Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down

Policy Statement 4/19 | Consultation Paper 27/18

Published on 20 February 2019

Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down - PS4/19

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback on responses to Consultation Paper (CP) 27/18 ‘Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down’. It also contains the PRA’s final policy on updating Supervisory Statement (SS) 3/15 ‘Solvency II: The quality of capital instruments’, see Appendix 1.

The PRA has also issued a reporting clarification on how such adjustments should be reflected in the Solvency II reporting templates (Appendix 2). 

This PS 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. 

The rationale for the expectation was to address the prudential implications of tax changes introduced by HMRC in the Budget on Monday 29 October 2018 pertaining to hybrid instruments.

Summary of responses

The PRA received six responses to the CP. Respondents made a number of observations and requests for clarification which, together with the PRA’s feedback, are set out in Chapter 2. Changes to the draft policy are set out in Chapter 1.

Implementation

The new policy will come into effect for all instruments issued on or after Thursday 21 February 2019.

PDFPolicy Statement 4/19


Published on 31 October 2018

Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down - CP27/18

Overview

In this consultation paper (CP), the Prudential Regulation Authority (PRA) sets out its proposals to amend Supervisory Statement (SS) 3/15 ‘Solvency II: the quality of capital instruments’. It proposes an expectation that insurers will deduct the maximum tax charge generated on write-down, when including items listed in Articles 69(a)(iii) and (b) of the Solvency II Regulation (the ‘Solvency II Regulation’) or certain items approved under Article 79 of the Solvency II Regulation to be recognised as restricted Tier 1 own funds (rT1) in their own funds. 

This is in the light of the proposed tax changes introduced by HMRC in the Budget on Monday 29 October 2018 pertaining to hybrid instruments. The CP specifically addresses the implications of those proposed tax changes on rT1.

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.

Implementation

The intended implementation date for the final policy following this CP is Friday 1 February 2019. 

Responses and next steps

This consultation closed on Wednesday 2 January 2019, the short consultation period being necessary to provide certainty as soon as possible to firms considering issuing rT1 instruments. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP27_18@bankofengland.co.uk.

PDFConsultation Paper 27/18

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