Implementation of reduction, redemption or repurchase of instruments that count towards the own funds base

5 November 2024
Ref.: 2410094

Circular no.: 29/2024
To financial undertakings and the Association of Companies in Financial Services

Subject: Implementation of reduction, redemption or repurchase of instruments that count towards the own funds base

With rules no. 696/2024, on financial undertakings' calculation of the own funds base and eligible liabilities,1 Delegated Regulation (EU) 2023/827, amending Delegated Regulation (EU) no. 241/2014 as regards technical standards for own funds requirements, was implemented. The Delegated Regulation (EU) is laid down on the basis of Regulation (EU) no. 575/2013 (CRR), as subsequently amended, cf. Article 1(c) of Act no. 161/2002, on financial undertakings.

In light of the aforementioned amendments, the Financial Supervisory Authority of the Central Bank of Iceland wishes to draw attention to the following points regarding the implementation of reduction, redemption or repurchase of instruments that count towards the own funds base:2

1. According to the first paragraph of Article 77 CRR, a financial undertaking requires the prior permission of the Financial Supervisory Authority to:

a. Reduce, redeem or repurchase instruments that count towards the Common Equity Tier 1 (CET1) that the financial undertaking concerned has issued in accordance with Act no. 2/1995, on public limited companies.

b. Reduce, pay out or reclassify share premium or capital contribution accounts.

c. Call, prepay, repay or repurchase instruments that count towards Additional Tier 1 (AT1) or Tier 2 (T2), as applicable, before their contractual maturity date.

2. In the first paragraph of Article 78 CRR, the conditions are set out for the Financial Supervisory Authority to permit the reduction, redemption or repurchase of instruments that count towards the own funds base, cf. the second to fourth paragraphs of the same Article. One of the following conditions must be met:

a. that the financial undertaking concerned issues new own funds instruments of the same or higher quality, with terms that are sustainable as regards

[1] With the entry into force of the rules, rules no. 1162/2022, on financial undertakings' calculation of the own funds base and eligible capital, were repealed.

[2] Attention is drawn to the fact that the circular neither addresses ordinary dividend payments by financial undertakings nor the prior permission of the Financial Supervisory Authority that authorises financial undertakings to include interim or annual profits in Common Equity Tier 1 before the financial undertaking concerned has taken a formal decision confirming the financial undertaking's final profit or loss. If such permission is granted, an auditor must examine the relevant financial statements and foreseeable dividend payments and expenses shall be deducted from the unconfirmed profit in accordance with the second paragraph of Article 26 CRR, cf. Articles 2 and 3 of Regulation (EU) no. 241/2014.

its earnings capacity, before the reduction, redemption or repurchase, or at the same time as such a measure takes place, or

b. that the financial undertaking has, in the opinion of the Financial Supervisory Authority, demonstrated in a satisfactory manner that its own funds base and eligible liabilities would after the reduction, redemption or repurchase exceed the relevant prudential requirements laid down in the CRR, cf. the Act on financial undertakings, and Act no. 70/2020, on the resolution of credit institutions and securities firms, by an amount that the Financial Supervisory Authority considers necessary.

3. The authorisation for reduction, redemption or repurchase of instruments that count towards the own funds base is discussed in more detail in the provisions of the first sub-section of Section 2 of Chapter IV of Delegated Regulation (EU) no. 241/2014, as subsequently amended, cf. the fifth paragraph of Article 78 CRR. The Central Bank directs financial undertakings to follow the provisions and wishes to emphasise the following points:

a. According to the first paragraph of Article 28 of the Regulation, the reduction, redemption or repurchase of own funds instruments shall not be notified to the holders of the instruments before the financial undertaking concerned has obtained the prior permission of the Financial Supervisory Authority.

b. The deduction from the own funds base due to the reduction, redemption or repurchase of instruments that count towards the own funds base is governed by the second to fourth paragraphs of Article 28 of the Regulation.

i. In general, a financial undertaking shall deduct from the own funds base the amount of those own funds instruments that are to be reduced, redeemed or repurchased when such a measure is likely to take place with sufficient certainty. Sufficient certainty is considered to be present in particular when the financial undertaking concerned has publicly announced its intention to reduce, redeem or repurchase own funds instruments, cf. the second paragraph of Article 28. Such sufficient certainty, in particular in the case of general prior permission, cf. the third paragraph of the same Article, is generally also considered to be present at the moment when the prior permission is granted.3

ii. For own funds instruments that contain redemption provisions under their terms, and if the redemption provision is exercised, sufficient certainty is considered to be present only when the redemption of the instruments is notified to their holders and the deduction shall therefore take place at that point in time.4

iii. Regarding the deduction from the own funds base due to a financial undertaking's repurchase due to an obligation for bonus payments to its employees, the amount of the instruments is deducted from the corresponding elements in the financial undertaking's own funds base while they are held by it. No deduction is required if the cost of

[3] Cf. also the response of the European Banking Authority (EBA) to query Q&A 2017_3277, which was updated in June 2023.

[4] Cf. the same EBA response.

the measures is already included in its equity according to the financial statements, cf. the fourth paragraph of Article 28.

c. The prior permission of the Financial Supervisory Authority shall be valid for a specified period so that the financial undertaking can implement its plans for reduction, redemption or repurchase, but not for longer than one year, cf. the fifth paragraph of Article 28 of the Regulation. The general prior permission shall also be valid for a specified period but not for longer than one year, cf. the first paragraph of Article 78 CRR.

d. According to the sixth paragraph of Article 28 of the Regulation, the first to fifth paragraphs of the Article apply on an individual, consolidated and sub-consolidated basis, as applicable.

e. An application prior to the measure of reduction, redemption or repurchase of instruments that count towards the own funds base is generally governed by Article 29 of the Regulation. It states that a financial undertaking shall specify whether prior approval or general prior approval of the Financial Supervisory Authority is requested, and the request, together with information and documents, shall cover the entity, consolidated and sub-consolidated basis as applicable.

f. Regarding the information and documents that shall accompany a request for reduction, redemption or repurchase, the provisions of Article 30, Article 30 a or Article 30 b of the Regulation shall apply, as applicable.

i. A request for prior approval shall be accompanied by the information and documents listed in Article 30, and they shall be tailored to the intended measure.

ii. If the request concerns general prior approval, additional information as specified in Article 30 a shall be included.

iii. If the request concerns renewal of a general prior approval, the information specified in Article 30 b shall be included.

g. Regarding time limits for a request for reduction, redemption or repurchase, the provisions of Article 31 of the Regulation shall apply:

i. A complete request shall generally have been received by the Financial Supervisory Authority four months before the requested measure is to take place, cf. paragraphs 1 and 2 of Article 31. If the request concerns renewal of a general request, it shall have been received by the Financial Supervisory Authority three months before the requested measure is to take place, cf. paragraph 3 of the same Article. The Financial Supervisory Authority may, under special circumstances, permit a financial undertaking to submit a request within a shorter time frame, cf. paragraph 4 of the Article.

ii. The Financial Supervisory Authority processes a complete request within the time limits specified in paragraphs 1-4 of Article 31, cf. paragraph 5 of the same Article.

The Central Bank notes that the above provisions are independent of other legal provisions that may apply to repurchase of own shares, including the provisions of Chapter VIII of Act No. 2/1995 on Public Limited Companies, or provisions on buy-back programmes under Regulation (EU) No. 596/2014 on market abuse (MAR), cf. Act No. 60/2021 on measures against market abuse.

The Financial Supervisory Authority has published a checklist on the Central Bank's website indicating what information and documents shall accompany a request for reduction, redemption or repurchase of instruments that qualify as own funds.

For reference, it is finally pointed out that according to paragraph 2 of Article 77 of the CRR, a financial undertaking requires prior approval of the Central Bank's resolution authority for the calling, redemption, repayment or repurchase of instruments before their contractual maturity date, other than own funds instruments, that qualify as eligible liabilities. In paragraphs 1 and 2 of Article 78a of the CRR, the conditions for the resolution authority to grant such permission are set out. A request for such permission is further discussed in the provisions of Subsection 2 of Section 2 of Chapter IV of Delegated Regulation (EU) No. 241/2014, as amended, cf. paragraph 3 of Article 78a of the CRR, and the form that the resolution authority has published on the Central Bank's website.

Yours faithfully,
CENTRAL BANK OF ICELAND

Gísli Óttarsson
Jónas Þór Brynjarsson
Managing Director
Head of Department
Prudential Supervision
Prudential Supervision