1This 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.

1. (1)

   This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

2. (2)

   Where an insurer carries on both long-term insurance business and general insurance business, except where a particular provision provides otherwise, this section applies separately to each type of business.

A firm must at all times monitor whether it is complying with GENPRU 2.1.13 R (the main capital adequacy rule for insurer) or the main BIPRU firm Pillar 1 rules and be able to demonstrate that it knows at all times whether it is complying with those rules.

A firm must notify the FSA immediately of any breach, or expected breach, of GENPRU 2.1.13 R (in the case of an insurer) or the main BIPRU firm Pillar 1 rules (in the case of a BIPRU firm).

1. (1)

   Subject to (2), an insurer must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).

2. (2)

   An insurer which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with INSPRU 6.1.9 R (Requirement to maintain group capital), is deemed to comply with this rule.

An insurer must comply with GENPRU 2.1.13 R separately in respect of both its long-term insurance business and its general insurance business unless it is a pure reinsurer or a captive reinsurer which has a single MCR in respect of its entire business in accordance with GENPRU 2.1.26 R.

The CRR for any insurer carrying on general insurance business is equal to the MCR in GENPRU 2.1.24 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.

The CRR for any insurer to which this rule applies (see GENPRU 2.1.19 R and GENPRU 2.1.20 R) is the higher of:

1. (1)

   the MCR in GENPRU 2.1.24A R2; and

2. (2)

   the ECR in GENPRU 2.1.38 R.

Subject to GENPRU 2.1.20 R, GENPRU 2.1.18 R applies to an insurer carrying on long-term insurance business, other than:

1. (1)

   a non-directive mutual;

2. (2)

   an insurer which has no with-profits insurance liabilities; and

3. (3)

   an insurer which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of GENPRU 2.1.18 R) have remained, less than £500 million.

GENPRU 2.1.18 R also applies to an insurer of a type listed in GENPRU 2.1.19R (3) if:

1. (1)

   the insurer makes an election that GENPRU 2.1.18 R is to apply to it; and

2. (2)

   that election is made by written notice given to the FSA in a way that complies with the requirements for written notice in SUP 15.7 (Form and method of notification).

The CRR for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply, is equal to the MCR in GENPRU 2.1.25 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.

Subject to GENPRU 2.1.26 R, for an insurer carrying on general insurance business the MCR in respect of that business is the higher of:

1. (1)

   the base capital resources requirement for general insurance business applicable to that firm; and

2. (2)

   the general insurance capital requirement.

2Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business to which GENPRU 2.1.18 R applies the MCR in respect of that business is the higher of:

1. (1)

   the base capital resources requirement for long-term insurance business applicable to that firm; and

2. (2)

   the long-term insurance capital requirement.

Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply,2 the MCR in respect of that business is the higher of:

1. (1)

   the base capital resources requirement for long-term insurance business applicable to that firm; and

2. (2)

   the sum of:

   1. (a)

      the long-term insurance capital requirement; and

   2. (b)

      the resilience capital requirement.

For a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business:

1. (1)

   the MCR in respect of its general insurance business is the general insurance capital requirement; and

2. (2)

   the MCR in respect of its long-term insurance business is the sum of:

   1. (a)

      the long-term insurance capital requirement; and

   2. (b)

      the resilience capital requirement;

unless the sum of:

1. (3)

   the general insurance capital requirement; and

2. (4)

   the sum of:

   1. (a)

      the long-term insurance capital requirement; and

   2. (b)

      the resilience capital requirement;

is lower than the base capital resources requirement, in which case the firm has a single MCR in respect of its entire business equal to the base capital resources requirement.

The amount of an insurer'sbase capital resources requirement is set out in the table in GENPRU 2.1.30 R. If an insurer falls within one or more of the descriptions of type of firm set out in GENPRU 2.1.30 R, its base capital resources requirement is the highest amount set out against the different types of firm within whose description it falls.

In the case of an insurer and for the purposes of the base capital resources requirement, the exchange rate from the Euro to the pound sterling for each year beginning on 31 December is the rate applicable on the last day of the preceding October for which the exchange rates for the currencies of all the European Union member states were published in the Official Journal of the European Union.

An insurer must calculate its general insurance capital requirement as the highest of:

1. (1)

   the premiums amount;

2. (2)

   the claims amount; and

3. (3)

   the brought forward amount.

An insurer must calculate its long-term insurance capital requirement as the sum of:

1. (1)

   the insurance death risk capital component;

2. (2)

   the insurance health risk and life protection reinsurance capital component;

3. (3)

   the insurance expense risk capital component; and

4. (4)

   the insurance market risk capital component.

For an insurer carrying on long-term insurance business the ECR in respect of that business is the sum of:

1. (1)

   the long-term insurance capital requirement; and2

2. (2)

   the with-profits insurance capital component.2

A BIPRU firm must maintain at all times capital resources equal to or in excess of the amount specified in the table in GENPRU 2.1.45 R (Calculation of the variable capital requirement for a BIPRU firm).

A BIPRU firm must maintain at all times capital resources equal to or in excess of the base capital resources requirement (see the table in GENPRU 2.1.48 R).

At the time that it first becomes a bank, building society or BIPRU investment firm, a firm must hold initial capital of not less than the base capital resources requirement applicable to that firm.

A UCITS investment firm must only calculate the variable capital requirement under GENPRU 2.1.40 R in respect of designated investment business. For this purpose scheme management activity is excluded from designated investment business.

The amount of a BIPRU firm'sbase capital resources requirement is set out in the table in GENPRU 2.1.48 R.

A BIPRU firm must calculate its credit risk capital requirement as the sum of:

1. (1)

   the credit risk capital component;

2. (2)

   the counterparty risk capital component; and

3. (3)

   the concentration risk capital component.

1. (1)

   A BIPRU firm must calculate its market risk capital requirement as the sum of:

   1. (a)

      the interest rate PRR (including the basic interest rate PRR for equity derivatives set out in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives));

   2. (b)

      the equity PRR;

   3. (c)

      the commodity PRR;

   4. (d)

      the foreign currency PRR;

   5. (e)

      the option PRR; and

   6. (f)

      the collective investment undertaking PRR.

2. (2)

   Any amount calculated under BIPRU 7.1.9 R - BIPRU 7.1.13 R (Instruments for which no PRR treatment has been specified) must be allocated between the PRR charges in (1) in the most appropriate manner.

In relation to a BIPRU investment firm which is required to calculate a fixed overheads requirement, the amount of that requirementis equal to one quarter of the firm's relevant fixed expenditure calculated in accordance with GENPRU 2.1.54 R.

For the purpose of GENPRU 2.1.53 R, and subject to GENPRU 2.1.55 R to GENPRU 2.1.57 R,a BIPRU investment firm's relevant fixed expenditure is the amount described as total expenditure in its most recent audited annual report and accounts, less the following items (if they are included within such expenditure):

1. (1)

   staff bonuses, except to the extent that they are guaranteed;

2. (2)

   employees' and directors' shares in profits, except to the extent that they are guaranteed;

3. (3)

   other appropriations of profits;

4. (4)

   shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue;

5. (5)

   interest charges in respect of borrowings made to finance the acquisition of the firm'sreadily realisable investments;

6. (6)

   interest paid to customers on client money;

7. (7)

   interest paid to counterparties;

8. (8)

   fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;

9. (9)

   foreign exchange losses; and

10. (10)

    other variable expenditure.

The relevant fixed expenditure of a firm in the following circumstances is:

1. (1)

   where its most recent audited annual report and accounts do not represent a twelve month period, an amount calculated in accordance with GENPRU 2.1.54 R, pro-rated so as to produce an equivalent annual amount; and

2. (2)

   where it has not completed twelve months' trading, an amount based on forecast expenditure included in the budget for the first twelve months' trading, as submitted with its application for authorisation.

A firm must adjust its relevant fixed expenditure calculation so far as necessary if and to the extent that since the date covered by the most recent audited annual report and accounts or (if GENPRU 2.1.55R (2) applies) since the budget was prepared:

1. (1)

   its level of fixed expenditure changes materially; or

2. (2)

   its regulated activities comprised within its permission change.

If a firm has a material proportion of its expenditure incurred on its behalf by third parties and such expenditure is not fully recharged to that firm then the firm must adjust its relevant fixed expenditure calculation by adding back in the whole of the difference between the amount of the expenditure and the amount recharged.

1. (1)

   This rule applies to a bank that meets the following conditions:

   1. (a)

      on 31 December 2006 it had the benefit of IPRU(BANK) rule 3.3.12 (Reduced minimum capital requirement for a bank that is a credit institution which immediately before 1 January 1993 was authorised under the Banking Act 1987);

   2. (b)

      the relevant amount (as referred to in IPRU(BANK) rule 3.3.12) applicable to it was below €5 million as at 31 December 2006; and

   3. (c)

      on 1 January 2007 it did not comply with the base capital resources requirement as set out in the table in GENPRU 2.1.48 R (€5 million requirement).

2. (2)

   Subject to (3), the applicable base capital resources requirement as at any time (the "relevant time") is the higher of:

   1. (a)

      the relevant amount applicable to it under IPRU(BANK) rule 3.3.12 as at 31 December 2006 as adjusted under GENPRU 2.1.62R (2); and

   2. (b)

      the highest amount of eligible capital resources which that bank has held between 1 January 2007 and the relevant time.

3. (3)

   This rule ceases to apply when:

   1. (a)

      that bank's eligible capital resources at any time since 1 January 2007 equal or exceed €5 million; or

   2. (b)

      a person (other than an existing controller) becomes the parent undertaking of that bank.

4. (4)

   If this rule ceases to apply under (3)(a) it continues not to apply if the bank's eligible capital resources later fall below €5 million.

For the purpose of GENPRU 2.1.60 R:

1. (1)

   an existing controller of a bank means:

   1. (a)

      a person who has been a parent undertaking of that bank since 31 December 2006 or earlier; or

   2. (b)

      a person who became a parent undertaking of that bank after 31 December 2006 but who, when he became a parent undertaking of that bank, was a subsidiary undertaking of an existing controller of that bank;

2. (2)

   the relevant amount of capital as referred to in GENPRU 2.1.60R (2)(a) is adjusted by identifying the time as of which the amount of capital it was obliged to hold under IPRU(BANK) rule 3.3.12 as referred to in GENPRU 2.1.60R (2)(a) was fixed and then recalculating the capital resources it held at that time in accordance with the definition of eligible capital resources (as defined in (3)); and

3. (3)

   eligible capital resources mean capital resources eligible under GENPRU 2.2 (Capital resources) to be used to meet the base capital resources requirement.

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'stier 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'sMCR 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).

An5insurer 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'sMCR 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'stier 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'slower 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'stier 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'scapital 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'strading 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'scapital 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 businessclasses, 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'sgroup.

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'sgroup; 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'scapital 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'stier 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.