The Australian Prudential Regulation Authority (APRA) will allow redemption of Tier 1 and Tier 2 capital instruments due to tax events.

It comes after some APRA-regulated capital issuers raised concerns about the matter’s treatment under Basel III prudential regulations.

Under the regulations Tier 1 and Tier 2 capital instruments can be redeemed as a result of tax or regulatory events within five years only.

The capital issuers called for an option to redeem instruments in such circumstances at any time, on the basis this would be an eligible tax event under Basel III.

Although the Basel Committee on Banking Supervision has not published guidance on the matter, APRA says it will allow this redemption option.

It is subject to the payment of additional amounts to instrument holders as a result of changes in taxation law that could not be anticipated at an instrument’s issue date.

“Issuers must not exercise any such option to call the instrument without APRA’s prior written approval,” the regulator says in a letter to the insurance industry. “Issuers must not assume, or create market expectations, that such options will be exercised.”