A&O Shearman | FinReg | UK Delays Legislation for Amending Ancillary Activities Test
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  • UK Delays Legislation for Amending Ancillary Activities Test

    May 29, 2024
    The Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024 was published on May 29, 2024 and enters into force on December 31, 2024. The 2024 Amendment Order amends the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 (S.I. 2023/548) by omitting the provisions relating to the new ancillary activities regime.

    The 2023 Order, which enters into force on January 1, 2025, among other things, paved the way for the Financial Conduct Authority to develop a simpler test for determining which firms need to be authorized as investment firms as a result of their commodities and emission allowances trading business, known as the "ancillary activities test". The ancillary activities test is an exemption from investment firm authorization requirements for firms that trade commodity derivatives or emission allowances as an ancillary activity to their main business, such as energy and other commodity trading firms which are active in both physical trading and financial instrument trading. Under the MiFID II regime, the ancillary activities exemption became based upon a hard-edged test with various financial thresholds. Some of these tests resulted in counterintuitive outcomes for firms, while other issues with the way in which the legislation had been drafted needed resolving via unusually narrow or arguably unnatural interpretations of the text, sometimes supported by regulatory or industry guidance. The 2023 Order simplified the process for determining when a firm satisfies the "ancillary activities" test in the post-Brexit U.K.

    Following the publication of the 2023 Order, the FCA consulted on reforming the commodity derivatives regulatory framework, including the ancillary activities test. The FCA proposed to provide guidance to the effect that "ancillary" is something "related" or "subordinate" to the main business of the group, and that firms may consider the trading and capital employed thresholds used in the EU delegated regulation in order to take a view on whether an activity is ancillary. Numerous responses to those proposals indicate that there are significant concerns about adopting a principles-based approach to determining whether a firm requires authorization for trading in commodity derivatives and emission allowances. The changes by the 2024 Order to the 2023 Order take into account that feedback. HM Treasury and the FCA will further engage with stakeholders on options for reforming the ancillary activities test to take the feedback into account and in line with the outcome of the Wholesale Markets Review, with an intended implementation date of January 1, 2027.

    The requirement for firms to notify their use of the exemption to the FCA has not been removed from the 2023 Order and will take effect on January 1, 2025 as planned.

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