1This chapter applies to:

1. (1)

   a MIFIDPRU investment firm; and

2. (2)

   a UK parent entity that is required by MIFIDPRU 2.5.7R to comply with MIFIDPRU 3 on the basis of its consolidated situation.

1This chapter also applies to a parent undertaking that is subject to the group capital test in accordance with MIFIDPRU 2.6.5R, but with the following modifications:

1. (1)

   the definitions in MIFIDPRU 2.6.2R apply when calculating the own funds instruments of the parent undertaking for the purposes of the group capital test; and

2. (2)

   MIFIDPRU 3.2.2R and MIFIDPRU 3.2.3R do not apply, but MIFIDPRU 3.7 applies instead.

1For the purposes of this chapter:

1. (1)

   any reference to the “UK CRR” is to the UK CRR in the form in which it stood on 1 January 2022, read together with any CRR rules (as defined in section 144A of the Act) made by the PRA that applied on that date;

2. (2)

   where a term is not italicised but is defined in the UK CRR, the definition in the UK CRR applies;

3. (3)

   where this chapter applies to a parent undertaking that is not a firm, reference to a “MIFIDPRU investment firm” or a “firm” includes a reference to that parent undertaking; and

4. (4)

   where this chapter applies on the basis of the consolidated situation of an entity under MIFIDPRU 3.1.1R(2), a reference in this chapter to a “firm” is a reference to the hypothetical single MIFIDPRU investment firm created under the consolidated situation.

1The own funds of a firm are the sum of its:

1. (1)

   common equity tier 1 capital;

2. (2)

   additional tier 1 capital; and

3. (3)

   tier 2 capital.

1A firm must, at all times, have own funds that satisfy all the following conditions:

1. (1)

   the firm’s common equity tier 1 capital must be equal to or greater than 56% of the firm’s own funds requirement under MIFIDPRU 4.3;

2. (2)

   the sum of the firm’scommon equity tier 1 capital and additional tier 1 capital must be equal to or greater than 75% of the firm’s own funds requirement under MIFIDPRU 4.3; and

3. (3)

   the firm’s own funds must be equal to or greater than 100% of the firm’s own funds requirement under MIFIDPRU 4.3.

1A firm’s initial capital must be made up of own funds.

1. (1)

   1A firm must determine its common equity tier 1 capital in accordance with Chapter 2 of Title I of Part Two of the UK CRR, as modified by the rules in this section.

2. (2)

   Any reference to the UK CRR in this section is to the UK CRR as applied by (1) and modified by the rules in this section.

1To apply for permission to include interim or year-end profits in its common equity tier 1 capital before the firm has taken a formal decision confirming the final profit or loss for the year in accordance with article 26(2) of the UK CRR, a firm must complete the form in MIFIDPRU 3 Annex 1R and submit it to the FCA using the online notification and application system.

1. (1)

   1To apply for permission to classify an issuance of capital instruments as common equity tier 1 capital in accordance with article 26(3) of the UK CRR, a firm must complete the form in MIFIDPRU 3 Annex 2R and submit it to the FCA using the online notification and application system.

2. (2)

   To notify the FCA in accordance with article 26(3) subparagraph two of the UK CRR about subsequent issuances of capital instruments for which it has already received the permission in (1), a firm must complete the form in MIFIDPRU 3 Annex 3R and submit it to the FCA using the online notification and application system.

1For the purposes of MIFIDPRU:

1. (1)

   MIFIDPRU 3.3.6R replaces article 36 of the UK CRR; and

2. (2)

   any reference to article 36 of the UK CRR or any part of that article in the following is a reference to MIFIDPRU 3.3.6R (or the equivalent part of it):

   1. (a)

      another provision of the UK CRR that is incorporated by reference into MIFIDPRU; or

   2. (b)

      any technical standard that applies to a MIFIDPRU investment firm under a provision of the UK CRR to which (a) applies.

1A MIFIDPRU investment firm must deduct the following from its common equity tier 1 items:

1. (1)

   losses for the current financial year;

2. (2)

   intangible assets;

3. (3)

   deferred tax assets that rely on future profitability;

4. (4)

   the value of any defined benefit pension fund assets on the balance sheet of the firm after deducting the amount of any associated deferred tax liability where that liability would be extinguished if the assets became impaired or were derecognised under the applicable accounting framework;

5. (5)

   direct, indirect and synthetic holdings by the firm of its own common equity tier 1 instruments, including own common equity tier 1 instruments that the firm is under an actual or contingent obligation to purchase by virtue of an existing contractual obligation;

6. (6)

   direct, indirect and synthetic holdings of the common equity tier 1 instruments of financial sector entities where those entities have a reciprocal cross holding with the firm that the FCA considers has been designed to inflate artificially the own funds of the firm;

7. (7)

   direct, indirect and synthetic holdings by the firm of common equity tier 1 instruments of financial sector entities where the firm does not have a significant investment in those entities;

8. (8)

   direct, indirect and synthetic holdings by the firm of the common equity tier 1 instruments of financial sector entities where the firm has a significant investment in those entities;

9. (9)

   the amount of items required to be deducted from additional tier 1 items under article 56 of the UK CRR that exceeds the additional tier 1 items of the firm; and

10. (10)

    any tax charge relating to common equity tier 1 items foreseeable at the moment of its calculation, except where the firm suitably adjusts the amount of common equity tier 1 items insofar as such tax charges reduce the amount up to which those items may be used to cover risks or losses.

1. (1)

   1For the purposes of MIFIDPRU 3.3.6R and MIFIDPRU 3.3.15R, holdings in a fund are to be treated as holdings in a non-financial sector entity.

2. (2)

   The requirement in (1) does not affect the meaning of the terms “financial sector entity” or “non-financial sector entity” when used in any other context in the Handbook.

1A firm must deduct deferred tax assets that rely on future profitability from its common equity tier 1 items under MIFIDPRU 3.3.6R(3) without applying:

1. (1)

   article 39 of the UK CRR (tax overpayments, tax loss carry backs and deferred tax assets that do not rely on future profitability); or

2. (2)

   article 48 of the UK CRR (threshold exemptions from deduction from common equity tier 1 items).

1A firm must deduct defined benefit pension fund assets on its balance sheet from its common equity tier 1 items under MIFIDPRU 3.3.6R(4) without applying article 41 of the UK CRR (deduction of defined benefit pension fund assets).

1. (1)

   1This rule applies to a firm’s holdings of capital instruments that are not held in its trading book.

2. (2)

   Subject to MIFIDPRU 3.3.14R, a firm must deduct its direct, indirect and synthetic holdings of common equity tier 1 instruments of financial sector entities under MIFIDPRU 3.3.6R(7) without applying article 46 of the UK CRR (deduction of holdings of common equity tier 1 instruments where an institution does not have a significant investment in a financial sector entity).

1The following provisions do not apply to common equity tier 1 instruments held in the trading book of a firm:

1. (1)

   MIFIDPRU 3.3.6R(7); and

2. (2)

   article 46 of the UK CRR.

1Subject to MIFIDPRU 3.3.14R, a firm must deduct its direct, indirect and synthetic holdings in the common equity tier 1 instruments of financial sector entities under MIFIDPRU 3.3.6R(8) without applying article 48 of the UK CRR (threshold exemptions from deduction from common equity tier 1 items).

1Article 49 of the UK CRR (requirement for deduction where consolidation, supplementary supervision or institutional protection schemes are applied) does not apply for the purposes of this section.

1A firm is not required to deduct holdings of common equity tier 1 instruments issued by a financial sector entity from the firm’s common equity tier 1 items in accordance with MIFIDPRU 3.3.6R if all of the following conditions are met:

1. (1)

   the financial sector entity forms part of the same investment firm group as the firm;

2. (2)

   there is no current or foreseen material, practical or legal impediment to the prompt transfer of capital or repayment of liabilities by the financial sector entity;

3. (3)

   the investment firm group is subject to prudential consolidation under MIFIDPRU 2.5; and

4. (4)

   the risk evaluation, measurement and control procedures of a parent undertaking included within the consolidated situation of the UK parent entity of the investment firm group include the financial sector entity.

1. (1)

   1A firm must deduct from its common equity tier 1 items any amounts in excess of the following limits:

   1. (a)

      a qualifying holding in a non-financial sector entity which exceeds 15% of the firm’s own funds; and

   2. (b)

      the total of all the qualifying holdings of the firm in non-financial sector entities which exceeds 60% of the firm’sown funds.

2. (2)

   When calculating any amounts in (1), the following must not be included:

   1. (a)

      shares in non-financial sector entities where any of the following conditions is met:

      1. (i)

         the shares are held temporarily during a financial assistance operation referred to in article 79 of the UK CRR;

      2. (ii)

         the holding of the shares is an underwriting position held for five business days or fewer; or

      3. (iii)

         the shares are held in the name of the firm on behalf of others; and

   2. (b)

      shares which are not fixed financial assets under Directive 86/635/EEC UK law (as defined in article 4(1)(128B) of the UK CRR).

1A partner’s account in relation to a firm that is a partnership satisfies the conditions in article 28(1)(e) (perpetual) and article 28(1)(f) (reduction or repayment) of the UK CRR if:

1. (1)

   capital contributed by partners is paid into the account; and

2. (2)

   under the terms of the partnership agreement an amount representing capital may be withdrawn from the account by a partner (“A”) only if:

   1. (a)

      A ceases to be a partner and an equal amount is transferred to another partner’s account by A’s former partners or any person replacing A as their partner;

   2. (b)

      any reduction in the capital credited to A’s account is immediately offset by additional contributions of at least an equal aggregate amount to other partner accounts by one or more of A’s partners (including any person becoming a partner of A at the time that the additional contribution is made);

   3. (c)

      the partnership is wound up or dissolved; or

   4. (d)

      the firm ceases to be authorised or no longer has a Part 4A permission.

1A member’s account in relation to a firm that is a limited liability partnership will meet the conditions in article 28(1)(e) (perpetual) and article 28(1)(f) (reduction or repayment) of the UK CRR if:

1. (1)

   capital contributed by the members is paid into the account; and

2. (2)

   under the terms of the limited liability partnership agreement, an amount representing capital may be withdrawn from the account by a partner (“B”) only if:

   1. (a)

      B ceases to be a member and an equal amount is transferred to another member account by B’s former fellow members or any person replacing B as a member;

   2. (b)

      any reduction in the capital credited to B’s account is immediately offset by additional contributions of at least an equal aggregate amount to other member accounts by one or more of B’s fellow members (including any person becoming a fellow member of B at the time that the additional contribution is made);

   3. (c)

      the limited liability partnership is wound up or dissolved; or

   4. (d)

      the firm ceases to be authorised or no longer has a Part 4A permission.

1. (1)

   1A firm must determine its additional tier 1 capital in accordance with Chapter 3 of Title I of Part Two of the UK CRR, as modified by the rules in this section.

2. (2)

   Any reference to the UK CRR in this section is to the UK CRR as applied by (1) and modified by the rules in this section.

1The following provisions of the UK CRR do not apply in relation to the additional tier 1 capital of a MIFIDPRU investment firm:

1. (1)

   article 54(1)(a); and

2. (2)

   article 54(4)(a).

1. (1)

   1A firm must specify in the terms of an additional tier 1 instrument one or more trigger events for the purposes of article 52(1)(n) of the UK CRR.

2. (2)

   The trigger events specified under (1) must include a trigger event that occurs where the common equity tier 1 capital of the firm falls below a level specified by the firm that is no lower than 64% of the firm’s own funds requirement.

3. (3)

   Article 54 of the UK CRR applies as if references to the trigger event in article 54(1)(a) of the UK CRR are references to the trigger event in (1).

4. (4)

   The full principal amount of an additional tier 1 instrument must be written down or converted when a trigger event occurs.

1. (1)

   1This rule applies to a firm’s holdings of capital instruments that are not held in its trading book.

2. (2)

   A firm must deduct its direct, indirect and synthetic holdings in additional tier 1 instruments of financial sector entities under article 56(c) of the UK CRR without applying article 60 of the UK CRR (deduction of holdings of additional tier 1 instruments where an institution does not have a significant investment in a financial sector entity).

3. (3)

   The requirement in article 56(c) of the UK CRR does not apply where MIFIDPRU 3.4.7R applies.

1The following provisions do not apply to additional tier 1 instruments held in the trading book of a firm:

1. (1)

   article 56(c) of the UK CRR; and

2. (2)

   article 60 of the UK CRR.

1A firm is not required to deduct holdings of additional tier 1 instruments issued by a financial sector entity from the firm’s additional tier 1 items in accordance with article 56 of the UK CRR if all of the following conditions are met:

1. (1)

   the financial sector entity forms part of the same investment firm group as the firm;

2. (2)

   there is no current or foreseen material, practical or legal impediment to the prompt transfer of capital or repayment of liabilities by the financial sector entity;

3. (3)

   the risk evaluation, measurement and control procedures of the parent undertaking include the financial sector entity; and

4. (4)

   the group capital test under MIFIDPRU 2.5 does not apply to the investment firm group.

1. (1)

   1A firm must determine its tier 2 capital in accordance with Chapter 4 of Title I of Part Two of the UK CRR, as modified by the rules in this section.

2. (2)

   Any reference to the UK CRR in this section is to the UK CRR as applied by (1) and modified by the rules in this section.

1. (1)

   1This rule applies to a firm’s holdings of capital instruments that are not held in its trading book.

2. (2)

   A firm must deduct its direct, indirect and synthetic holdings in the tier 2 instruments of financial sector entities under article 66(c) of the UK CRR without applying article 70 of the UK CRR (deduction of tier 2 instruments where an institution does not have a significant investment in the relevant entity).

3. (3)

   The requirement in article 66(c) of the UK CRR does not apply where MIFIDPRU 3.5.4R applies.

1The following provisions do not apply to tier 2 instruments held in the trading book of the firm:

1. (1)

   article 66(c) of the UK CRR; and

2. (2)

   article 70 of the UK CRR.

1A firm is not required to deduct holdings of tier 2 instruments issued by a financial sector entity from the firm’s tier 2 items in accordance with article 66 of the UK CRR if all of the following conditions are met:

1. (1)

   the financial sector entity forms part of the same investment firm group as the firm;

2. (2)

   there is no current or foreseen material, practical or legal impediment to the prompt transfer of capital or repayment of liabilities by the financial sector entity;

3. (3)

   the risk evaluation, measurement and control procedures of the parent undertaking include the financial sector entity; and

4. (4)

   the group capital test under MIFIDPRU 2.6 does not apply to the investment firm group.

1. (1)

   1A firm must comply with Chapter 6 of Title I of Part Two of the UK CRR, as modified by the rules in this section.

2. (2)

   Any reference to the UK CRR in this section is to the UK CRR as applied by (1) and modified by the rules in this section.

1To apply for permission for the purposes of articles 77 and 78 of the UK CRR to do any of the following, a firm must complete the form in MIFIDPRU 3 Annex 4R and submit it to the FCA using the online notification and application system:

1. (1)

   reduce, redeem or repurchase any of its common equity tier 1 instruments;

2. (2)

   reduce, distribute or reclassify as another own funds item the share premium accounts related to any of its own funds instruments; or

3. (3)

   effect the call, redemption, repayment or repurchase of its additional tier 1 instruments or tier 2 instruments prior to the date of their contractual maturity;

1Permission under MIFIDPRU 3.6.2R is deemed to have been granted if the following conditions are met:

1. (1)

   either of the conditions in MIFIDPRU 3.6.4R apply;

2. (2)

   at least 20 business days before the day on which the reduction, repurchase, call or redemption is proposed to occur, the firm has notified the FCA of:

   1. (a)

      the proposed reduction, repurchase, call or redemption; and

   2. (b)

      the basis on which the firm has concluded that either condition in (1) is satisfied;

3. (3)

   the notification in (2) is made using the form in MIFIDPRU 3 Annex 5R and submitted using the online notification and application system; and

4. (4)

   the FCA has not notified the firm of any objection to the proposal before the day on which the reduction, repurchase, call or redemption is proposed to occur.

1The conditions referred to in MIFIDPRU 3.6.3R are that:

1. (1)

   before or at the same time as the reduction, repurchase, call or redemption, the firm replaces the relevant own funds instruments with own funds instruments of equal or higher quality on terms that are sustainable for the income capacity of the firm; or

2. (2)

   the firm is redeeming additional tier 1 instruments or tier 2 instruments within five years of their date of issue and either:

   1. (a)

      there is a change in the regulatory classification of the instruments that is likely to result in their exclusion from own funds or reclassification as a lower quality form of own funds, and both the following conditions are met:

      1. (i)

         there are reasonable grounds to conclude that the change is sufficiently certain; and

      2. (ii)

         the regulatory reclassification of the instruments was not reasonably foreseeable at the time of their issuance; or

   2. (b)

      there is a change in the applicable tax treatment of those instruments which is material and was not reasonably foreseeable at the time of their issuance.

1. (1)

   1A firm must notify the FCA at least 20 business days before the intended issuance date of the firm’s intention to issue:

   1. (a)

      additional tier 1 instruments; or

   2. (b)

      tier 2 instruments.

2. (2)

   The notification requirement in (1) does not apply if:

   1. (a)

      the firm has previously notified the FCA of an issuance of the same class of additional tier 1 instruments or tier 2 instruments; and

   2. (b)

      the terms of the new instruments are identical in all material respects to the terms of the instruments in the issuance previously notified to the FCA.

3. (3)

   The notification under (1) must:

   1. (a)

      be submitted to the FCA through the online notification and application system using the form in MIFIDPRU 3 Annex 6R; and

   2. (b)

      include the following:

      1. (i)

         confirmation of whether the instruments are intended to be classified as additional tier 1 instruments or tier 2 instruments;

      2. (ii)

         confirmation of whether the instruments are intended to be issued to external investors or only to other members of the firm’s group or connected parties;

      3. (iii)

         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;

      4. (iv)

         confirmation from a member of the firm’s senior management or governing body who has oversight of the intended issuance that the instrument meets the conditions in MIFIDPRU 3.4 or MIFIDPRU 3.5 (as applicable, and including any conditions in the UK CRR applied by those sections) to be classified as additional tier 1 instruments or tier 2 instruments; and

      5. (v)

         a properly reasoned legal opinion from an appropriately qualified individual, confirming that the capital instruments meet the conditions in (iv).

1. (1)

   1A UK parent entity must apply the modifications in (2) when either of the following apply on a consolidated basis in accordance with MIFIDPRU 2.5.7R:

   1. (a)

      MIFIDPRU 3.3.2R to MIFIDPRU 3.3.4G; and

   2. (b)

      MIFIDPRU 3.6.5R.

2. (2)

   The Handbook provisions in (1)(a) and (b) apply as if a reference to:

   1. (a)

      a “firm” is a reference to the UK parent entity;

   2. (b)

      “capital instruments” is a reference to capital instruments issued by the UK parent entity;

   3. (c)

      “additional tier 1 instruments” and “tier 2 instruments” is a reference to these instruments issued by the UK parent entity; and

   4. (d)

      “common equity tier 1 capital” is a reference to that type of capital as calculated on a consolidated basis.

1This section applies to a parent undertaking in accordance with MIFIDPRU 3.1.2R.

1A parent undertaking must, at all times, have own funds instruments that satisfy the following conditions:

1. (1)

   the parent undertaking’s common equity tier 1 capital must be at least equal to:

   1. (a)

      the sum of the book value of the parent undertaking’s holdings of the common equity tier 1 capital of the relevant financial undertakings under MIFIDPRU 2.6.5R; plus

   2. (b)

      the total amount of all the parent undertaking’s contingent liabilities in favour of the relevant financial undertakings under MIFIDPRU 2.6.5R;

2. (2)

   the sum of common equity tier 1 capital and additional tier 1 capital of the parent undertaking must be at least equal to the sum of:

   1. (a)

      the amounts in (1)(a) and (1)(b); plus

   2. (b)

      the sum of the book value of the parent undertaking’s holdings in the additional tier 1 capital of the relevant financial undertakings under MIFIDPRU 2.6.5R; and

3. (3)

   the sum of the parent undertaking’s own funds instruments must be at least equal to the total requirement under MIFIDPRU 2.6.5R.

1. (1)

   1Subject to (2), a parent undertaking must comply with:

   1. (a)

      MIFIDPRU 3.3.2R to MIFIDPRU 3.3.4G when issuing own funds instruments which are intended to qualify as common equity tier 1 capital;

   2. (b)

      MIFIDPRU 3.6.5R when issuing own funds instruments which are intended to qualify as additional tier 1 instruments or tier 2 instruments.

2. (2)

   Where the Handbook provisions in (1)(a) and (b) apply, they apply as if a reference to:

   1. (a)

      a “firm” is a reference to the parent undertaking;

   2. (b)

      “capital instruments” is a reference to capital instruments issued by the parent undertaking;

   3. (c)

      “additional tier 1 instruments” and “tier 2 instruments” is a reference to these instruments issued by the parent undertaking; and

   4. (d)

      “common equity tier 1 capital” is a reference to this type of capital as held by the parent undertaking.

1. (1)

   1This rule applies where a responsible UK parent applies the approach in MIFIDPRU 2.6.7R(2)(a) in relation to an undertaking established in a third country.

2. (2)

   Where this rule applies, a responsible UK parent must comply with MIFIDPRU 3.7.4R in relation to any issuance of own funds instruments by the undertaking established in a third country.

1[Editor’s note: The form can be found at this address: https://www.handbook.fca.org.uk/form/mifidpru/MIFIDPRU 3 Annex 1R Application under MIFIDPRU 3.3.2R for permission to include interim or year-end profits as common equity tier 1 (CET1) capital before the firm.pdf

1[Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/MIFIDPRU 3 Annex 2R Application under MIFIDPRU 3.3.3R(1) for permission to classify an issuance of capital instruments as common equity tier 1 (CET1) capital.pdf

]

1[Editor’s note: The form can be found at this address: https://www.handbook.fca.org.uk/form/MIFIDPRU 3 Annex 3R Notification under MIFIDPRU 3.3.3R(2) of issuance of additional capital instruments that have already been approved as CET1 instruments.pdf

1[Editor’s note: The form can be found at this address: https://www.handbook.fca.org.uk/form/MIFIDPRU 3 Annex 4R Application under MIFIDPRU 3.6.2R for permission to reduce own funds instruments where neither condition in MIFIDPRU 3.6.4R applies.pdf

1[Editor’s note: The form can be found at this address: https://www.handbook.fca.org.uk/form/MIFIDPRU 3 Annex 5R Notification under MIFIDPRU 3.6.3R of the intended reduction in own funds instruments where a condition in MIFIDPRU 3.6.4R applies.pdf

1[Editor’s note: The form can be found at this address: https://www.handbook.fca.org.uk/form/MIFIDPRU 3 Annex 6R Notification under MIFIDPRU 3.6.5R of the intended issuance of AT1 or T2 instruments.pdf