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PRA consultation CP 26-19 Solvency II Adjusting for the reduction of loss absorbency

PRA consultation CP 26/19: Solvency II: Adjusting for the reduction of loss absorbency

Background

  • CP 26/19: Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion; published by the PRA on 11 October 2019
  • The CP is relevant to UK insurance firms within the scope of Solvency II, the Society of Lloyd’s, and firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, together with their advisors.
  • In this consultation paper (CP), the Prudential Regulation Authority (PRA) proposes to amend its expectation on the treatment of restricted Tier 1 own funds (rT1) instruments in the light of recent information from HMRC. The proposals would make amendments to Supervisory Statement (SS) 3/15 ‘Solvency II: the quality of capital instruments.’

Impacts

The SS currently sets out the PRA’s expectation that insurers will deduct the maximum tax charge generated on write down, when including externally issued rT1 instruments in their own funds. This consultation proposes expanding this expectation to reflect the maximum tax charge that could be generated on conversion of such items into ordinary shares.

The purpose of the proposals in this consultation is to maintain the existing regulatory policy of only recognising rT1 items to the extent that they provide loss absorbency on trigger, and to prevent the amount of loss-absorbency provided by rT1 instruments that convert into ordinary shares on trigger from being overstated.

The proposals set out in this CP have been designed in the context of the current UK and EU regulatory framework. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the European Union take effect.

Timeline with relevant dates to be logged on regulatory calendar

  • Consultation opens on 13 October 2019
  • Consultation closes on 13 January 2020

Next steps

Any respondents need to send comments to the PRA.

The intended implementation date for the final policy following this CP is the date of publication of the final policy.

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