Holding of shares in group members by otHolding of shares in group members by other group members

Holding of shares in group members by other group members

51. Capital instruments[14] of the parent entity of a Level 2 insurance group or of a controlled entity within the group that are held as direct investments by a vehicle[15] subject to consolidation within the group’s accounts may be included in Tier 1 capital and Tier 2 capital only if:

(a) the parent entity (or other group entity) did not fund the acquisition of the capital instrument;

(b) the risk and rewards associated with the investments are borne primarily by third parties; and

(c) the parent entity of the group can demonstrate to APRA, if required, that decisions to acquire or sell such capital instruments are made independently of the issuer of the capital instruments and in the interests of the third parties who primarily bear the risks and rewards of the investments in the instruments.

52. Direct investments in shares of an insurer, or an entity that carries on international business within a Level 2 insurance group, by an SPV (e.g. trust) established under a share-based employee remuneration scheme may only be included in a Level 2 insurance group’s Tier 1 capital where they satisfy the requirements specified in GPS 112.[16] When calculating the capital of the Level 2 insurance group, the SPV holding shares must be excluded from the consolidated group. As a consequence, any associated change in the fair value of shares held by an SPV must be excluded from both the group’s capital and the assets subject to a risk charge.

Capital support

53. For the purposes of determining whether an instrument constitutes capital support, including a guarantee provided to a related party, APRA will have regard to, amongst other things, whether:

(a) the facility represents a recognised capital instrument or is otherwise accepted as standing in place of capital required to be held by a related entity; or

(b) the provider of the facility, in terms of either repayment or maturity, ranks below other senior unsecured or unsubordinated creditors, or

(c) the facility is provided by an insurer or other group entity and the funding provided flows through one group entity (including any SPV) to another group entity and the funding received by the second entity meets either (a) or (b).

54. In the event that a facility covered in paragraph 53 represents a form of capital support, it must be considered for the purposes of this Prudential Standard to form part of the Level 2 insurance group’s “other capital investments”. In the event that such investments are not deducted from Tier 1 capital or Tier 2 capital, they attract an investment risk capital charge of 20 per cent.