GENPRU 2.2 Capital resources

This section applies to:

1. (1)

   a BIPRU firm; and

2. (2)

   an insurer unless it is:

   1. (a)

      a non-directive friendly society; or

   2. (b)

      a Swiss general insurer; or

   3. (c)

      an EEA-deposit insurer; or

   4. (d)

      an incoming EEA firm; or

   5. (e)

      an incoming Treaty firm.

A firm must calculate its capital resources in accordance with the version of the capital resources table applicable to the firm, subject to the capital resources gearing rules. The version of the capital resources table that applies to a firm is specified in the table in GENPRU 2.2.19 R.

In the case of a BIPRU firm the capital resources table also sets out how the capital resources requirement is deducted from capital resources in order to decide whether its capital resources equal or exceed its capital resources requirement.

A firm may include in a lower stage of capital, capital resources which are eligible for inclusion in a higher stage of capital if the capital resources gearing rules would prevent the use of that capital in that higher stage of capital. However:

1. (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. (2)

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

An item of tier one capital which is included in a firm's tier two capital resources under GENPRU 2.2.25 R is not subject to the requirement to obtain a legal opinion in GENPRU 2.2.159R (12).

A BIPRU firm may include in a lower stage of capital, innovative tier one capital that it is prohibited from using under GENPRU 2.2.42 R (BIPRU firms may not use innovative tier one capital to meet the CRR). However:

1. (1)

   the capital resources gearing rules applicable to that lower stage of capital apply to that innovative tier one capital; and

2. (2)

   (subject to GENPRU 2.2.28 R) the rules in GENPRU governing the eligibility of capital in that lower stage of capital continue to apply.

The requirement to obtain a legal opinion in GENPRU 2.2.159R (12) does not apply to innovative tier one capital treated under GENPRU 2.2.27 R but the requirements to obtain a legal opinion in GENPRU 2.2.118 R continue to apply.

In relation to the tier one capital resources of an insurer, bank or building society, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions), at least 50% must be accounted for by core tier one capital.

In relation to the capital resources of an insurer,and subject to GENPRU 2.2.42 R (Restriction on the use of innovative tier one capital), those of a BIPRU firm, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions), no more than 15% may be accounted for by innovative tier one capital.

At least 50% of an insurer's MCR must be accounted for by the sum of:

1. (1)

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

2. (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);

less the amount calculated at stage E of the calculation in the capital resources table (Deductions from tier one capital).

An insurer carrying on long-term insurance business must meet the higher of:

1. (1)

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

2. (2)

   the base capital resources requirement;

with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E in the capital resources table (Deductions from tier one capital).

An5 insurer carrying on general insurance business must meet the higher of:

1. (1)

   1/3 of the general insurance capital requirement; and

2. (2)

   the base capital resources requirement;

with the sum of the items listed at stages A (Core tier one capital), B (Perpetual non-cumulative preference shares), G (Upper tier two capital) and H (Lower tier two capital) in the capital resources table less the sum of the items listed at stage E (Deductions from tier one capital) in the capital resources table.

In GENPRU 2.2.33 R andGENPRU 2.2.34 R:

1. (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. (2)

   innovative tier one capital that meets the conditions (other than GENPRU 2.2.159R (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. (3)

   an insurer must exclude from the calculation the higher of the following:

   1. (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

   2. (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;

   where adjusted stage M means the amount calculated at stage M of the calculation in the capital resources table (Total capital after deductions) less the amount of any innovative tier one capital that is not treated as upper tier two capital for the purpose of GENPRU 2.2.33 R orGENPRU 2.2.34 R, as the case may be.

Subject to GENPRU 2.2.38 R, an insurer must exclude from the calculation of its capital resources the following:

1. (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. (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.

At least 75% of an insurer's MCR must be accounted for by the sum of:

1. (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. (2)

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

An insurer that carries on both long-term insurance business and general insurance business must apply the relevant limits in GENPRU 2.2.32 R to GENPRU 2.2.38 R separately for each type of business.

For the purpose of meeting the main BIPRU firm Pillar 1 rules, a BIPRU firm may not include innovative tier one capital in its tier one capital resources.

Tier one capital and tier two capital are the only type of capital resources that a BIPRU firm may use for the purpose of meeting:

1. (1)

   the credit risk capital component;

2. (2)

   the operational risk capital requirement;

3. (3)

   the counterparty risk capital component; and

4. (4)

   the base capital resources requirement.

GENPRU 2.2.44 R (and the capital resources gearing rules that relate to it) also applies for the purposes of any other requirement in the Handbook for which it is necessary to calculate the capital resources of a BIPRU firm, except for the purposes described in GENPRU 2.2.47 R and except as may otherwise be stated in the relevant part of the Handbook.

For the purpose of GENPRU 2.2.44 R:

1. (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. (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.

For the purposes of meeting:

1. (1)

   the market risk capital requirement;

2. (2)

   the concentration risk capital component; and

3. (3)

   the fixed overheads requirement (where applicable);

a BIPRU firm may only use the following parts of its capital resources:

1. (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);

2. (5)

   tier two capital to the extent that it:

   1. (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

   2. (b)

      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 two capital is required to meet the requirements in GENPRU 2.2.44 R);

3. (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

4. (7)

   tier three capital.

The amount of tier one capital and tier two capital that is not used to meet the requirements in GENPRU 2.2.44 R as referred to in GENPRU 2.2.47R (4) and (5)(5) is equal to the amount calculated at stage N of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) less the parts of the capital resources requirement deducted immediately after stage N of the capital resources table (the parts of the capital resources requirements listed in GENPRU 2.2.44 R).

For the purpose of meeting the requirements in GENPRU 2.2.47R (1) to GENPRU 2.2.47R (3) and subject to GENPRU 2.2.50 R, a BIPRU firm must not include any item in either:

1. (1)

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

2. (2)

   its upper tier three capital resources;

to the extent that the sum of (1) and (2) would exceed 250% of the amount resulting from the following calculation:

1. (3)

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

2. (4)

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

In relation to a BIPRU investment firm which calculates its capital resources under GENPRU 2 Annex 4 (Capital resources table for a BIPRU investment firm deducting material holdings), the figure of 200% replaces that of 250% in GENPRU 2.2.49 R.

A BIPRU firm may use the capital resources used to meet the base capital resources requirement to meet any other part of the capital resources requirement.

A firm may not include a capital instrument in its tier one capital resources unless it complies with the following conditions:

1. (1)

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

2. (2)

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

3. (3)

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

4. (4)

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

The categories referred to in GENPRU 2.2.62R (1) are:

1. (1)

   permanent share capital;

2. (2)

   eligible partnership capital;

3. (3)

   eligible LLP members' capital;

4. (4)

   sole trader capital;

5. (5)

   a perpetual non-cumulative preference share;

6. (6)

   (in the case of a building society) PIBS; and

7. (7)

   an innovative tier one instrument.

The conditions that an item of capital of a firm must comply with under GENPRU 2.2.62R (2)1 are as follows:

1. (1)

   it is issued by the firm;

2. (2)

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

3. (3)

   it:

   1. (a)

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

   2. (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. (4)

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

   1. (a)

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

   2. (b)

      (if the firm is obliged to pay the coupon) the coupon is payable in the form of an item of capital that is included in a higher stage of capital or the same stage of capital as that first item of capital;

5. (5)

   any coupon is either:

   1. (a)

      non-cumulative; or

   2. (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. (6)

   it is able to absorb losses to allow the firm to continue trading and 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 (Innovative tier one instrument should not constitute a liability);

7. (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. (8)

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

9. (9)

   it ranks for repayment upon winding up, administration or any other similar process no higher than a share of a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986(whether or not it is such a share); and

10. (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)).

An item of capital does not qualify for inclusion as tier one capital if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in GENPRU 2.2.64R (1) to GENPRU 2.2.64R (9).

A firm may not include a capital instrument in its tier one capital resources, unless its contractual terms are such that:

1. (1)

   (if it is redeemable other than in circumstances set out in GENPRU 2.2.64R (3)(a) (redemption on a winding up)) it is redeemable only at the option of the firm; and

2. (2)

   the firm cannot exercise that redemption right:

   1. (a)

      before the fifth anniversary of its date of issue;

   2. (b)

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

   3. (c)

      unless at the time of exercise of that right it complies with the main BIPRU firm Pillar 1 rules and will continue to do so after redemption.

A firm may include a term in a tier one instrument allowing the firm to redeem it before the date in GENPRU 2.2.70R (2)(a) if the following conditions are satisfied:

1. (1)

   the other conditions in GENPRU 2.2.70 R are met;

2. (2)

   the circumstance that entitles the firm to exercise that right is 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;

3. (3)

   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

4. (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.

A firm must not redeem a tier one instrument in accordance with a term included under GENPRU 2.2.71 R.

A firm must not redeem any tier one instrument that it has included in its tier one capital resources unless it has notified the FSA of its intention at least one month before it does so.

If a firm gives notice of the redemption or repayment of any tier one instrument, the firm must no longer include that instrument in its tier one capital resources.

In relation to an innovative tier one instrument or a PIBS which is redeemable and which satisfies1 the following conditions:

1. (1)

   it is or may become subject to a step-up; and1

2. (2)

   a reasonable person would think that:

   1. (a)

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

   2. (b)

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

   the redemption date in GENPRU 2.2.70R (2)(a) is amended by replacing "fifth anniversary" with "tenth anniversary".

1. (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. (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. (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. (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. (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. (1)

   A share is not redeemable for the purposes of this section merely because the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 allows the firm that issued it to purchase it.

2. (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).

A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in GENPRU 2.2):

1. (1)

   (in the case of a firm that is a company as defined in the Companies Act 1985 or the Companies (Northern Ireland) Order 1986)it is "called-up share capital" within the meaning given to that term in that Act or, as the case may be, that Order; or

2. (2)

   (in the case of a building society) it is a "deferred share" as defined in the Building Societies (Deferred Shares) Order 1991; or

3. (3)

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

   1. (a)

      in economic terms; and

   2. (b)

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

   substantially the same as called-up share capital falling into (1).

A firm may not include a capital instrument other than a share in its tier one capital resources unless it complies with GENPRU 2.2.80R (3).

Permanent share capital means an item of capital which (in addition to satisfying GENPRU 2.2.64 R) meets the following conditions:

1. (1)

   it is:

   1. (a)

      an ordinary share; or

   2. (b)

      a members' contribution; or

   3. (c)

      part of the initial fund of a mutual;

2. (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; and

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 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).

1. (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. (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 stages A (Core tier one capital) and B (Perpetual non-cumulative preference shares) in the capital resources table.

3. (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.

1. (1)

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

2. (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. (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.

Dividends must be deducted from reserves as soon as they are declared.

A firm must account for a capital contribution as an increase in reserves and may, notwithstanding GENPRU 2.2.63 R, count that increase in reserves as core tier one capital.

In the case of a BIPRU firm which is the originator of a securitisation, net gains arising from the capitalisation of future income from the securitised assets and providing credit enhancement to positions in the securitisation must be excluded from profit and loss account and other reserves.

Eligible partnership capital means a partners' account:

1. (1)

   into which capital contributed by the partners is paid; and

2. (2)

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

   1. (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; or

   2. (b)

      the partnership is otherwise dissolved or wound up and either the BIPRU firm has ceased to be authorised or no longer has a Part IV permission.

Eligible LLP members' capital means a members' account:

1. (1)

   into which capital contributed by the members is paid; and

2. (2)

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

   1. (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; or

   2. (b)

      the limited liability partnership is otherwise dissolved or wound up and either the BIPRU firm has ceased to be authorised or no longer has a Part IV permission.

A BIPRU firm that is a partnership or a limited liability partnership may not include eligible partnership capital or eligible LLP members' capital in its tier one capital resources unless (in addition to GENPRU 2.2.62 R (General conditions relating to tier one capital)) it complies with GENPRU 2.2.83R (2) (Coupons should not be cumulative or mandatory). However GENPRU 2.2.64R (3) (Redemption) is replaced by GENPRU 2.2.93 R or GENPRU 2.2.94 R.

The items permanent share capital and share premium account (which form part of core tier one capital) and perpetual non-cumulative preference shares (which forms stage B of the capital resources table) do not apply to a BIPRU firm that is a partnership or a limited liability partnership.

Without prejudice to GENPRU 2.2.62 R (Tier one capital: General), the item other reserves (which forms part of the item profit and loss and other reserves) applies to a BIPRU firm that is a partnership or a limited liability partnership to the extent the reserves correspond to reserves that are eligible for inclusion as other reserves in the case of a BIPRU firm that is incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986.

A BIPRU firm which is a partnership or limited liability partnership must deduct at stage E of the calculation in the capital resources table (Deductions from tier one capital) the amount by which the aggregate of the amounts withdrawn by its partners or members exceeds the profits of that firm. Amounts of eligible partnership capital or eligible LLP members' capital repaid in accordance with GENPRU 2.2.93 R or GENPRU 2.2.94 R are not included in this calculation.

1. (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. (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. (3)

   A firm that is incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986may 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. (4)

   (3) applies to a firm that is not incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 if its share premium account is subject to substantially the same or greater restraints on use than a share premium account falling into (3).

Externally verified interim net profits are interim profits which have been verified by a firm's external auditors after deduction of tax, declareddividends and other appropriations.

GENPRU 2.2.104 R to GENPRU 2.2.107 R only apply to an insurer.

Valuation differences are all differences between the valuation of assets and liabilities as valued in GENPRU and the valuation that the insurer uses for its external financial reporting purposes, except valuation differences which are dealt with elsewhere in the capital resources table. The sum of these valuation differences must either be added to (if positive) or deducted from (if negative) an insurer's capital resources in accordance with the capital resources table.

1. (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. (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:

   1. (a)

      the difference between the undiscounted technical provisions and the discounted technical provisions; or

   2. (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. (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.

In relation to an insurer the fund for future appropriations means the fund of the same name required by the insurance accounts rules, comprising all funds the allocation of which either to policyholders or to shareholders has not been determined by the end of the financial year, or the balance sheet items under international accounting standards which in aggregate represent as nearly as possible that fund.

A perpetual non-cumulative preference share may be included at stage B of the calculation in the capital resources table if (in addition to satisfying all the other requirements in relation to tier one capital) it satisfies the following conditions:

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. (2)

   it is not an innovative tier one instrument.

A building society may include a PIBS at stage B of the calculation in the capital resources table if (in addition to satisfying all the other requirements in relation to tier one capital) it is a "deferred share" as defined in the Building Societies (Deferred Shares) Order 1991.

If an item of capital is stated to be an innovative tier one instrument by the rules in GENPRU 2.2, it cannot be included in stages A (Core tier one capital) or B (Perpetual non-cumulative preference shares) of the calculation in the capital resources table.

If a tier one instrument, other than a PIBS:

1. (1)

   is redeemable; and

2. (2)

   a reasonable person would think that:

   1. (a)

      the firm is likely to redeem it; or

   2. (b)

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

that tier one instrument is an innovative tier one instrument.

A firm may include a capital instrument that is not a share in its innovative tier one capital resources if (in addition to satisfying all the other requirements in relation to tier one capital and innovative tier one capital) it satisfies the condition in this rule. In addition a firm may not include any other capital in its innovative tier one capital resources unless it satisfies the condition in this rule. The condition in this rule is that the firm's obligations under the instrument either:

1. (1)

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

2. (2)

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

   1. (a)

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

      1. (i)

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

      2. (ii)

         its liabilities exceed its assets;

   2. (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

   3. (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).

A firm 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.

A tier one instrument, other than a PIBS, with a cumulative or mandatory coupon is an innovative tier one instrument.

If:

1. (1)

   a potential tier one instrument, other than a PIBS, is or may become subject to a step-up; and

2. (2)

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

that potential tier one instrument is an innovative tier one instrument.

GENPRU 2.2.123 R to GENPRU 2.2.137 R apply to a BIPRU firm.

1. (1)

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

   1. (a)

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

   2. (b)

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

2. (2)

   The conditions referred to in (1) are:

   1. (a)

      that capital is issued to an SPV; or

   2. (b)

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

3. (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:

   1. (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

   2. (b)

      (in any other case) GENPRU 2.2.133 R.

A BIPRU firm may only count capital to which GENPRU 2.2.124 R applies as innovative tier one capital.

For the purpose of GENPRU 2.2, an SPV is, in relation to a BIPRU firm, any undertaking whose main activity is to raise funds for that firm or for a group to which that BIPRU firm belongs.

The SPV referred to in GENPRU 2.2.124R (2)(a) must satisfy the following conditions:

1. (1)

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

2. (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; and

3. (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.

The SPV referred to in GENPRU 2.2.124R (2)(a) must fund its subscription for the capital issued by the firm by the issue of capital that satisfies the following conditions:

1. (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. (2)

   its terms must include an obligation on the firm to substitute for the instrument issued by the SPV a tier one instrument issued by that firm that is not an innovative tier one instrument when the capital resources of the firm fall below, or are likely to fall below, its capital resources requirement;

3. (3)

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

4. (4)

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

   1. (a)

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

   2. (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 innovative tier one capital.

For the purpose of GENPRU 2.2.129 R and GENPRU 2.2.132 R, GENPRU 2.2.118 R (Requirement to obtain a legal opinion) does not apply.

In relation to the obligation to substitute described in GENPRU 2.2.129R (2), a firm must take all reasonable steps to ensure that it has at all times authorised and unissued tier one instruments that are not innovative tier one instruments (and the authority to issue them) sufficient to discharge its obligation to substitute.

The capital which the firm seeks to include in its capital resources under GENPRU 2.2.124R (3)(a) must satisfy the following conditions:

1. (1)

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

2. (2)

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

3. (3)

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

1. (1)

   This rule deals with any transaction:

   1. (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

   2. (b)

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

2. (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. (3)

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

4. (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 2.2.129R (1) and GENPRU 2.2.129R (4), whether or not issued by an SPV.

5. (5)

   The obligations in GENPRU 2.2.129R (2) and GENPRU 2.2.129R (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. (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).

A firm which satisfies the conditions for the inclusion of capital set out in GENPRU 2.2.124 R, must, in addition, if that transaction is in any respect unusual, notify the FSA at least one Month in advance of the date on which the firm intends to include that capital in its capital resources.

A firm must ensure that, in relation to a transaction falling within GENPRU 2.2.124 R:

1. (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. (2)

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

1. (1)

   This rule applies to a potential tier one instrument if:

   1. (a)

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

   2. (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

   3. (c)

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

2. (2)

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

   1. (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 200%; or

   2. (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. (3)

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

In GENPRU 2.2.138 R to GENPRU 2.2.142 R:

1. (1)

   the original capital item means the capital item that is being redeemed; and

2. (2)

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

In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio means the ratio of:

1. (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. (2)

   one unit of the original capital item.

In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio as at the date of issue of the original capital item is calculated as if the original capital item were redeemable at that time.

If the conversion instruments or the original capital item are subdivided or consolidated or subject to any other occurrence that would otherwise result in like not being compared with like, the conversion ratio calculation in GENPRU 2.2.138 R must be adjusted accordingly.

1. (1)

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

   1. (a)

      the redemption proceeds; or

   2. (b)

      any coupon on that capital item;

can be satisfied by the issue of another capital instrument.

1. (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):

   1. (a)

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

   2. (b)

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

1. (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. (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.

1. (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. (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. (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.

1. (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 2.2.147R (1) as adjusted under GENPRU 2.2.147R (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. (2)

   If a tier two instrument:

   1. (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

   2. (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);

   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.

An instrument does not breach GENPRU 2.2.147 R or as the case may be, is not subject to a deemed maturity date under GENPRU 2.2.151 R, even though it is or may be subject to a step-up that exceeds the amount specified in those rules if:

1. (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. (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. (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. (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. (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. (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.

A firm must deduct from its tier one capital resources the value of intangible assets.

A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:

1. (1)

   the claims of the creditors must rank behind those of all unsubordinated creditors;

2. (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. (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. (4)

   any:

   1. (a)

      remedy permitted by (3);

   2. (b)

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

   3. (c)

      remedy permitted by GENPRU 2.2.161 R; and

   4. (d)

      terms about repayment as referred to in (5);

   must not prejudice the matters in (1) and (2) and in particular any damages permitted by (b) or (c) and repayment obligation must be subordinated in accordance with (1);

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 2.2.194R (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. (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. (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. (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. (9)

   the debt must be unsecured and fully paid up;

10. (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. (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. (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.

A holder of a non-deferred share of a building society must be treated as a senior unsecured creditor of that building society for the purpose of GENPRU 2.2.159 R.

A capital instrument may be included in a firm's tier two capital resources even though the remedies available to the subordinated creditor go beyond those referred to in GENPRU 2.2.159R (3), if the following conditions are satisfied:

1. (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. (2)

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

GENPRU 2.2.159R (6) does not apply if the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the same degree of subordination has been achieved under the law that governs the debt and the agreement as that which would have been achieved under the laws of England and Wales, Scotland, or Northern Ireland.

An item of capital does not comply with GENPRU 2.2.159 R (General conditions for eligibility as tier two capital instruments) or GENPRU 2.2.177 R (Upper tier two capital: General) if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in whichever of those rules apply.

A firm must not amend the terms of the capital or the documents referred to in GENPRU 2.2.159R (8) unless:

1. (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. (2)

   that notice includes confirmation that the legal opinions referred to in GENPRU 2.2.159R (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.

A tier two instrument may be redeemable at the option of the firm, but any term of the instrument providing for the firm to have the right to exercise such an option must not provide for that right to be exercisable earlier than the fifth anniversary of the date of issue of the instrument.

GENPRU 2.2.71 R to GENPRU 2.2.73 G (Tier one instruments may be redeemed by the issuer before the fifth anniversary in limited circumstances) apply to GENPRU 2.2.172 R in the same way as they do to GENPRU 2.2.70 R (The issuer should not redeem tier one capital before the fifth anniversary).

In relation to a tier two instrument, a firm must notify the FSA:

1. (1)

   in the case of an insurer, six Months; and

2. (2)

   in the case of a BIPRU firm, one Month;

before the date of the proposed repayment (unless that firm intends to repay an instrument on its final maturity date) providing details of how it will meet its capital resources requirement after such repayment.

A capital instrument must (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) meet the following conditions before it can be included in a firm's upper tier two capital resources:

1. (1)

   it must have no fixed maturity date;

2. (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. (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. (4)

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

5. (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.

If a firm gives notice of the redemption or repayment of an upper tier two instrument, the firm must no longer include it in its upper tier two capital resources.

A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:

1. (1)

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

2. (2)

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

   1. (a)

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

      1. (i)

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

      2. (ii)

         its liabilities exceed its assets;

   2. (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

   3. (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).

A firm may not include an upper tier two instrument in its upper tier two capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.177R (3) and GENPRU 2.2.180 R (Loss absorption) are met. This rule does not apply to a perpetual cumulative preference share.

1. (1)

   This rule applies to a BIPRU firm.

2. (2)

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

   1. (a)

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

   2. (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. (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. (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. (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. (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.

A BIPRU firm which adopts the standardised approach to credit risk may include general/collective provisions in its tier two capital resources only if:

1. (1)

   they are freely available to the firm;

2. (2)

   their existence is disclosed in internal accounting records; and

3. (3)

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

The value of general/collective provisions which a firm may include in its tier two capital resources as referred to in GENPRU 2.2.187 R may not exceed 1.25% of the sum of the following:

1. (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. (2)

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

Where a firm is unable to determine whether collective/general provisions relate only to exposures on either the standardised approach or the IRB approach, that firm must allocate them on a basis which is reasonable and consistent.

A BIPRU firm calculating risk weighted exposure amounts under the IRB approach may include in its upper tier two capital resources positive amounts resulting from the calculation in BIPRU 4.3.8 R (Treatment of expected loss amounts), up to 0.6% of the risk weighted exposure amounts calculated under that approach.

A BIPRU firm calculating risk weighted exposure amounts under the IRB approach may not include in its capital resources value adjustments and provisions included in the calculation in BIPRU 4.3.8 R (Treatment of expected loss amounts under the IRB approach for trading book exposures) or value adjustments and provisions for exposures that would otherwise have been eligible for inclusion in general/collective provisions other than in accordance with GENPRU 2.2.190 R.

For the purpose of GENPRU 2.2.190 R and GENPRU 2.2.191 R, risk weighted exposure amounts must not include those calculated in respect of securitisation positions which have a risk weight of 1250%.

If a BIPRU firm calculates risk weighted exposure amounts under the IRB approach for the purposes of BIPRU 14 (Capital requirements for settlement and counterparty risk) it must not include valuation adjustments referred to in BIPRU 14.2.18 R (1) (Treatment of expected loss amounts) in its capital resources except in accordance with that rule.

A firm may include a capital instrument in its lower tier two capital resources if (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) either the holder has no right to repayment or it satisfies either of the following conditions:

1. (1)

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

2. (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. (1)

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

   1. (a)

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

   2. (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;

   the principal amount must be amortised on a straight line basis.

2. (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.

GENPRU 2.2.198 R to GENPRU 2.2.201 R apply to a tier one instrument, tier two instrument or tier three instrument of a firm that is treated as a liability under the accounting framework to which it is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) (a "debt instrument").

A firm must recognise for the purpose of this section any effect that changes in exchange rates or interest rates have on a debt instrument (as defined in GENPRU 2.2.198 R) under 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).

A firm must recognise, in accordance with GENPRU 2.2.201 R, the effect of a foreign currency hedge on a debt instrument (as defined in GENPRU 2.2.198 R) denominated in a foreign currency or of an interest rate hedge on a fixed rate coupon debt instrument if:

1. (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. (2)

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

3. (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. (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:

   1. (a)

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

   2. (b)

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

A firm must recognise the effect of a hedge as referred to in GENPRU 2.2.200 R by including the net accounting fair value of the hedging instrument in the valuation of the debt instrument (as defined in GENPRU 2.2.198 R).

GENPRU 2.2.202 R to GENPRU 2.2.207 R only apply to a bank or building society.

A qualifying holding is a direct or indirect holding of a bank or building society in a non-financial undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking.

For the purpose of GENPRU 2.2.203 R, a non-financial undertaking is an undertaking other than:

1. (1)

   a credit institution or financial institution;

2. (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. (3)

   an insurer.

The amount of qualifying holdings that a bank or building society must deduct in the calculation in the capital resources table is:

1. (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. (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.

The relevant capital resources of a firm mean for the purposes of this rule the sum of the amount of capital resources calculated at stages L (Total tier one capital plus tier two capital) and Q (Total tier three capital) of the calculation in the capital resources table as adjusted in accordance with the following:

1. (1)

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

   1. (a)

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

   2. (b)

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

   3. (c)

      GENPRU 2.2.237 R (securitisation positions);

2. (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. (3)

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

The following are not included as qualifying holdings:

1. (1)

   shares that are not held as investments; or

2. (2)

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

3. (3)

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

GENPRU 2.2.208 R to GENPRU 2.2.216 G only apply to a BIPRU firm.

A material holding is:

1. (1)

   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; or

2. (2)

   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 (1) 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; or

3. (3)

   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 (1) or (2) 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; or

4. (4)

   a material insurance holding.

When calculating the size of its material holdings a firm must only include an actual holding (that is, a long cash position). A firm must not net such holdings with a short position.

A material insurance holding means the holdings of a BIPRU firm of items of the type set out in GENPRU 2.2.213 R in any:

1. (1)

   insurance undertaking; or

2. (2)

   insurance holding company;

that fulfils one of the following conditions:

1. (3)

   it is a subsidiary undertaking of that firm; or

2. (4)

   that firm holds a participation in it.

An item falls into this provision for the purpose of GENPRU 2.2.212 R if it is:

1. (1)

   an ownership share; or

2. (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.

The amount to be deducted with respect to each material insurance holding is the higher of:

1. (1)

   the book value of the material insurance holding; and

2. (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 (Method 3 of the capital adequacy calculations for financial conglomerates).

For the purpose of the definition of a material holding, holdings must be valued using the valuation method which the holder uses for its external financial reporting purposes.

GENPRU 2.2.217 R to GENPRU 2.2.220 R apply to a BIPRU firm.

A BIPRU firm must deduct at stage M of the calculation in the capital resources table (Deductions from the totals of tier one and two) any reciprocal cross-holdings. However a BIPRU firm must not deduct such holdings to the extent that they fall to be deducted at Part 1 of stage M of the calculation in the capital resources table (Deductions for material holdings, qualifying holdings and certain other items).

A reciprocal cross-holding means a holding of the BIPRU firm of shares, any other interest in the capital, and subordinated debt, whether in the trading or non-trading book, in:

1. (1)

   a credit institution; or

2. (2)

   a financial institution;

that satisfies the following conditions:

1. (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;

2. (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

3. (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.

For the purpose of GENPRU 2.2.219 R, a relevant rule means a rule in GENPRU, BIPRU or INSPRU or any other capital adequacy or solvency requirements of the FSA or any other regulator, territory or country.

GENPRU 2.2.221 R to GENPRU 2.2.235 G only apply to a bank.

Connected lending of a capital nature means all lending within GENPRU 2.2.227 R or GENPRU 2.2.229 R and guarantees within GENPRU 2.2.231 R or GENPRU 2.2.233 R.

A bank must not deduct any item as connected lending of a capital nature to the extent that it falls to be deducted at Part 1 of stage M of the calculation in the capital resources table (Deductions for material holdings, qualifying holdings and certain other items) or as a reciprocal cross-holding.

For the purpose of the rules in this section about connected lending of a capital nature and in relation to a bank, a connected party means another person ("P") who fulfils at least one of the following conditions and is not solo-consolidated with the bank under BIPRU 2.1 (Solo consolidation):

1. (1)

   P is closely related to the bank; or

2. (2)

   P is an associate of the bank; or

3. (3)

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

For the purpose of GENPRU 2.2.224 R, in relation to a person ("P") to which a bank has an exposure when P is acting on his own behalf and also an exposure to P when P acts in his capacity as a trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or similar fund (a "fund") the bank may choose to treat this latter exposure as an exposure to the fund, unless such treatment would be misleading.

A loan is connected lending of a capital nature if:

1. (1)

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

2. (2)

   it falls into GENPRU 2.2.228 R.

A loan falls into this rule for the purposes of GENPRU 2.2.227R (2) if, whether through contractual, structural, reputational or other factors:

1. (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. (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.

A loan is also connected lending of a capital nature if:

1. (1)

   it funds directly or indirectly a loan to a connected party of the bank falling into GENPRU 2.2.228 R1 or an investment in the capital of a connected party of the bank; and

2. (2)

   it falls into GENPRU 2.2.228 R.

A guarantee is connected lending of a capital nature if it is a guarantee by the bank of a loan from a third party to a connected party of the bank and:

1. (1)

   the loan meets the requirements of GENPRU 2.2.228 R; or

2. (2)

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

A guarantee is also connected lending of a capital nature if it is a guarantee by the bank of a loan falling into GENPRU 2.2.229R (1); and

1. (1)

   the loan meets the conditions in GENPRU 2.2.228 R; or

2. (2)

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