PRU 2.2 Capital resources

PRU 2.2 applies to an insurer unless it is:

1. (1)

   a non-directive friendly society; or

2. (2)

   a Swiss general insurer; or

3. (3)

   an EEA-deposit insurer; or

4. (4)

   an incoming EEA firm; or

5. (5)

   an incoming Treaty firm.

A firm must calculate its capital resources for the purpose of PRU in accordance with PRU 2.2.14 R, subject to the limits in PRU 2.2.16 R to PRU 2.2.26 R.

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

1. (1)

   the amount calculated at stage A of the calculation in PRU 2.2.14 R; and

2. (2)

   notwithstanding PRU 2.2.20 R (1), the amount calculated at stage B of the calculation in PRU 2.2.14 R;

less the amount calculated at stage E of the calculation in PRU 2.2.14 R.

A firm 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, B, G and H in PRU 2.2.14 R2 less the sum of the items listed at stage E in PRU 2.2.14 R.

A firm 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, B, G and H in PRU 2.2.14 R2 less the sum of the items listed at stage E in PRU 2.2.14 R.

2In PRU 2.2.17 R and PRU 2.2.18 R:

1. (1)

   items listed at stage B in PRU 2.2.14 R may be included notwithstanding PRU 2.2.20 R (1);

2. (2)

   innovative tier one capital that meets the conditions (other than PRU 2.2.108 R (11)) for it to be included as upper tier two capital at stage G in PRU 2.2.14 R may be treated as an item listed at stage G; and

3. (3)

   a firm 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 and H in PRU 2.2.14 R 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 PRU 2.2.14 R 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 PRU 2.2.14 R less the amount of any innovative tier one capital that is not treated as upper tier two capital for the purpose of PRU 2.2.17 R or PRU 2.2.18 R, as the case may be.

In relation to a firm's tier one capital resources calculated at stage F of the calculation in PRU 2.2.14 R:

1. (1)

   at least 50% must be accounted for by core tier one capital; and

2. (2)

   no more than 15% may be accounted for by innovative tier one capital.

1. (1)

   2A firm may, subject to the limits in PRU 2.2.23 R, include in its tier two capital resources any capital item excluded from its tier one capital resources under PRU 2.2.20 R which meets the conditions for it to be included as tier two capital at stage G or H in PRU 2.2.14 R.

2. (2)

   For the purpose of (1), the requirement to obtain a legal opinion in PRU 2.2.108 R (11) does not apply.

Subject to PRU 2.2.24 R, a firm 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 of the calculation in PRU 2.2.14 R; 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 PRU 2.2.14 R.

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

1. (1)

   the amount calculated at stage A plus, notwithstanding PRU 2.2.20 R (1), the amount calculated at2 stage B less the amount calculated at2 stage E of the calculation in PRU 2.2.14 R; and

2. (2)

   the amount calculated at stage G of the calculation in PRU 2.2.14 R.

2In PRU 2.2.24 R the amount of any innovative tier one capital that meets the conditions for it to be included as upper tier two capital at stage G in PRU 2.2.14 R may be included in the amount calculated at stage G.

A firm that carries on both long-term insurance business and general insurance business must apply the limits in PRU 2.2.16 R to PRU 2.2.24 R separately for each type of business.

A firm may not include a share in, or another investment in, or external contribution to the capital of, that firm in its tier one capital resources unless it complies with the following conditions:

1. (1)

   it is included in one of the categories in PRU 2.2.28 R;

2. (2)

   it is not excluded by any of the rules in PRU 2.2; and

3. (3)

   it complies with the conditions set out in PRU 2.2.29 R.

The categories referred to in PRU 2.2.27 R (1) are:

1. (1)

   permanent share capital;

2. (2)

   a perpetual non-cumulative preference share; and

3. (3)

   an innovative tier one instrument.

Subject to PRU 2.2.30 R, an item of capital in a firm complies with PRU 2.2.27 R (3) if:

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 PRU 2.2.38 R and PRU 2.2.39 R;

4. (4)

   any coupon is either non-cumulative or, if it is cumulative, it complies with PRU 2.2.40 R;

5. (5)

   it is able to absorb losses to allow the firm to continue trading and in the case of an innovative tier one instrument it complies with PRU 2.2.56 R to PRU 2.2.58 R;

6. (6)

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

7. (7)

   the firm is under no obligation2 to pay a coupon on it in cash at any time; and2

   2
8. (8)

   the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy PRU 2.2.29 R (1) to PRU 2.2.29 R (7) and, where it applies, PRU 2.2.93 R2.

1. (1)

   An item of capital does not comply with PRU 2.2.27 R (3) 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 produce the effect described in (2).

2. (2)

   The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.29 R (1) to (8).

An item of capital does not comply with PRU 2.2.29 R (5) if the holder of that item does not bear losses to at least the same degree as the holder of a share of a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).

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

1. (1)

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

2. (2)

   (in the case of 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).

Permanent share capital means an item of capital which (in addition to satisfying PRU 2.2.29 R) meets the following conditions:

1. (1)

   it is:

   1. (a)

      an ordinary share; or

   2. (b)

      a members' contribution; or

   3. (c)

      part of the initial fund of a mutual;

2. (2)

   any coupon on it is not cumulative, and the firm is under no obligation2 to pay a coupon and has2 the right to choose the amount of any2 coupon that it pays2; and

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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 degree of an ordinary share issued by a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).

In relation to a perpetual non-cumulative preference share which is redeemable, a firm may not include it in its tier one capital resources unless its contractual terms are such that:

1. (1)

   it is redeemable only at the option of the firm; and

2. (2)

   the firm cannot exercise that redemption right:

   1. (a)

      before the fifth anniversary of its date of issue;

      2
   2. (b)

      unless it has given notice to the FSA in accordance with PRU 2.2.72 R; and

   3. (c)

      unless at the time of exercise of that right it complies with PRU 2.1.9 R and will continue to do so after redemption.

In relation to an innovative tier one instrument which is redeemable and which, either:

1. (1)

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

2. (2)

   satisfies PRU 2.2.54 R (2);

a firm may not include it in its tier one capital resources unless it complies with the conditions in PRU 2.2.38 R, except that in PRU 2.2.38 R (2)(a)"fifth anniversary" is replaced by "tenth anniversary".

A potential tier one instrument with a cumulative coupon complies with PRU 2.2.29 R (4) only if any such coupon must, if deferred, be paid by the firm in the form of permanent share capital.

A perpetual non-cumulative preference share may be included at stage B of the calculation in PRU 2.2.14 R if:

1. (1)

   it complies with PRU 2.2.29 R, PRU 2.2.35 R and PRU 2.2.38 R;

2. (2)

   any coupon on it is not cumulative, and the firm is under no obligation2 to pay a coupon in any2 circumstances;

   22
3. (3)

   it is not excluded from tier one capital resources by any of the rules in PRU 2.2; and

4. (4)

   it is not an innovative tier one instrument.

If an item of capital is stated to be an innovative tier one instrument by the rules in PRU 2.2, it cannot be included in stages A or B of the calculation in PRU 2.2.14 R.

If a tier one instrument is redeemable at the option of the firm, it is an innovative tier one instrument unless it is redeemable solely in cash.

If a tier one instrument:

1. (1)

   is redeemable; and

2. (2)

   is issued on terms that are (or its terms are amended and the amended terms are) such that a reasonable person would (judging at or around the time of issue or amendment) think that:

   1. (a)

      the firm is likely to redeem it; or

   2. (b)

      the firm is likely to have a substantial economic incentive to redeem it;

   that tier one instrument is an innovative tier one instrument.

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

1. (1)

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

2. (2)

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

   1. (a)

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

      1. (i)

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

      2. (ii)

         its liabilities exceed its assets;

   2. (b)

      a creditor (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and

   3. (c)

      the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

A firm wishing to issue an innovative tier one instrument must obtain a properly reasoned legal2 opinion from Queen's Counsel or,2 where the opinion relates to the law of a jurisdiction outside the United Kingdom, from a lawyer in that jurisdiction of equivalent status, confirming that the criteria in PRU 2.2.29 R (5) and PRU 2.2.31 R are met.

A tier one instrument with a cumulative coupon which complies with PRU 2.2.40 R is an innovative tier one instrument.

If:

1. (1)

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

2. (2)

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

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

If a potential tier one instrument is or may become subject to a step-up, a firm must not include it in its tier one capital resources if the amount of the step-up as calculated as at the date of issue of the instrument2 exceeds or may exceed;

1. (1)

   100 basis points; and

2. (2)

   50% of the initial credit spread.

A firm must not include a potential tier one instrument that is or may become subject to a step-up in its tier one capital resources if the step-up can arise earlier than the tenth anniversary of the date of issue of that item of capital.

A firm must not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources if:

1. (1)

   the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than 200%; or

2. (2)

   the issue or market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price (or, as the case may be, market price) of that original capital item.

In PRU 2.2.65 R to PRU 2.2.69 R:

1. (1)

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

2. (2)

   the conversion instrument means the permanent share capital issued on its redemption.

In PRU 2.2.65 R to PRU 2.2.69 R, the conversion ratio means the ratio of:

1. (1)

   the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to

2. (2)

   one unit of the original capital item.

In PRU 2.2.65 R, the conversion ratio as at the date of issue of the original capital item is calculated as if the original capital item were redeemable at that time.

If the conversion instruments or the original capital item are subdivided or consolidated or subject to any other occurrence that would otherwise result in like not being compared with like, the conversion ratio calculation in PRU 2.2.65 R must be adjusted accordingly.

1. (1)

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

   1. (a)

      the redemption proceeds; or

   2. (b)

      any coupon on that capital item;

   can be satisfied by the issue of another tier one instrument.

2. (2)

   A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued tier one instruments of the kind in question (and the authority to issue them):

   1. (a)

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

   2. (b)

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

A firm must not include any perpetual non-cumulative preference shares or innovative tier one instruments in its tier one capital resources for the purpose of PRU 2.2 unless it has notified the FSA of its intention at least one month before it first includes them.

A firm must not redeem any tier one instrument that it has included in its tier one capital resources for the purpose of PRU 2.2 unless it has notified the FSA of its intention at least one month before it does so.

In relation to a tier one instrument, a step-up means any change in the coupon rate on that instrument that results in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments. A step-up:

1. (1)

   includes (in the case of a fixed rate) an increase in that coupon rate;

2. (2)

   includes (in the case of a floating rate calculated by adding a fixed amount to a fluctuating amount) an increase in that fixed amount;

3. (3)

   includes (in the case of a floating rate) a change in the identity of the benchmark by reference to which the fluctuating element of the coupon is calculated that results in an increase in the absolute amount of the coupon;

4. (4)

   does not include (in the case of a floating rate) an increase in the absolute amount of the coupon caused by fluctuations in the fluctuating figure by reference to which the absolute amount of the coupon floats.

Where a rule in PRU 2.2 says that a particular treatment applies to an item of capital that is subject to a step-up of a specified amount, the question of whether that rule is satisfied must be judged by reference to the cumulative amount of all step-ups since the issue of that item of capital rather than just by reference to a particular step-up.

Negative amounts, including any interim net losses, must be deducted from profit and loss account and other reserves.2

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

Valuation differences are all differences between the valuation of assets and liabilities as valued in PRU and the valuation that the firm uses for its external financial reporting purposes, except valuation differences which are dealt with elsewhere in PRU 2.2.14 R. The sum of these valuation differences must either be added to (if positive) or deducted from (if negative) a firm's capital resources in accordance with PRU 2.2.14 R.

PRU 2.2.81 R applies to a firm that carries on general insurance business, except a pure reinsurer, and which discounts or reduces its technical provisions for claims outstanding.

A firm of a kind referred to in PRU 2.2.80 R must deduct from its capital resources the difference between the undiscounted technical provisions or technical provisions before deductions and the discounted technical provisions or technical provisions after deductions. This adjustment must be made for all general insurance business classes, except for risks listed under classes 1 and 2. For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions. For classes 1 and 2 (other than annuities), if the expected average interval between the settlement date of the claims being discounted and the accounting date is not at least four years, the firm must deduct:1

1. (1)

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

   1
2. (2)

   where it can identify a subset of claims such that the expected average interval between the settlement date of the claims and the accounting date is at least four years, the difference between the undiscounted technical provisions and the discounted technical provisions for the other claims.1

2The fund for future appropriations means the fund of the same name required by the insurance accounts rules, comprising all funds the allocation of which either to policyholders or to shareholders has not been determined by the end of the financial year, or the balance sheet items under international accounting standards which in aggregate represent as nearly as possible that fund.

Externally verified interim net profits are interim profits verified by a firm's external auditors after deduction of tax, declared dividends and other appropriations.

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

For the purposes of PRU 2.2.14 R, a firm must deduct from total capital resources the value of any asset which is not an admissible asset as listed in PRU 2 Annex 1 R, unless the asset is held to cover property-linked liabilities or index-linked liabilities under PRU 4.2.57 R or PRU 4.2.58 R2.

A firm must deduct from its capital resources the value of its investments in each of its related undertakings that is an ancillary services undertaking.

In relation to each of its related undertakings that is a regulated related undertaking (other than an insurance undertaking) a firm must add to (if positive), at stage J in PRU 2.2.14 R, or deduct from (if negative), at stage L in PRU 2.2.14 R, its capital resources the value of its shares in that undertaking calculated in accordance with PRU 1.3.35 R.

A firm carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in PRU 2.2, meet the following conditions before a capital instrument can be included in the firm's capital resources:

1. (1)

   the firm must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;

2. (2)

   the intention to manage the with-profits fund on the basis set out in PRU 2.2.93 R (1) must be disclosed in the firm's Principles and Practices of Financial Management; and

3. (3)

   no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under Principle 6.

A capital instrument must meet the following conditions before it can be included in a firm's upper tier two capital resources:

1. (1)

   it must meet the general conditions described in PRU 2.2.108 R;

2. (2)

   it must have no fixed maturity date;

3. (3)

   the contractual terms of the instrument must provide for the firm to have the option to defer any interest payment in cash on the debt;

   2
4. (4)

   the contractual terms of the instrument must provide for the loss-absorption capacity of the debt and unpaid interest, whilst enabling the firm to continue its business; and2

   2
5. (5)

   the contractual terms of the instrument must not provide for the instrument to be redeemable or the debt to be repayable on notice from the holder.2

2Where a capital instrument meets PRU 2.2.101 R, and notice of the redemption or repayment of that instrument has been given by the firm in accordance with PRU 2.2.116A R, the firm must no longer include that instrument in its tier two capital resources.

A capital instrument does not meet PRU 2.2.101 R (4) unless it meets PRU 2.2.103 R and PRU 2.2.105 R.

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

1. (1)

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

2. (2)

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

   1. (a)

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

      1. (i)

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

      2. (ii)

         its liabilities exceed its assets;

   2. (b)

      a creditor (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and

   3. (c)

      the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).

A firm wishing to issue an upper tier two instrument other than a perpetual preference share must obtain a properly reasoned legal2 opinion from Queen's Counsel or,2 where the opinion relates to the law of a jurisdiction outside the United Kingdom, from a lawyer in that jurisdiction of equivalent status, confirming that the criteria in PRU 2.2.101 R (4) are met.

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

1. (1)

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

2. (2)

   the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm;

3. (3)

   the remedies available to the subordinated creditor in the event of non-payment or other breach of the written agreement or instrument must be limited to petitioning for the winding-up of the firm or proving for the debt and claiming in the liquidation of the firm;

4. (4)

   any events of default and any remedy described in (3) must not prejudice the matters in (1) and (2);

5. (5)

   in addition to the requirement about repayment in (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2) or as permitted by PRU 2.2.116A R or PRU 2.2.123A R2;

6. (6)

   the debt agreement or terms of the capital instrument are governed by the law of England and Wales, or of Scotland or of Northern Ireland;

7. (7)

   to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;

8. (8)

   the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);

9. (9)

   the debt must be unsecured and fully paid up;

10. (10)

    the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9) and, where it applies, PRU 2.2.93 R2; and

11. (11)

    the firm has obtained a properly reasoned external legal opinion stating that the requirements in (1) to (10) have been met.

PRU 2.2.108 R (6) does not apply if the firm has obtained a properly reasoned external legal opinion confirming that the same degree of subordination has been achieved under the law that governs the debt and the agreement as that which would have been achieved under the laws of England and Wales, Scotland, or Northern Ireland.

1. (1)

   An item of capital does not comply with PRU 2.2.101 R or PRU 2.2.108 R 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 produce the effect described in (2).

2. (2)

   The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.101 R or PRU 2.2.108 R.

A firm must not amend the terms of the debt and the documents referred to in PRU 2.2.108 R (8) unless:

1. (1)

   at least one month before the amendment is due to take effect, the firm has given the FSA notice in writing of the proposed amendment and the FSA has not objected; and

2. (2)

   that notice includes confirmation that the legal opinions referred to in PRU 2.2.108 R (11) and, if applicable, PRU 2.2.105 R and PRU 2.2.111 R, continue in full force and effect in relation to the terms of the debt and documents, notwithstanding any proposed amendment.

2A tier two instrument may be redeemable at the option of the firm, but any contractual term of the instrument providing for the firm to have the right to exercise such an option on a specified date must not provide for that right to be exercisable earlier than the fifth anniversary of the date of issue of the instrument.

A firm must notify the FSA of its intention to repay a tier two instrument at least six months before the date of the proposed repayment (unless the firm intends to repay an instrument on its contractual repayment date) providing details of how it will meet its capital resources requirement after such repayment.

In relation to a tier two instrument, a step-up in a coupon rate means:

1. (1)

   (in the case of a fixed rate) an increase in that rate;

2. (2)

   (in any other case) any change in the way that the interest or other payment is calculated that may result in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments.

Where a tier two instrument is subject to one or more step-ups, the first date that a step-up can take effect must be treated, for the purposes of this section, as the instrument's final maturity date if its actual maturity date occurs after that, unless the effect of the step-up or step-ups as calculated as at the date of issue of the instrument2 is to increase the coupon rate at which payments are to be made by no more than:

1. (1)

   50 basis points in the first ten years of the life of the debt; or

2. (2)

   100 basis points over the whole life of the debt.

A firm may not include in its tier two capital resources a capital instrument the terms of which provide for a step-up in the first five years after issue.

Where a step-up arises through a change from paying a coupon on a debt instrument to paying a dividend on a share issued in settlement of the coupon, any net2 cost to the firm arising from the different2 tax treatment of the dividend compared to the tax treatment of interest2 may be ignored for the purpose of assessing the effect of the step-up2.

A capital instrument may be included in lower tier two capital resources only if it has an original maturity of at least five years or it has no fixed maturity date.

2A lower tier two instrument may include a contractual term providing for the instrument to be redeemable on notice from the holder, but the period of notice of redemption or repayment required to be given by the holder must not be less than five years.

For2 the purposes of calculating the amount of a lower tier two instrument which may be included in a firm's capital resources:2

1. (1)

   in the case of an instrument with a fixed maturity date, in the final five years to maturity; and2

2. (2)

   in the case of an instrument with or without a fixed maturity date but where five or more years' notice of redemption or repayment has been given, in the final five years to the date of redemption or repayment;2

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