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

Consultation Paper 26/19
Published on 11 October 2019


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.’

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. To reflect any changes to SS3/15 following this consultation the PRA would also update the reporting clarification published as Appendix 2 to Policy Statement (PS) 4/19 ‘Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down’.

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.


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. 

Responses and next steps

This consultation closes on Monday 13 January 2020. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to

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.

In the event that the UK leaves the EU with no implementation period in place, the PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018 (EUWA).


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

PDF Consultation Paper 26/19

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