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COBS 3.5 Professional clients

COBS 3.5.1R

[Note: article 4(1)(11) of MiFID]

Per se professional clients

COBS 3.5.2R

Each of the following is a per se professional client unless and to the extent it is an eligible counterparty or is given a different categorisation under this chapter:

  1. (1)

    an entity required to be authorised or regulated to operate in the financial markets. The following list includes all authorised entities carrying out the characteristic activities of the entities mentioned, whether authorised by an EEA State or a third country and whether or not authorised by reference to a directive:

    1. (a)

      a credit institution;

    2. (b)

      an investment firm;

    3. (c)

      any other authorised or regulated financial institution;

    4. (d)

      an insurance company;

    5. (e)

      a collective investment scheme or the management company of such a scheme;

    6. (f)

      a pension fund or the management company of a pension fund;

    7. (g)

      a commodity or commodity derivatives dealer;

    8. (h)

      a local;

    9. (i)

      any other institutional investor;

  2. (2)

    in relation to MiFID or equivalent third country business a large undertaking meeting two of the following size requirements on a company basis:

    1. (a)

      balance sheet total of EUR 20,000,000;

    2. (b)

      net turnover of EUR 40,000,000;

    3. (c)

      own funds of EUR 2,000,000;

  3. (3)

    in relation to business that is not MiFID or equivalent third country business a large undertaking meeting any1of the following conditions:

    1. (a)

      a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) (or has had at any time during the previous two years) 1called up share capital or net assets 1of at least £51 million (or its equivalent in any other currency at the relevant time);

    2. (b)

      an 1undertaking that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:

      1. (i)

        a balance sheet total of EUR 12,500,000;

      2. (ii)

        a net turnover of EUR 25,000,000;

      3. (iii)

        an average number of employees during the year of 250;

    3. (c)

      a partnership or unincorporated association which has (or has had at any time during the previous two years) net assets of at least £5 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;1

    4. (d)

      a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) which has (or has had at any time during the previous two years) assets of at least £10 million (or its equivalent in any other currency at the relevant time) calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;1

    5. (e)

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

      1. (i)

        at least 50 members; and

      2. (ii)

        assets under management of at least £10 million (or its equivalent in any other currency at the relevant time);1

    6. (f)

      a local authority or public authority.1

  4. (4)

    a national or regional government, a public body that manages public debt, a central bank, an international or supranational institution (such as the World Bank, the IMF, the ECP, the EIB) or another similar international organisation;

  5. (5)

    another institutional investor whose main activity is to invest in financial instruments (in relation to the firm's MiFID or equivalent third country business) or designated investments (in relation to the firm's other business). This includes entities dedicated to the securitisation of assets or other financing transactions.

[Note: first paragraph of section I of annex II to MiFID]

COBS 3.5.2AR

1In relation to MiFID or equivalent third country business a local authority or a public authority is not likely to be a regional government for the purposes of COBS 3.5.2 R (4). 2In the FCA's opinion, a local authority may be a per se professional client for those purposes if it meets the test for large undertakings in COBS 3.5.2 R (2)2.

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Elective professional clients

COBS 3.5.3R

A firm may treat a client as an elective professional client if it complies with (1) and (3) and, where applicable, (2):

  1. (1)

    the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");

  2. (2)

    in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:

    1. (a)

      the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

    2. (b)

      the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;

    3. (c)

      the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;

    (the "quantitative test"); and

  3. (3)

    the following procedure is followed:

    1. (a)

      the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;

    2. (b)

      the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and

    3. (c)

      the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.

[Note: first, second, third and fifth paragraphs of section II.1 and first paragraph of section II.2 of annex II to MiFID]

COBS 3.5.4R

If the client is an entity, the qualitative test should be performed in relation to the person authorised to carry out transactions on its behalf.

[Note: fourth paragraph of section II.1 of annex II to MiFID]

COBS 3.5.5G

The fitness test applied to managers and directors of entities licensed under directives in the financial field is an example of the assessment of expertise and knowledge involved in the qualitative test.

[Note: fourth paragraph of section II.1 of annex II to MiFID]

COBS 3.5.6R

Before deciding to accept a request for re-categorisation as an elective professional client a firm must take all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the quantitative test.

[Note: second paragraph of section II.2 of annex II to MiFID]

COBS 3.5.7G

An elective professional client should not be presumed to possess market knowledge and experience comparable to a per se professional client

[Note: second paragraph of section II.1 of annex II to MiFID]

COBS 3.5.8G

Professional client are responsible for keeping the firm informed about any change that could affect their current categorisation.

[Note: fourth paragraph of section II.2 of annex II to MiFID]

COBS 3.5.9R

  1. (1)

    If a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for categorisation as an elective professional client , the firm must take the appropriate action.

  2. (2)

    Where the appropriate action involves re-categorising that client as a retail client, the firm must notify that client of its new categorisation.

[Note: fourth paragraph of section II.2 of annex II to MiFID and article 28(1) of the MiFID implementing Directive]