COBS 3.5 Professional clients

COBS 3.5.1RRP

[Note: article 4(1)(10)3 of MiFID]

Per se professional clients

COBS 3.5.2RRP

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

  4. (4)

    a national or regional government, including3 a public body that manages public debt at national or regional level3, a central bank, an international or supranational institution (such as the World Bank, the IMF, the ECB4, 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 3.5.2ARRP

[deleted]3

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COBS 3.5.2BR

3A firm must categorise a local public authority or municipality which (in either case) does not manage public debt as a retail client, unless it is permitted to treat such a person as an elective professional client in accordance with COBS 3.5.3BR to COBS 3.5.3ER.

COBS 3.5.2CG

3As a result of COBS 3.5.2BR, a local public authority or municipality which (in either case) does not manage public debt should not be treated as a per se professional client.

Elective professional clients

COBS 3.5.3RRP

A firm may treat a client other than a local public authority or municipality3 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 3.5.3AG
  1. (1)

    3As a result of COBS 3.5.3BR and COBS 3.5.3ER a firm should always assess a local public authority or municipality against a “quantitative test” to treat it as an elective professional client, regardless of whether the firm intends to conduct business involving MiFID or equivalent third country business or other regulated activities subject to COBS 3.

  2. (2)

    The “quantitative test” that a firm should use depends on the application of COBS 3.5.3BR (which applies for UK clients) and COBS 3.5.3ER (which applies for non-UK clients).

COBS 3.5.3BR
  1. (1)

    3A firm may treat a UK local public authority or municipality as an elective professional client if it complies with COBS 3.5.3R(1) and COBS 3.5.3R(3) and, in addition, paragraph (2) of this rule.

  2. (2)

    In the course of the assessment under COBS 3.5.3R(1) the criterion in (a) below is satisfied as well as one of the criteria in (b) below (the “quantitative test”):

    1. (a)

      the size of the client’s financial instrument portfolio defined as including cash deposits and financial instruments, exceeds £10,000,000; and

    2. (b)

      either:

      1. (i)

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

      2. (ii)

        the person authorised to carry out transactions on behalf of the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the provision of services envisaged; or

      3. (iii)

        the client is an ‘administering authority’ of the Local Government Pension Scheme within the meaning of the version of Schedule 3 of The Local Government Pension Scheme Regulations 2013 or, (in relation to Scotland) within the meaning of the version of Schedule 3 of The Local Government Pension Scheme (Scotland) Regulations 2014 in force at 1 January 2018, and is acting in that capacity.

COBS 3.5.3CR
  1. (1)

    3This rule applies where a firm is subjecting a UK local public authority or municipality to the tests and is following the procedure required as a result of COBS 3.5.3BR in respect of the firm’s business carried on in relation to that person’s:

    1. (a)

      business in the course of or connected to its administration of a pension scheme; and

    2. (b)

      other business as a local public authority or municipality.

  2. (2)

    A firm must apply the qualitative and quantitative tests required as a result of COBS 3.5.3BR separately and independently in relation to the client’s business under (1)(a) and (1)(b).

  3. (3)

    A firm must follow the procedure in COBS 3.5.3R(3) required as a result of COBS 3.5.3BR separately and independently in relation to the client’s business under (1)(a) and (1)(b).

COBS 3.5.3DG

3As a result of COBS 3.5.2BR and COBS 3.5.3CR, and depending on the outcome of the qualitative and quantitative tests required as a result of COBS 3.5.3BR, a firm may be required to categorise a UK local public authority or municipality differently in relation to the two sorts of business described at COBS 3.5.3CR(1)(a) and (b).

COBS 3.5.3ER
  1. (1)

    3A firm may treat a non-UK local public authority or municipality as an elective professional client if it complies with COBS 3.5.3R(1) and COBS 3.5.3R(3) and, in addition, applies the relevant “quantitative test” under paragraph (2).

  2. (2)

    The relevant “quantitative test” under this rule is either:

    1. (a)

      where the local public authority or municipality is established in an EEA State and the EEA State has adopted alternative or additional criteria to those listed in the fifth paragraph to section II.1 of annex II to MiFID, those criteria as set out in the law or measures of that EEA State; or

    2. (b)

      in any other case the same “quantitative test” that is applied in relation to MiFID or equivalent third country business under COBS 3.5.3R(2).

COBS 3.5.4RRP

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 3.5.5GRP

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 3.5.6RRP

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 relevant3 quantitative test.

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

COBS 3.5.7GRP

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 3.5.8GRP

Professional clients3 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 3.5.9RRP

  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 MiFID3]