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COB 4.1 Client classification

Application

COB 4.1.1R
  1. (1)

    This section applies to a firm intending to conduct, or conducting designated investment business or ancillary business relating to designated investment business (but not to a firm which in relation to any customer intends only to provide basic advice on a stakeholder product)7.

  2. (2)

    For the purposes of COB only, the following provisions in COB 4.1 also apply to a firm intending to carry on, or carrying on, any other regulated activity to which COB applies5:

    1. (a)

      COB 4.1.12 R and COB 4.1.13 G (Large intermediate customer classified as a market counterparty); and

    2. (b)

      COB 4.1.14 R (Client classified as a private customer).

COB 4.1.2G

Purpose

COB 4.1.3G
  1. (1)

    This section requires a firm to classify the persons with or for whom it intends to carry on designated investment business, to achieve appropriate application of the rules in COB and MAR 3 (Inter-professional conduct). Its purpose is to ensure that clients are appropriately categorised so that regulatory protections are focused on those classes of client that need them most, while allowing an appropriately "light-touch" approach for inter-professional business.

  2. (2)

    Some of the rules in COB relating to activities other than designated investment business are disapplied if the activity is carried on with or for a market counterparty rather than a customer, for example rules in COB 6.8 (Insurance contracts: life policies5). For guidance on how a firm carrying on these other activities may approach client classification, see PRIN 1.2.4 G (Classification: other activities).

    5

Requirement to classify

COB 4.1.4R
  1. (1)

    Before conducting designated investment business with or for any client, a firm must take reasonable steps to establish whether that client is a private customer, intermediate customer or market counterparty.

  2. (2)

    A firm which takes reasonable steps to classify its clients, as required by the rules in this section, and treats a client in accordance with the classification it has established for that purpose, does not breach any other rule in COB to the extent that the breach arises only from inappropriate classification of that client.3

Agent as client

COB 4.1.5R
  1. (1)

    If a firm ("F") is aware that a person ("C1") with or for whom it is conducting designated investment business, or related ancillary activities, is acting as agent for another person ("C2") in relation to that business, C1, and not C2, is the client of F in respect of that business, if:

    1. (a)

      C1 is another firm or an overseas financial services institution; or

    2. (b)

      C1 is any other person, provided that avoidance of duties which F would otherwise owe to C2 is not the main purpose of the arrangements between the parties.

  2. (2)

    Paragraph (1) does not apply if F has agreed with C1 in writing to treat C2 as its client.

  3. (3)

    If there is an agreement under (2) in relation to more than one client (C2) represented by C1, F may discharge any requirement to notify, obtain instructions or consent from, or enter into an agreement with each C2 by sending to, or receiving from, C1, a single communication which is expressed to cover each C2, except that:

    1. (a)

      separate risk warnings under COB 5.4 (Customers' understanding of risk);

    2. (b)

      confirmations under COB 8.1 (Confirmation of transactions); and

    3. (c)

      periodic statements under COB 8.2 (Periodic statements) are required for each C2

    are required for each C2.

  4. (4)

    If paragraph (1) does not apply, because of the proviso in (1)(b) or an agreement under (2), C2, and not C1, is the client of F in respect of that business.2

COB 4.1.6G

Firms are reminded that COB 4.1.5 R:

  1. (1)

    [deleted]8

    8
  2. (2)

    is not relevant to the question of who is the firm's counterparty for the purposes of the Interim Prudential sourcebook; and

  3. (3)

    does not relieve them of any obligation the firm may owe to C2 under the general law relating to principals and agents; if a firm is in any doubt about such obligations, it is advised to take appropriate legal advice.

Classification of another firm or an overseas financial services institution

COB 4.1.7R
  1. (1)

    When a firm ("F") conducts designated investment business, or related ancillary activities, with or for:

    1. (a)

      another firm; or

    2. (b)

      an overseas financial services institution;3

    ("C1"), C1 is a market counterparty of F, unless (2), (3) or (4) applies.

  2. (2)

    C1 is an intermediate customer of F when the activity carried on by F would be inter-professional business (if C1 were a market counterparty), and:

    1. (a)

      C1 is acting for an underlying customer ("C2"); and

    2. (b)

      [deleted]

    3. (c)

      F and C1 have agreed that F should classify C1 as an intermediate customer when C1 is acting for C2.3

  3. (3)

    C1 is an intermediate customer of F when the activity carried on would not be inter-professional business (if C1 were a market counterparty) and:

    1. (a)

      C1 has not indicated that it is acting on its own behalf in relation to that activity; or

    2. (b)

      C1 is a long-term insurer acting on behalf of its life fund.

  4. (4)

    If C1 is a collective investment scheme, C1 is an intermediate customer of F.4

  5. (5)

    [deleted]4

Classification of a collective investment scheme

COB 4.1.7AG
  1. (1)

    COB 4.1.7 R, paragraph (1)(b)(iii) of the definition of client and paragraph (1)(j) of the definition of intermediate customer together have the effect that a collective investment scheme, whether it has separate legal personality or not, will always be classified as an intermediate customer, unless classified as a private customer under COB 4.1.14 R or (if an unregulated collective investment scheme) as a market counterparty under COB 4.1.12 R. This means that, for a firm acting as the trustee of a unit trust, for example, the client for these purposes will be the scheme and therefore an intermediate customer.

  2. (2)

    The application of COB to an operator, trustee or depositary is governed by COB 10 (Operators of collective investment schemes) and COB 11 (Trustee and depositary activities).

  3. (3)

    In many cases, a firm such as an investment manager or custodian will carry on activities with or for an operator, trustee or depositary of the scheme rather than with or for a scheme.4

COB 4.1.8G
  1. (1)

    Any agreement under COB 4.1.7 R (2)(c) may be in relation to a particular underlying customer of C1's or in relation to all cases in which C1 acts on behalf of its customers.

  2. (2)

    When deciding whether it should be classified as an intermediate customer under COB 4.1.7 R (2), C1 should have regard to the fact that it will be responsible to C2 for delivering applicable protections under COB (or, if C1 is an overseas financial services institution, under any relevant overseas provisions). C1 should also remember that F is entitled to refuse to agree to classify C1 as an intermediate customer; and, in such a case, it may be appropriate for C1 to obtain services from a different firm.

  3. (3)

    C1 may be an intermediate customer under COB 4.1.7 R (2) or (3), but remains a market counterparty for other purposes. For example, for designated investment business which is not inter-professional business, C1 is a market counterparty for transactions for C1's own account.

  4. (4)

    In relation to activities other than designated investment business, and related ancillary activities, C1 is a market counterparty in accordance with the definition of "market counterparty".

  5. (5)

    When C1 is a market counterparty, then only limited parts of COB will apply to F's business with C1. The Principles (other than 6, 8 and 9 and most of 7) will also apply, as will MAR 3 (Inter-professional conduct) for inter-professional business. See MAR 3 Annex 1 for further guidance on the application of the Principles, COB and MAR 3 for inter-professional business.

  6. (6)

    COB 4.1.7 R does not preclude F from offering C1 protections over and above those that are owed to C1 as a market counterparty. However, any such protections would be a matter between F and C1 (for example, in contract) and would not confer the benefits owed to an intermediate or private customer under COB.3

Classification of an exchange or clearing house

Expert private customer classified as an intermediate customer

COB 4.1.9R
  1. (1)

    A firm may classify a client who would otherwise be a private customer as an intermediate customer if:

    1. (a)

      the firm has taken reasonable care to determine that the client has sufficient experience and understanding to be classified as an intermediate customer; and

    2. (b)

      the firm:

      1. (i)

        has given a written warning to the client of the protections under the regulatory system that he will lose;

      2. (ii)

        has given the client sufficient time to consider the implications of being classified as an intermediate customer; and

      3. (iii)

        has obtained the client's written consent, or is otherwise able to demonstrate that informed consent has been given.

  2. (2)

    For the purposes of (1), a client's consent to being classified as an intermediate customer may be limited to one or more types of:

    1. (a)

      designated investment; or

    2. (b)

      designated investment business.

COB 4.1.10G
  1. (1)

    To take reasonable care to determine that a client has sufficient experience and understanding to be classified as an intermediate customer for the purposes of COB 4.1.9 R (1)(a), the firm should have regard to:

    1. (a)

      the client's knowledge and understanding of the relevant designated investments and markets, and of the risks involved;

    2. (b)

      the length of time the client has been active in these markets, the frequency of dealings and the extent to which he has relied on the adviceon investments of the firm;

    3. (c)

      the size and nature of transactions that have been undertaken for the client in these markets;

    4. (d)

      the client's financial standing, which may include an assessment of his net worth or of the value of his portfolio.

  2. (2)

    It is likely that a firm will need to have regard to more than one of these criteria, or to other criteria, before it can be satisfied that a client, who would otherwise be a private customer, is eligible to be classified as an intermediate customer.

COB 4.1.11E
  1. (1)

    In the written warning required by COB 4.1.9 R (1)(b)(i), a firm should, where relevant:

    1. (a)

      advise the client that he will lose the protection afforded by the following rules in COB applicable to private customers:

      1. (i)

        COB 3 (Financial promotion);1

      2. (ii)

        COB 4.3 (Disclosing information about services, fees and commissions - packaged products);6

      3. (iii)

        COB 5.1 (Advising on packaged products);6

      4. (iv)

        COB 5.4 (Customers' understanding of risk);6

      5. (v)

        COB 5.7 (Disclosure of charges, remuneration and commission);6

      6. (vi)

        COB 6.1 (Packaged product and ISA disclosure);6

      7. (vii)

        COB 7.9 (Lending to private customers);6

      8. (viii)

        COB 7.10 (Margin requirements);6

      9. (ix)

        COB 7.11 (Non-exchange traded securities);36

    2. (b)

      explain any consequences to the client in respect of the following rules in COB which are limited or modified in their application to intermediate customers:

      1. (i)

        COB 8.1 (Confirmation of transactions);6

      2. (ii)

        COB 8.2 (Periodic statements);36

    3. (c)

      explain possible consequences to the client in respect of the following rules which are capable of modification in their application to intermediate customers:

      1. (i)

        COB 7.5 (Best execution);

      2. (ii)

        CASS 2 (Custody);

      3. (iii)

        CASS 4 (Client money);

    4. (d)

      warn the client that he will also lose the right of access to the Financial Ombudsman Service; and

    5. (e)

      warn the client that the firm may have regard to his expertise when complying with requirements under the regulatory system that communications must be clear, fair and not misleading.

  2. (2)

    Contravention of any part of COB 4.1.11 E (1) may be relied upon as tending to establish contravention of COB 4.1.9 R (1)(b)(i).

Large intermediate customer classified as a market counterparty

COB 4.1.12R

A firm may classify a client (other than another firm, regulated collective investment scheme, or an overseas financial services institution) who would otherwise be an intermediate customer as a market counterparty if:4

  1. (1)

    the client at the time he is classified is one of the following:

    1. (a)

      a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least £10 million (or its equivalent in any other currency at the relevant time);

    2. (b)

      a body corporate that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:

      1. (i)

        a balance sheet total of 12.5 million euros (or its equivalent in any other currency at the relevant time);

      2. (ii)

        a net turnover of 25 million euros (or its equivalent in any other currency at the relevant time);

      3. (iii)

        an average number of employees during the year of 250;

    3. (c)

      a local authority or public authority;

    4. (d)

      a partnership or unincorporated association which has net assets of at least £10 million (or its equivalent in any other currency at the relevant time) (and calculated, in the case of a limited partnership, without deducting loans owing to any of the partners);

    5. (e)

      a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme9 or stakeholder pension scheme) with assets of at least £10 million (or its equivalent in any other currency), calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;

    6. (f)

      a trustee of an occupational pension scheme or9 SSAS, or a trustee or operator of a personal pension scheme9 or stakeholder pension scheme where the scheme9has (or has had at any time during the previous two years):

      99
      1. (i)

        at least 50 members; and

      2. (ii)

        assets under management of not less than £10 million (or its equivalent in any other currency at the relevant time); and

  2. (2)

    the firm has, before commencing business with the client on a market counterparty basis:

    1. (a)

      advised the client in writing that he is being classified as a market counterparty;

    2. (b)

      given a written warning to the client that he will lose protections under the regulatory system;

    3. (c)

      for a client falling under (1)(a) or (b):

      1. (i)

        taken reasonable steps to ensure that the written notices required by (2)(a) and (b) have been delivered to a person authorised to take such a decision for the client; and

      2. (ii)

        not been notified by the client that the client objects to being classified as a market counterparty;

    4. (d)

      for a client falling under (1)(c), (d), (e) or (f):

      1. (i)

        taken reasonable steps to ensure that the written notices required by 2(a) and (b) have been delivered to a person authorised to take such a decision for the client; and

      2. (ii)

        obtained the client's written consent or is otherwise able to demonstrate that consent has been given.

COB 4.1.13G

In the written warning required by COB 4.1.12 R (2)(b), a firm should advise a client who is classified as a market counterparty in accordance with COB 4.1.12 R that he will lose all protections applicable to customers afforded by the rules in COB and Principle 6 (Customers' interests), Principle 8 (Conflicts of interest) and Principle 9 (Customers: relationships of trust) and most of Principle 7 (Communications with clients). (The firm should also advise the client that, in respect of inter-professional business conducted between market counterparties, MAR 3 (Inter-professional conduct) applies.)

Client classified as a private customer

COB 4.1.14R
  1. (1)

    A firm may classify as a private customer any client (other than a firm, unless it is an ICVC, or an overseas financial services institution) who would otherwise be a market counterparty or an intermediate customer, and must notify any such client accordingly.4

  2. (2)

    A notice under (1) must advise the client that he may not necessarily have rights under the Financial Ombudsman Service or the compensation scheme as a result of such classification.

Review of classification

COB 4.1.15R
  1. (1)

    If a firm classifies:

    1. (a)

      a client as an intermediate customer under COB 4.1.9 R (Expert privatecustomer classified as an intermediate customer); or

    2. (b)

      a client as a market counterparty under COB 4.1.12 R (Large intermediate customer classified as a market counterparty);

    it must review that classification at least annually to ensure that it remains appropriate to the designated investment business which the firm carries on with or for that client, unless (2) applies.

  2. (2)

    If a firm has not conducted designated investment business with or for a client during the previous 12 month period, the firm may defer the review referred to in (1) until the firm next conducts designated investment business with or for the client.

Record keeping

COB 4.1.16R
  1. (1)

    A firm must make a record of the classification established for each client under this section, including sufficient information to support that classification. 3

  2. (2)

    A firm must retain the record referred to in (1) for a minimum period after the date on which the firm ceases to carry on business with or for that client, as follows:

    1. (a)

      indefinitely, if relevant to a pension transfer, pension opt-out or FSAVC;

    2. (b)

      for a period of at least six years, if relevant to a life policy or pension contract;

    3. (c)

      for a period of at least three years in any other case.