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 appropriate regulator 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).

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 a3collective portfolio management investment firm9 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 managing an AIF or managing a UCITS9 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.

11A collective portfolio management investment firm must maintain capital resources which equal or exceed the higher of (1) and (2).

1. (1)
   1. (a)

      The higher of:

      1. (i)

         the funds under management requirement (in line with GENPRU 2.1.66 R); and

      2. (ii)

         the fixed overheads requirement (in line with GENPRU 2.1.53 R); plus

   2. (b)

      whichever is applicable of:

      1. (i)

         the professional negligence capital requirement (in line with GENPRU 2.1.67G (1)(a); or

      2. (ii)

         the PII capital requirement (in line with GENPRU 2.1.67G (1)(b).

2. (2)

   The amount specified in the table in GENPRU 2.1.45 R.

11A collective portfolio management investment firm must hold liquid assets (in line with GENPRU 2.1.73 R) which equal or exceed:

1. (1)

   the higher of:

   1. (a)

      the funds under management requirement (in line with GENPRU 2.1.66 R) less the base capital resources requirement in GENPRU 2.1.48 R; and

   2. (b)

      the fixed overheads requirement (in line with GENPRU 2.1.53 R); plus

2. (2)

   whichever is applicable of:

   1. (a)

      the professional negligence capital requirement (in line with GENPRU 2.1.67G (1)(a)); or

   2. (b)

      the PII capital requirement (in line with GENPRU 2.1.67G (1)(b)).

11The funds under management requirement is (subject to a maximum of €10,000,000) the sum of:

1. (1)

   the base capital resources requirement; plus

2. (2)

   0.02% of the amount by which the funds under management exceed €250,000,000.

11If a firm satisfies the requirement referred to in GENPRU 2.1.67 G with professional indemnity insurance, it must, in addition to maintaining an amount of own funds to cover any defined excess, hold adequate own funds to cover any exclusions in the insurance policy that would otherwise result in the firm having insufficient resources to cover liabilities arising. A firm may satisfy its requirements for professional indemnity insurance with a policy that also provides cover to one or more entities other than the firm, provided the policy satisfies the conditions of the AIFMD level 2 regulation, exclusive of the cover provided to other firms by the policy.

11In GENPRU 2.1.64 R, liquid assets are assets which:

1. (1)

   are readily convertible to cash within one month; and

2. (2)

   have not been invested in speculative positions.

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.

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.

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 appropriate regulator 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 appropriate regulator 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 appropriate regulator.

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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator'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 appropriate regulator 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.

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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator.

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 appropriate regulator 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.

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 14GENPRU 1.3.35A G14 (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 foreseeable3.

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;

      2
   2. (b)

      the partnership is wound up or2 otherwise dissolved; or2

      2
   3. (c)

      the BIPRU firm has ceased to be authorised or no longer has a Part 4A permission.2

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;

      2
   2. (b)

      the limited liability partnership is wound up or2 otherwise dissolved; or2

      2
   3. (c)

      the BIPRU firm has ceased to be authorised or no longer has a Part 4A permission.2

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) (10Coupons should not be cumulative or mandatory) and GENPRU 2.2.83A R to GENPRU 2.2.83C R (General conditions for eligibility of capital instruments as core tier one capital (BIPRU firm only)10. However, GENPRU 2.2.64R (3) (Redemption), GENPRU 2.2.83AR (5) (Capital repayment) and GENPRU 2.2.83AR (12) (Characteristics in contract) are10 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) 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 20066.

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 20066 may include its share premium account as core tier one capital notwithstanding (2) to the extent that the terms of issue of the share concerned provide that any premium is not repayable on redemption.

   6
4. (4)

   Paragraph6 (3) applies to a firm that is not incorporated under the Companies Act 20066 if its share premium account is subject to substantially the same or greater restraints on use than a share premium account falling into (3).

   6

Externally verified interim net profits are interim profits which have been verified by a firm's external auditors after deduction of tax, forseeable3dividends and other appropriations.

8A BIPRU firm must not include a capital instrument at stage B1 of the calculation in the capital resources table unless (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) its contractual terms are such that:

1. (1)

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

2. (2)

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

3. (3)

   the emergency situations referred to in (2):

   1. (a)

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

   2. (b)

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

4. (4)

   the appropriate regulator may require its conversion into core tier one capital when the appropriate regulator considers it necessary;

5. (5)

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

6. (6)

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

   1. (a)

      be determined at the date of its issue;

   2. (b)

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

   3. (c)

      have an aggregate value equal to its par value; and

   4. (d)

      not increase if the price of those other instruments decreases.

8A BIPRU firm may include a capital instrument at stage B2 of the calculation in the capital resources table if (while satisfying all the other requirements in relation to tier one capital and hybrid capital)it cannot be included at stage B1 of that calculation as it does not satisfy the requirements of GENPRU 2.2.115A R.

8A BIPRU firm may include a capital instrument at stage C of the calculation in the capital resources table, and must not include it in stage B1 or B2 of that calculation, if (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) it either:

1. (1)

   is dated; or

2. (2)

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

8A BIPRU firm must not include a capital instrument that is not a share at stage B1, B2 or C of the calculation in the capital resources table unless (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) 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).

8A BIPRU firm must not include a capital instrument at stage B1, B2 or C of the calculation in the capital resources table unless (in addition to satisfying all the other requirements in relation to tier one capital and hybrid capital) its contractual terms provide for a mechanism within the instrument which:

1. (1)

   is clearly defined and legally certain;

2. (2)

   is disclosed and transparent to the market;

3. (3)

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

4. (4)

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

5. (5)

   when initiated, operates in one of the following ways:

   1. (a)

      the principal of the instrument is written down permanently; or

   2. (b)

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

   3. (c)

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

      1. (i)

         be determined at the date of its issue;

      2. (ii)

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

      3. (iii)

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

      4. (iv)

         not increase if the share price decreases; or

   4. (d)

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

8The trigger points required by GENPRU 2.2.117AR (3) must:

1. (1)

   be clearly defined within the instrument and legally certain;

2. (2)

   be disclosed and transparent to the market; and

3. (3)

   be prudent and timely, and include trigger points which occur:

   1. (a)

      before a breach of the firm'scapital resources requirement and both:

      1. (i)

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

      2. (ii)

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

   2. (b)

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

1. (1)

   8An insurer may not include an innovative tier one instrument, unless it is a preference share, in its tier one capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.64R (6) (loss absorption) and GENPRU 2.2.80 R to GENPRU 2.2.81 R (Loss absorption) are met.

2. (2)

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

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 at stage C of the calculation in the capital resources table.8

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;

   8
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; and8

4. (4)

   8it is incorporated under, and governed by, the laws and jurisdiction of England and Wales, Scotland or Northern Ireland.

8 GENPRU 2.2.127R (4) does not apply if the firm has conducted a properly reasoned analysis confirming that any potential risks, including legal and operational risks, associated with cross-border issues, which undermine the quality of the capital for the issuer, that arise from an SPV not being incorporated under or governed by the laws and jurisdiction of England and Wales, Scotland or Northern Ireland, are adequately mitigated.

8The analysis must be set out in writing and dated before the date of issue of the capital instrument and the firm must be able to show that the analysis has been fully considered as part of its decision to proceed with the issue. The analysis must be conducted by a person or persons appropriately qualified to assess the relevant risks and that person may be an independent adviser or an employee of the firm who is not part of the business unit responsible for the transaction (including the drafting of the issue documentation).

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) 48
   1. (a)

      its terms must include an obligation on the firm that, in the event of a collapse of the SPV structure, and if the mechanism contained within the instrument under GENPRU 2.2.117A R is a conversion, the firm must substitute the capital instrument issued by the SPV with core tier one capital issued by the firm; and8

      48
   2. (b)

      there must be no obstacle to the firm's issue of new securities;8

      48
3. (3)

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

   8
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 8tier one capital included at stage C of the calculation in the capital resources table; and

      8
5. (5)

   8if the SPV structure collapses, the holder of it has no better a claim against the firm than a holder of the same type of instrument directly issued by the firm.

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 capital instruments which are core tier one capital8 (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).