On 1 July 2021, Her Majesty's Treasury (Treasury) launched a consultation on proposals to reform the UK's wholesale markets regulatory framework (Consultation).

For a summary of the proposals put forward in the Consultation, please see our earlier FinBrief.

On 1 March 2022, the Treasury published its response to the Consultation (Response).

Several key Treasury proposals (Proposals) include:

  • updating the ancillary activities test based on the Markets in Financial Instruments Directive 2014/65/EU, associated regulation and delegated EU legislation (MiFID II);
  • reintroducing a "commodity dealer exemption"; and
  • removing the annual notification requirements to the Financial Conduct Authority (FCA).

Updating the Ancillary Activities Test (AAT)

On the basis of the Consultation, the Treasury intends to go forward with its proposal to scrap the current quantitative form of the AAT, implemented as part of MiFID II, to a principles-based assessment (the approach that was in place prior to 2018).

While the Consultation proposed changing the basis of the AAT to take into account expected activity (rather than solely backward-looking activity), many respondents raised concerns with this proposed change, cautioning that firms may not be able to predict business models with any degree of certainty. However, the Treasury believes that the Proposals together should alleviate any concerns with using an expected activities test basis, rather than a historical test basis.

Commodity Dealer Exemption

While the Markets in Financial Instruments Directive 2004/39/EC (MiFID I) previously had an exemption for persons trading in commodity derivatives, [1] this was not included in MiFID II.

On the basis that the Consultation and the proposed principles-based assessment of the AAT was supposed to mirror the pre-MiFID II approach, the Treasury has agreed to reintroduce the "commodity dealer exemption".

Removing the Annual Notification Requirements to the FCA

The Response set out that the FCA and respondents were generally supportive of removing the annual notification requirement on the basis that it provided limited value and placed a significant burden on both the firms producing the reports and the FCA.

Next Steps

The government intends to bring forward secondary legislation to enact the Proposals.

The Response acknowledges that while removing the energy market participant regime may have unintended consequences, the Treasury and the FCA will continue to review the regime, "will not be making any imminent amendments" and "any future changes will be considered alongside amendments to the regulatory perimeter".

Interim Changes

The government is yet to bring forward the secondary legislation to enact the Proposals.

In the interim, the FCA has published interim changes to amend the AAT in its March 2022 Quarterly Consultation No 35 (QC 35).

The FCA proposes to make amendments so that persons relying on the AAT may meet either the market share test or the main business test but need not meet both to validly qualify for the AAT.

In addition, for the main business test, the FCA will allow firms to rely on information published by an EU institution or regulator for the last 3 annual calculation periods for which that information is available.

These technical clarifications will enable firms to gain certainty over the status of their activity and their ability to qualify for the AAT as an interim measure both more wholesale changes to the AAT come into force as a result of the Proposals.

[1] Article 2(1)(k) of MiFID I.

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