CP2/22 - Definition of capital: updates to PRA Rules and supervisory expectations

PRA Consultation Paper 2/22
Published on 07 February 2022

Overview

This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed approach to transferring the UK Technical Standards for own funds requirements for institutions  (‘UKTS’) into PRA rules, with amendments to reflect revisions to the Capital Requirements Regulation  (‘CRR’) which applied from 27 June 2019. These changes to the CRR were not reflected in the relevant EU Regulatory Technical Standard (RTS) before the end of the EU withdrawal transition period and are therefore not currently included in the UKTS on own funds. It also proposes updates to PRA Supervisory Statement (SS) 7/13 ‘Definition of capital (CRR firms)’  to clarify the PRA’s expectations of CRR firms regarding capital issuances and reductions.

The proposals in this CP would amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook (Appendix 1) and SS7/13 (Appendix 3).

This CP is relevant to banks, building societies, PRA-designated investment firms and PRA-approved, or PRA-designated, financial or mixed financial holding companies.

Summary of proposals

The purpose of the proposals in this CP is to revoke the UKTS and replicate it in the PRA Rulebook with proposed amendments to align with updates to the CRR, in particular the rules relating to the prior permission regime to reduce own funds instruments. The proposed updates to SS7/13 aim to enhance the quality of capital instruments issued by firms, simplify procedures where appropriate, and clarify PRA expectations in relation to permissions to reduce own funds instruments.

The policy proposals included in this CP are as follows:

(a) Alongside replicating the UKTS requirements in the PRA Rulebook, the PRA proposes to update the relevant provisions in the Own Funds and Eligible Liabilities (CRR) Part to align with the changes introduced to the CRR in 2019. This includes updates to the requirements on firms regarding: information which must be provided when seeking PRA permission to reduce capital instruments; the new general prior permission process; and the process for reductions in share premium accounts. 

(b) The PRA also proposes to update SS7/13 to clarify its expectations of CRR firms regarding the quality of capital instruments, in light of recent supervisory experience. The proposals also set out PRA expectations on liability-accounted Additional Tier 1 (AT1) instruments, update existing references on subordinated swaps, and introduce an expectation for firms to seek PRA views prior to issuing any new Tier 2 instruments which include new or complex features. The PRA also clarifies its expectation that firms seek PRA permission for any forms of reduction of own funds instruments, and that firms should inform supervisory contacts when there is sufficient certainty regarding capital reduction transactions in order to facilitate publication of the related PRA permission.

Responses and next steps

This consultation closes on Monday 2 May 2022. The PRA invites feedback on the proposals set out in this consultation. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be. Please address any comments or enquiries to CP2_22@bankofengland.co.uk.
The PRA proposes that the implementation date for the changes resulting from this CP would be September 2022.

Consultation Paper 2/22

Appendices

Consultation end date: 2 May 2022

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