resources table); or

(c) profit and loss and other reserves (see stage (A) of the capital resources table).

Deductions from total capital: Inadmissible assets (insurers only)

(1) for which a sufficiently objective and verifiable basis of valuation does not exist; or

(2) whose realisability cannot be relied upon with sufficient confidence; or

(3) whose nature presents an unacceptable custody risk; or

(4) the holding of which may give rise to significant liabilities or onerous duties.

Deductions from total capital: Adjustments for related undertakings

Deductions from total capital: Illiquid assets (BIPRU investment firm only)

(1) tangible fixed assets (except land and buildings if they are used by a firm as security for loans, but this exclusion is only up to the value of the principal outstanding on the loans); or

(2) any holdings in the capital resources of credit institutions or financial institutions, except to the extent that:

(a) they have already been deducted as a material holding; or

(b) they are shares which are included in a firm's trading book and included in the calculation of the firm's market risk capital requirement; or

(3) holdings of other securities which are not readily realisable securities; or

(4) deficiencies of net assets in subsidiary undertakings; or

(5) deposits which are not repayable within 90 days (except for payments in connection with margined futures or options contracts); or

(6) loans and other amounts owed to a firm except where they are due to be repaid within 90 days; or

(7) physical stocks except for positions in physical commodities which are included in the calculation of a firm's commodity PRR.

Deductions from total capital: Excess trading book position (bank or building society only)

(1) The excess trading book position is the excess of:

(a) a bank or building society's aggregate net long (including notional) trading book positions in shares, subordinated debt or any other interest in the capital of credit institutions or financial institutions;

(b) 25% of that firm's capital resources calculated at stage T (Total capital after deductions) of the capital resources table (calculated before deduction of the excess trading book position).

(2) Only the excess amount calculated under (1) must be deducted.

Other capital resources: Unpaid share capital or initial funds and calls for supplementary contributions (Insurer only)

Other requirements: insurers carrying on with-profits business (Insurer only)

(1) the insurer must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;

(2) the intention to manage the with-profits fund on the basis set out in (1) must be disclosed in the firm's Principles and Practices of Financial Management; and

(3) no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under Principle 6 (Customers' interests).

(1) Upper tier two instruments should meet the requirements of GENPRU 2.2.177 R (3) which goes beyond the requirement in GENPRU 2.2.271 R (3) since it requires a firm to have the option to defer payments in all circumstances, not just if necessary to treat customers fairly. However, for lower tier two instruments, GENPRU 2.2.271 R (3) represents an additional requirement since a failure to pay amounts of interest or principal on a due date must not constitute an event of default under GENPRU 2.2.159 R (2) for firms carrying on with-profits insurance business.

(2) For firms which are realistic basis life firms compliance with GENPRU 2.2.271 R (3) would usually be achieved if the capital instrument provides that no amounts will be payable under it unless the firm's capital resources exceed its capital resources requirement. However, such firms should ensure that the terms of the capital instrument refer to FSA capital resources requirements in force from time to time, including the current realistic reserving requirements and are not restricted to former minimum capital requirements based only on the Insurance Directives' required minimum margin of solvency. For firms which are not realistic basis life firms, compliance with GENPRU 2.2.271 R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.

Public sector guarantees