Prudential Regulation Authority Rulebook

4.1

[Deleted.]

4.2

A firm must not avoid the requirements of the CRR by structuring its investments as connected funding of a capital nature.

4.3

A firm must treat all connected funding of a capital nature as a holding of capital of the connected party and apply to it the treatment under the CRR and the PRA Rulebook applicable to such a holding, including any reporting or disclosure requirements in respect of such holding.

4.4

If the connected party is a financial sector entity, the firm must treat the connected funding of a capital nature as a holding of Common Equity Tier 1 instruments, Additional Tier 1 instruments or Tier 2 instruments of the connected party, as appropriate in light of the funding’s characteristics when compared to the characteristics of each type of own funds instruments.

4.5

A firm must report to the PRA all connected funding of a capital nature at least one month in advance of entry into the relevant funding transaction and identify each relevant transaction with sufficient detail to allow the PRA to evaluate it.

4.6

A loan or other funding transaction is connected funding of a capital nature if it is made by the firm to a connected party and:

1. (1) based on its terms and other factors of which the firm is aware, the connected party would be able to consider it from the point of view of its characteristics as capital as being similar to an own funds instrument; or
2. (2) the position of the firm from the point of view of maturity and repayment is inferior to that of the senior unsecured and unsubordinated creditors of the connected party.

4.7

A loan or other funding transaction is connected funding of a capital nature if it:

1. (1) funds directly or indirectly a loan to a connected party that has the characteristics described in 4.6 or of a capital investment in a connected party; or
2. (2) has itself the characteristics described in 4.6.

4.8

A guarantee is connected funding of a capital nature if it is a guarantee by the firm of a loan or other funding transaction from a third party to a connected party of the firm and:

1. (1) the loan or other funding transaction has the characteristics described in 4.6 or the characteristics described in 4.7; or
2. (2) the rights that the firm would have against the connected party have the characteristics described in 4.6(2).

4.9

For the purposes of this Chapter and in relation to a firm, a connected party means another person (“P”) in respect of whom the firm has not been permitted to apply the individual consolidation method under Article 9 of the CRR and one of the following applies:

1. (1) P is closely related to the firm;
2. (2) P is an associate of the firm; or
3. (3) the same persons significantly influence the management body of P and the firm.

4.10

For the purposes of 4.9(1), a firm and another person are closely related when:

4.11

For the purposes of 4.9(2), a person is an associate of a firm if it is:

1. (1) in the same group as the firm;
2. (2) an appointed representative (in the sense of section 39 of FSMA) or tied agent (as described in Article 4(1)(29) of MiFID) of the firm or a member of the firm’s group; or
3. (3) any other person whose relationship with the firm or a member of the firm’s group might reasonably be expected to give rise to a community of interest between them which may involve a conflict of interest in dealings with third parties.