[co-author: Dianne Bell]

The consultation response heralds innovation-friendly reform to the UK wholesale capital markets regime.

On 1 March 2022, HM Treasury published its response to the July 2021 consultation on the Wholesale Markets Review after considering the feedback received. The consultation response sets out changes that are expected to “liberate businesses from unwieldy and stifling rules that hold back their ability to grow and innovate”, according to Economic Secretary to the Treasury John Glen.

The consultation response covers areas such as:

• Trading venues
• Systemic internalisers
• Equity markets
• Fixed income and derivatives markets
• Commodity derivatives
• Market data
• Reporting
• Cross-cutting issues regarding the UK’s position as a:
• Global financial centre
• Country at the forefront of technology
• World leader in green finance
• Competitive marketplace that promotes the effective use of capital

With the consultation response, HM Treasury aims to improve the UK’s competitive position in financial services and simultaneously set an international example or standard. Other steps in this vision for a globally competitive financial services sector involve reforms to the UK listing regime and prospectus regime.

“Tailored” UK Approach

The consultation response describes a simpler, less prescriptive, and more agile regime. One key message in the proposed overhaul is that unnecessary regulatory burdens and restrictions will be closely scrutinised and potentially removed, and further improvements may also be made to provisions or regimes. For example, HM Treasury has decided to make the following changes:

• The systematic internaliser (SI) regime will be simplified, and unnecessary regulatory burdens removed (e.g., the SI definition will be clarified, and the reporting regime simplified). Furthermore, restrictions on how SIs trade will be removed so that they can execute orders at the midpoint between the best bid and offer (a common practice in other global markets).
• Restrictions on firms’ ability to execute transactions will be removed to ensure that market participants get the best outcomes for investors.
• The transparency regime for fixed income and derivatives markets will be overhauled so that only appropriate instruments are subject to enhanced transparency requirements. Powers will be delegated to the FCA, which is regarded as best placed to ensure that the rules are applied proportionately.
• The scope of the commodities position limits regime will be reduced. As part of the amendments to the regime, the FCA will be provided with the necessary discretion to determine which contracts trading venues will be required to set position limits on, and to set limits directly on OTC contracts. Powers will also be delegated to the FCA to establish a framework to support trading venues in setting position limits.

A number of the proposals set out under each of the areas listed above will involve further consultation and engagement with relevant stakeholders in 2022. In addition, future policy work will be undertaken following the feedback received on cross-cutting issues. On these issues, the consultation response includes a (non-exhaustive) summary of points raised that focus on technology, green finance, and a number of points dealing with retail investors.

Significant change is clearly ahead in the wholesale markets sector. The extent of that change is not yet known, although we now have some indications of the approach. What is known is that the FCA will have the power to work out a set of rules that are to be “properly tailored for UK markets”. The FCA will also be able to make “appropriate rule changes” to implement the outcome of the Wholesale Markets Review consultation, working closely with HM Treasury. The FCA plans to begin consulting in those areas that currently form part of its rules and do not depend on any legislative changes.

The consultation response should be seen against the background of the UK’s approach to divergence from EU financial services more generally. The UK is prepared to undertake its own analysis of the pros and cons of each individual measure, rather than only making changes where the case for change is overwhelming in order to assist firms running pan-European businesses. Changes to the SI regime are a good example of this trend in action.

In a speech delivered on 3 March 2022, the FCA’s Director of Markets and Wholesale Policy and Wholesale Supervision expressed the regulator’s determination to take forward differences between regimes that can have a cost for international businesses where it believes those changes will achieve better outcomes for both international and domestic firms involved in that business.

Whatever the less prescriptive regime is, the goal set out in the consultation response is to arrive at a regime that will be internationally respected. The consultation response repeatedly makes the point that the changes are meant to “maintain” or “improve” the regulatory outcome, and preserve high regulatory standards.

The Wholesale Markets Review is being conducted alongside the broader changes to the regulatory framework through the Future Regulatory Framework (FRF) Review. The FRF Review, whose consultation closed in February 2022, is looking to develop a coherent, agile, and internationally respected approach to financial services regulation that is right for the UK. Some changes will require legislative amendments, and HM Treasury will progress these based on their level of importance, while others will be delivered as part of the implementation of the outcomes of the FRF Review. The FCA can progress other regime changes under its normal processes. A useful table summarising the different delivery routes is included in Chapter 10 of the consultation response. Firms will need to monitor all of these avenues to stay abreast of the UK’s new approach and emerging timetable for consultation and change.

In the FCA’s speech on 3 March, the regulator announced that it plans to consult in the second quarter of 2022 on the detail of some of these changes, as it is able to act first where rules are set out in technical standards and are not dependent on changes to legislation.

Details Awaited

The message in the consultation response is that high regulatory standards will not be sacrificed to achieve the competitive vision for the UK financial services sector, but a certain amount of flexibility or agility is needed. This approach will involve some degree of UK-EU divergence as the UK uses its freedom to adopt the onshored regime to fit UK objectives.

Exactly what a “simpler and less prescriptive” regime involves will not be clear until we see the specific legislative changes and work through the detailed changes in the consultation processes ahead.