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.

When a3UCITS investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only3 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 and GENPRU 2.2.26A R)8 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).

8A dated item of tier one capital which is included in a BIPRU firm'stier two capital resources under GENPRU 2.2.25 R is not subject to the requirement to have no fixed maturity date in GENPRU 2.2.177R (1).

In the case of a BIPRU firm, the8 requirement to obtain a legal opinion in GENPRU 2.2.159R (12) does not apply to hybrid capital treated under GENPRU 2.2.25 R8 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, 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 tier one capital resources8 of an insurer, 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.

8In relation to the tier one capital resources of a BIPRU firm, calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions):

1. (1)

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

2. (2)

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

3. (3)

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

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).

Subject to GENPRU 2.2.34A R, an5insurer 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).

Subject to GENPRU 2.2.34A R, 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.

5A pure reinsurer carrying on both long-term insurance business and general insurance business must meet the higher of:

1. (1)

   1/3 of the sum of the long-term insurance capital requirement and 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 ,5GENPRU 2.2.34 R and GENPRU 2.2.34A 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 ,5GENPRU 2.2.34 R or GENPRU 2.2.34A R5, 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 (other than a pure reinsurer)5 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.

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.

12This section applies to a firm intending to issue a capital instrument on or after 1 March 2012 for inclusion in its capital resources.

12A firm must notify the FSA in writing of its intention to issue a capital instrument which it intends to include within its capital resources at least one month before the intended date of issue, unless there are exceptional circumstances which make it impracticable to give such a period of notice, in which event the firm must give as much notice as is practicable in those circumstances. When giving notice, a firm must:

1. (1)

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

2. (2)

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

3. (3)

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

4. (4)

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

This rule does not apply to a firm which intends to issue a capital instrument listed in GENPRU 2.2.61E R

12A firm must provide a further notification to the FSA in writing including all the information required in GENPRU 2.2.61BR (1) to (4) as soon as it proposes any change to the intended date of issue, amount of issue, type of investors, stage of capital or any other feature of the capital instrument to that previously notified to the FSA.

12If a firm proposes to establish a debt securities program for the issue of capital instruments for inclusion within its capital resources, it must:

1. (1)

   notify the FSA of the establishment of the program; and

2. (2)

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

at least one month before the first proposed drawdown. Any changes must be notified to the FSA in accordance with GENPRU 2.2.61C R.

12The capital instruments to which GENPRU 2.2.61B R does not apply are:

1. (1)

   ordinary shares which:

   1. (a)

      are the most deeply subordinated capital instrument issued by the firm;

   2. (b)

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

   3. (c)

      are the same as ordinary shares previously issued by the firm;

2. (2)

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

3. (3)

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

12A firm must notify the FSA in writing, no later than the date of issue, of its intention to issue a capital instrument listed in GENPRU 2.2.61E R which it intends to include within its capital resources. When giving notice, a firm must:

1. (1)

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

2. (2)

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

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)

   (in the case of an insurer)8 a perpetual non-cumulative preference share;

6. (6)

   [deleted]8

   8
7. (7)

   (in the case of an insurer)8 an innovative tier one instrument; and8

8. (8)

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

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:8

      1. (i)

         8in the case of a BIPRU firm, core tier one capital; and

      2. (ii)

         in the case of an insurer,8 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:8

   1. (a)

      8in the case of an insurer, in particular it complies with GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) and, in the case of an innovative tier one instrument, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption); and

   2. (b)

      8in the case of a BIPRU firm, it does not, through appropriate mechanisms, hinder the recapitalisation of the firm, and in particular it complies with:

      1. (i)

         GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption);10

      2. (ii)

         in the case of core tier one capital, GENPRU 2.2.83AR (9) to GENPRU 2.2.83AR (10) (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)); and10

      3. (iii)

         10in the case of hybrid capital, GENPRU 2.2.116 R to GENPRU 2.2.118 R (Other tier one capital: loss absorption);

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:8

   68
   1. (a)

      8in the case of an insurer, no higher than a share of a company incorporated under the Companies Act 2006 (whether or not it is such a share); or

   2. (b)

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

      1. (i)

         eligible for inclusion within the firm'stier two capital resources; and

      2. (ii)

         not eligible for inclusion within the firm'stier one capital resources; 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).

8A BIPRU firm must not include a capital instrument in its tier one capital resources if:

1. (1)

   the capital instrument is affected by a dividend stopper; and

2. (2)

   the dividend stopper operates in a way that hinders recapitalisation.

8A BIPRU firm must not make a payment of a coupon on an item of hybrid capital if the firm has no distributable reserves.

8A BIPRU firm must cancel the payment of a coupon on an item of hybrid capital if the BIPRU firm does not meet its capital resources requirement or if the payment of that coupon would cause it to breach its capital resources requirement.

8A BIPRU firm must not pay a coupon on an item of hybrid capital in the form of core tier one capital in accordance with GENPRU 2.2.64R (4)(b) unless:

1. (1)

   the firm meets its capital resources requirement; and

2. (2)

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

8A BIPRU firm must cancel the payment of a coupon if circumstances arise whereby the payment of the coupon by newly issued instruments, in accordance with GENPRU 2.2.64R (4)(b), does not comply with the requirements of GENPRU 2.2.69C R.

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 or, in the case of a BIPRU firm, on the date of maturity;8

   8
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 GENPRU 2.1.13 R (the main capital adequacy rule for insurers) or2 the main BIPRU firm Pillar 1 rules and will continue to do so after redemption;8

3. (3)

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

4. (4)

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

   1. (a)

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

   2. (b)

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

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:

   8
   1. (a)

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

   2. (b)

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

3. (3) 8
   1. (a)

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

   2. (b)

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

4. (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 becomes committed to do so. When giving notice, the firm must provide details of its position after such redemption in order to show how it will:7

1. (1)

   meet its capital resources requirement;7

   8
2. (2)

   7have sufficient financial resources to meet the overall financial adequacy rule; and8

3. (3)

   8in the case of a BIPRU firm, not otherwise suffer any undue effects to its financial or solvency conditions.

8If a BIPRU firm does not comply with its capital resources requirement or if the redemption of any dated tier one instrument would cause it to breach its capital resources requirement, it must suspend the redemption of its dated tier one instruments.

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 the case of an insurer, in8 relation to an innovative tier one instrument 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 1985,6 the Companies (Northern Ireland) Order 1986 or the Companies Act 20066 allows the firm that issued it to purchase it.

   6
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).

8A BIPRU firm must not purchase a tier one instrument that it has included in its tier one capital resources unless:

1. (1)

   the firm initiates the purchase;

2. (2)

   10[deleted]10

3. (3)

   the firm has given notice to the FSA in accordance with GENPRU 2.2.79G R; and10

4. (4)

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

8 GENPRU 2.2.79AR (4) does not apply if:10

1. (1)

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

2. (2)

   the replacement capital instrument has already been issued.

8 GENPRU 2.2.79AR (4) does not apply if:10

1. (1)

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

2. (2)

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

   1. (a)

      10% of the relevant issuance; or

   2. (b)

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

8For the purposes of calculating its tier one capital resources, a firm must deduct the amount of any item of hybrid capital which it then holds.

8A BIPRU firm must not purchase a tier one instrument in accordance with GENPRU 2.2.79A R unless it has notified the FSA of its intention at least one month before it becomes committed to doing so. When giving notice, the firm must provide details of its position after the purchase in order to show how, over an appropriate timescale, adequately stressed, and without planned recourse to the capital markets, it will:

1. (1)

   meet its capital resources requirement; and

2. (2)

   have sufficient financial resources to meet the overall financial adequacy rule.

10A BIPRU firm must not announce to the holders of a tier one instrument its intention to purchase that instrument unless it has notified that intention to the FSA in accordance with GENPRU 2.2.79G R and it has not, during the period of one month from the date of giving notice, received an objection from the FSA.

10If a BIPRU firm announces the purchase of any tier one instrument, the firm must no longer include that instrument in its tier one capital resources.

10If a BIPRU firm does not comply with its capital resources requirement, or if the purchase of any tier one instrument would cause it to breach its capital resources requirement, it must suspend the purchase of tier one instruments.

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 20066 it is "called-up share capital" within the meaning given to that term in that Act; or

   66
2. (2)

   (in the case of a building society) it is a deferred share;8 or

   8
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; or8

   4. (d)

      a deferred share;8

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;

   10
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 20066 (whether or not it is such a share); and10

   610
4. (4)

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

10The conditions that a BIPRU firm's permanent share capital must comply with under GENPRU 2.2.83AR (4) or that a BIPRU firm'seligible partnership capital or eligible LLP members' capital must comply with under GENPRU 2.2.95 R are as follows:

1. (1)

   it is undated;

2. (2)

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

3. (3)

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

4. (4)

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

5. (5)

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

6. (6)

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

7. (7)

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

8. (8)

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

9. (9)

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

10. (10)

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

11. (11)

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

12. (12)

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

13. (13)

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

10A BIPRU firm must not include in stage A of the capital resources table different classes of the same share type (for example "A ordinary shares" and "B ordinary shares") that meet the conditions in GENPRU 2.2.83 R and GENPRU 2.2.83A R but have differences in voting rights, unless it has notified the FSA of its intention at least one month before the shares are issued or (in the case of existing issued shares) the differences in voting rights take effect.

10A BIPRU firm must not pay a coupon on a tier one instrument included in stage A of the capital resources table if it has no distributable reserves.

10A building society may include in stage A of the capital resources table a capital instrument that includes in its terms of issue an upper limit on the amount of any coupon that may be payable and the prohibition on a coupon limit under GENPRU 2.2.83AR (3) does not apply to that capital instrument, provided that:

1. (1)

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

2. (2)

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

3. (3)

   the objective of the limit is to protect the capital reserves of the firm;

4. (4)

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

5. (5)

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

   1. (a)

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

   2. (b)

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

6. (6)

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

10A building society must not issue a capital instrument that includes a coupon limit in its terms of issue in accordance with GENPRU 2.2.83E R unless it has notified the FSA of its intention to do so at least one month before the intended date of issue.

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 stage A (Core tier one capital)8 in the capital resources table.

   8
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.