Prudential Regulation Authority Rulebook

9.1

Firms are required⁵ to notify the PRA at least one month before the intended date of issuance or amendment or variation to the terms of each CET1 or AT1 capital instrument, and immediately after issuing or amending or varying the terms of each Tier 2 capital instrument, that will count towards regulatory capital resources or own funds, either at solo, sub-consolidated or group consolidated level or any combination of these.

9.2

The PRA is likely to need more time to review a notified instrument with complex feature(s) (as set out in paragraphs 2.3 to 2.5 above), or issuances with new features, for example, instruments marketed as ‘Green’, ‘Social’, or ‘Environmental, Social, Governance (ESG)’. The PRA expects the firm to engage with its usual supervisory contact as early as possible (for example, once the relevant terms and conditions including any side agreements are drafted) with a clear explanation of how the proposed features comply with the letter and objective of the relevant CRR requirements, the PRA’s rules and supervisory expectations. Notwithstanding the post-issuance notification of Tier 2 instruments, the PRA expects firms to discuss Tier 2 instruments which include complex or new features that could affect their capital eligibility with the PRA prior to issuance.

9.3

The PRA expects the relevant SMF (as defined in paragraph 2.5 above) to ensure that the notified capital instrument complies with the letter and objective of the relevant CRR requirements, the PRA’s rules and supervisory expectations.

9.4

The PRA requires all new issuances of capital instruments to be accompanied by an independent legal opinion to confirm the instrument’s eligibility as a capital instrument. The PRA expects the legal opinion to explain how the instrument complies with the respective CRR eligibility criteria, including the CRR Article 79a requirement that the combined economic effect of the substantial features of instruments and all arrangements related to the instruments are compliant with the objective of the CRR eligibility requirements.

9.5

The PRA may ask firms to provide additional information, for example in case of an incomplete notification, unclear terms and conditions or changes to terms and conditions during the assessment period, which is likely to delay the PRA’s assessment beyond the normal one month period. The PRA reserves the right to review any capital instrument at any time – particularly in light of international policy developments or lessons learnt from its own assessments.

9.6

CRR II allows a firm to count any subsequent issuance of a form of CET1 instrument for which it has already received the PRA’s permission (pursuant to CRR Article 26(3) (as amended)) towards its CET1 capital provided the conditions set out in the second subparagraph of the amended Article 26(3) are met. These conditions are that:

1. (a) the provisions governing those subsequent issuances are substantially the same as the provisions governing those issuances for which the firms have already received permission from the PRA; and
2. (b) firms have notified those subsequent issuances to the PRA sufficiently in advance of their classification as CET1 instruments.

9.7

CET1 issuances whose terms and conditions (including any side agreements) are identical to those of an issuance for which a firm has already received the PRA’s permission would satisfy the conditions for being ‘substantially the same’ as the previous issuance. For subsequent issuances of CET1 instruments on such identical terms, firms may notify the PRA no later than the intended date of the subsequent issuance.

9.8

However, a CET1 issuance will normally not be considered substantially the same as a previous issuance if:

1. (a) there is any change to provisions governing voting rights, subordination, or distributions; or any feature that might be considered a potential barrier to recapitalisation;
2. (b) there is material change to other provisions governing the instrument; or
3. (c) the transaction involves new side agreements or material amendments to an existing side agreement which were not considered in the PRA’s previous assessment.

9.9

In any such cases, firms should notify the PRA at least one month in advance of the intended date of issuance.

9.10

Similarly, a firm may count an issuance of an AT1 instrument towards its AT1 capital provided that the AT1 instrument will be issued on substantially the same terms as a previously notified AT1 issuance. The PRA considers an AT1 instrument to be substantially the same if its terms and conditions (including any side agreements) are identical to a previous AT1 instrument except for the issue date, the amount of issuance, the currency of issuance or the rate of interest payable by the issuer.

9.11

For subsequent issuances of AT1 instruments on such terms, firms may notify the PRA no later than the intended date of the subsequent issuance.

9.12

However, an AT1 issuance will normally not be considered substantially the same as a previous issuance if:

1. (a) there is any change to provisions governing subordination, conversion or write-down mechanism, call option, frequency or amount of distributions; or any feature that might be considered a barrier to recapitalisation or an incentive to redeem; or
2. (b) there is material change to any other provision governing the instrument.

9.13

In such cases, the PRA expects firms to notify the PRA at least one month in advance of the intended date of issuance.

9.14

For issuances of Tier 2 instruments, firms need not submit a legal opinion provided that the Tier 2 instrument was issued on substantially the same terms as a previously notified Tier 2 issuance. Similar to AT1 instruments, the PRA considers a Tier 2 instrument to be substantially the same if its terms and conditions (including any side agreements) are identical to a previous Tier 2 instrument except for the issue date, the amount of issuance, the maturity, the currency of issuance or the rate of interest payable by the issuer.

9.15

However, a Tier 2 issuance will normally not be considered substantially the same as a previous issuance if:

1. (a) there is any change to provisions governing subordination, conversion or write-down mechanism, call option, frequency or amount of distributions; or any feature that might be considered a barrier to recapitalisation or an incentive to redeem; or
2. (b) there is material change to any other provision governing the instrument.

9.16

In such cases, the PRA expects firms to submit a legal opinion in accordance with Definition of Capital 7C.2.

9.17

Further, an AT1 or Tier 2 instrument would be considered substantially the same if, following an amendment to the terms of the instrument, it remains identical other than in respect of the issue date, the amount of issuance, or the currency of issuance. However, it will normally not be considered substantially the same as the existing instrument if:

1. (a) there is any change to provisions governing subordination, conversion or write-down mechanism, call option, frequency or amount of distributions; or any feature that might be considered a barrier to recapitalisation or an incentive to redeem; or
2. (b) there is material change to any other provision governing the instrument.