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

Policy Statement 7/20 | Consultation Paper 26/19

Published on 16 March 2020

Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion - PS7/20

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 26/19 ‘Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion’ (page 2 of 2). It also contains the PRA’s final policy in an updated Supervisory Statement (SS) 3/15 ‘Solvency II: The quality of capital instruments’ (see Appendix).

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. 

Summary of responses

The PRA received six responses to the CP. Respondents made requests for clarification on the tax opinion process, made technical observations on how the maximum tax impact was to be calculated and suggested alternative means for the PRA to achieve its policy objective. The PRA provides feedback to these responses, clarifications and suggestions together with its final policy decision, in Chapter 2. After considering the responses, the PRA has made minor changes to its proposals.

Implementation

This policy will take effect on publication of this PS on Monday 16 March 2020.

The policy set out in this PS has been designed in the context of the UK’s withdrawal from the European Union and entry into the transition period, during which time the UK remains subject to European law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect.

The PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details. 

PDFPolicy Statement 7/20


Published on 11 October 2019

Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion -CP26/19

Overview

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.

Purpose

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 CP26_19@bankofengland.co.uk

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).

Implementation

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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