Prudential Regulation Authority Rulebook

9.1

A firm must not include a capital instrument in its tier two capital resources unless it complies with 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 and any such event of default must not prejudice the subordination in (1);
3. (3) to the fullest extent permitted under the laws of the relevant jurisdictions, the remedies available to the subordinated creditor in the event of non-payment or other breach of the terms of the capital instrument must (subject to 9.2) be limited to petitioning for the winding-up of the firm or proving for the debt in the liquidation or administration;
4. (4) any:
1. (a) remedy permitted by (3);
2. (b) remedy that cannot be excluded under the laws of the relevant jurisdictions as referred to in (3);
3. (c) remedy permitted by 9.2; and
4. (d) terms about repayment as referred to in (5);
5. must not prejudice the matters in (1) and (2) and in particular any damages permitted by (b) or (c) and repayment obligation must be subordinated in accordance with (1);
5. (5) without prejudice to (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 9.4 or 11.1 and any remedy described in (4)(a) to (c) must not prejudice this requirement;
6. (6) subject to 9.3, 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
11. (11) 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.

9.2

A firm must only include a capital instrument in its tier two capital resources when the remedies available to the subordinated creditor go beyond those referred to in 9.1(3), if the following conditions are satisfied:

1. (1) those remedies are not available for failure to pay any amount of principal, interest or expenses or in respect of any other payment obligation; and
2. (2) those remedies do not in substance amount to remedies to recover payment of the amounts in (1).

9.3

9.1(6) does not apply if the firm has obtained a properly reasoned independent legal opinion from an appropriately qualified individual 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, or of Scotland, or of Northern Ireland.

9.4

A tier two instrument must not provide for any right of the firm to redeem the instrument to be exercisable earlier than the fifth anniversary of the date of issue of the instrument unless the conditions in 9.5 are met.

9.5

The conditions in 9.4 are that:

1. (1) the circumstance that entitles the firm to exercise that right is 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;
2. (2) 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
3. (3) the firm's right is conditional on it obtaining a waiver of 9.6.

9.6

A firm must not redeem a tier one instrument in accordance with a term that meets the conditions set out in 9.5.

9.7

A firm must notify the PRA in accordance with Notifications 7 three months before it becomes committed to the proposed repayment of a tier two instrument (unless that firm intends to repay an instrument on its final maturity date).

9.8

When giving notice under 9.7, the firm must provide details of its position after such repayment in order to show how it will:

1. (1) comply with Insurance Company – Capital Resources Requirements 3.1; and
2. (2) have sufficient financial resources to meet Insurance Company – Overall Resources and Valuation 2.3.

9.9

If a firm gives notice to the PRA of the redemption or repayment of any tier two instrument, the firm must no longer include that instrument in its tier two capital resources from the time the notice is given.

9.10

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

9.11

A firm must not include in its tier two capital resources an item of capital does not comply with any requirement in 9 to 11 if the issue of that item of capital by the firm is connected with one or more other transactions or arrangements 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 whichever of those rules apply.