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COBS 3.1 Application

Scope

COBS 3.1.1 R

1The scope of this chapter is the same as that of the rules in the Handbook to which it relates.

COBS 3.1.2 G RP

This chapter relates to parts of the Handbook whose application depends on whether a person is a client, a retail client, a professional client or an eligible counterparty. However, it does not apply to the extent that another part of the Handbook provides for a different approach to client categorisation. For example, a separate approach to client categorisation is set out in the definition of a retail client for a firm that gives basic advice2.

COBS 3.1.3 R RP

The sections in this chapter on general notifications (COBS 3.3) and policies, procedures and records (COBS 3.8) do not apply in relation to a firm that is neither:

  1. (1)

    conducting designated investment business; nor

  2. (2)

    in the case of MiFID or equivalent third country business providing an ancillary service that does not constitute designated investment business.

Mixed business

COBS 3.1.4 R RP

If a firm conducts business for a client involving both:

  1. (1)

    MiFID or equivalent third country business; and

  2. (2)

    other regulated activities subject to this chapter;

it must categorise that client for such business in accordance with the provisions in this chapter that apply to MiFID or equivalent third country business.

COBS 3.1.5 G RP

  1. (1)

    For example, the requirement concerning mixed business will apply if a MiFID investment firm advises a client on whether to invest in a scheme or a life policy. This is because the former is within the scope of MiFID and the latter is not. In such a case, the MiFIDclient categorisation requirements prevail.

  2. (2)

    The requirement does not apply where the MiFID or equivalent third country business is provided separately from the other regulated activities. Where this is the case, in accordance with Principle 7 (communications with clients) the basis on which the different activities will be performed, including any differences in the categorisations that apply, should be made clear to the client.

COBS 3.2 Clients

General definition

COBS 3.2.1 R RP

  1. (1)

    A person to whom a firm provides, intends to provide or has provided:

    1. (a)

      a service in the course of carrying on a regulated activity; or

    2. (b)

      in the case of MiFID or equivalent third country business, an ancillary service,

    is a "client" of that firm;

  2. (2)

    A "client" includes a potential client.

  3. (3)

    In relation to the financial promotion rules, a person to whom a financial promotion is or is likely to be communicated is a "client" of a firm that communicates or approves it.

  4. (4)

    A client of an appointed representative or, if applicable, a tied agent is a "client" of the firm for whom that appointed representative, or tied agent, acts or intends to act in the course of business for which that firm has accepted responsibility under the Act or MiFID (see sections 39 and 39A of the Act and SUP 12.3.5 R).

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

COBS 3.2.2 G RP
1
  1. (1)

    A corporate finance contact or a venture capital contact is not a client under the first limb of the general definition. This is because a firm does not provide a service to such a contact. However, it will be a client under the third limb of the general definition for the purposes of the financial promotion rules if the firmcommunicates or approves a financial promotion that is or is likely to be communicated to such a contact. 1

  2. (2)

    Communicating or approving a financial promotion that is or is likely to be communicated to such a contact is not MiFID or equivalent third country business. In such circumstances, the "non-MiFID" client categorisations are relevant and, in categorising elective professional clients, the "quantitative test" will not need to be satisfied.1

Who is the client?

COBS 3.2.3 R RP

  1. (1)

    If a firm provides services to a person that is acting as an agent, the identity of its client will be determined in accordance with the rule on agents as clients (see COBS 2.4.3 R).

  2. (2)

    In relation to a firm establishing, operating or winding up a personal pension scheme or a stakeholder pension scheme, a member or beneficiary of that scheme is a client of the firm.

  3. (3)

    If a firm that does not fall within (2) provides services to a person that is acting as the trustee of a trust, that person will be the firm's client and the underlying beneficiaries of the trust will not.

  4. (4)

    In relation to business that is neither MiFID or equivalent third country business, if a firm provides services to a fund3 that does not have separate legal personality, that fund3 will be the firm's client.

    33
  5. (5)

    If a firm provides services relating to a contribution to or interest in a CTF (except for a personal recommendation relating to a contribution to a CTF or in relation to the communication or approval of a financial promotion), the firm's only client is:

    1. (a)

      the registered contact, if there is one;

    2. (b)

      otherwise, the person to whom the statement must be sent in accordance with Regulation 10 of the CTF Regulations.

      2

COBS 3.3 General notifications

COBS 3.3.1 R RP

A1firm must:

  1. (1)

    notify a new client of its categorisation as a retail client, professional client, or eligible counterparty in accordance with this chapter; and

  2. (2)

    prior to the provision of services, inform a client in a durable medium about:

    1. (a)

      any right that client has to request a different categorisation; and

    2. (b)

      any limitations to the level of client protection that such a different categorisation would entail.

[Note: paragraph 2 of section I of annex II to MiFID and articles 28(1) and (2) and the second paragraph of article 50(2) of the MiFID implementing Directive]

COBS 3.3.2 G RP

This chapter requires a firm to allow a client to request re-categorisation as a client that benefits from a higher degree of protection (see COBS 3.7.1 R). A firm must therefore notify a client that is categorised as a professional client or an eligible counterparty of its right to request a different categorisation whether or not the firm will agree to such requests. However, a firm need only notify a client of a right to request a different categorisation involving a lower level of protection if it is prepared to consider such requests.

COBS 3.5 Professional clients

COBS 3.5.1 R RP

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

Per se professional clients

COBS 3.5.2 R RP

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'sMiFID 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 3.5.2A R RP

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.

2 2

Elective professional clients

COBS 3.5.3 R RP

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 3.5.4 R RP

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 3.5.5 G RP

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 3.5.6 R RP

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 3.5.7 G RP

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 3.5.8 G RP

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 3.5.9 R RP

  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]

COBS 3.6 Eligible counterparties

COBS 3.6.1 R RP

  1. (1)

    An eligible counterparty is a client that is either a per se eligible counterparty or an elective eligible counterparty.

  2. (2)

    A1client can only be an eligible counterparty in relation to eligible counterparty business (PRIN 1 Annex 1 R is an exception to this).1

[Note: article 24(1) of MiFID]

Per se eligible counterparties

COBS 3.6.2 R RP

Each of the following is a per se eligible counterparty (including an entity that is not from an EEA State3 that is equivalent to any of the following) unless and to the extent it is given a different categorisation under this chapter:

  1. (1)

    an investment firm;

  2. (2)

    a credit institution;

  3. (3)

    an insurance company;

  4. (4)

    a collective investment scheme authorised under the UCITS Directive or its management company;

  5. (5)

    a pension fund or its management company;

  6. (6)

    another financial institution authorised or regulated under EU2 legislation or the national law of an EEA State;

    2
  7. (7)

    an undertaking exempted from the application of MiFID under either Article 2(1)(k) (certain own account dealers in commodities or commodity derivatives) or Article 2(1)(l) (locals) of that directive;

  8. (8)

    a national government or its corresponding office, including a public body that deals with the public debt;

  9. (9)

    a central bank;

  10. (10)

    a supranational organisation.

[Note: first paragraph of article 24(2) and first paragraph of article 24(4) of MiFID]

COBS 3.6.3 G RP

For the purpose of COBS 3.6.2 R (6), a financial institution includes regulated institutions in the securities, banking and insurance sectors.

Elective eligible counterparties

COBS 3.6.4 R RP

A firm may treat a client as an elective eligible counterparty if:

  1. (1)

    the client is an undertaking and:

    1. (a)

      is a per se professional client (except for a client that is only a per se professional client because it is an institutional investor under COBS 3.5.2 R (5)) and, in relation to business other than MiFID or equivalent third country business:1

      1. (i)

        is 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); or1

      2. (ii)

        meets the criteria in the rule on meeting two quantitative tests (COBS 3.5.2 R (3)(b)); or1

    2. (b)

      requests such categorisation and is an elective professional client, but only in respect of the services or transactions for which it could be treated as a professional client; and

  2. (2)

    the firm has, in relation to MiFID or equivalent third country business, obtained express confirmation from the prospective counterparty that it agrees to be treated as an eligible counterparty.

[Note: article 24(3) and the second paragraph of article 24(4) of MiFID and article 50(1) of the MiFID implementing Directive]

COBS 3.6.5 G RP

The categories of elective eligible counterparties include an equivalent undertaking that is not from an EEA State provided the above conditions and requirements are satisfied.

COBS 3.6.6 R RP

A firm may obtain a prospective counterparty's confirmation that it agrees to be treated as an eligible counterparty either in the form of a general agreement or in respect of each individual transaction.

[Note: second paragraph of article 24(3) of MiFID]

Client and firm located in different jurisdictions

COBS 3.6.7 R RP

In the case of MiFID or equivalent third country business, in the event of a transaction where the prospective counterparties are located in different EEA States, the firm shall defer to the status of the other undertaking as determined by the law or measures of the EEA State in which that undertaking is established.

[Note: first paragraph of article 24(3) of MiFID]

COBS 3.7 Providing clients with a higher level of protection

COBS 3.7.1 R RP

A firm must allow a professional client or an eligible counterparty to request re-categorisation as a client that benefits from a higher degree of protection.

[Note: second paragraph of article 24(2) of, and the second paragraph of section I of annex II to, MiFID and the second paragraph of article 50(2) of the MiFID implementing Directive]

COBS 3.7.2 G RP

It is the responsibility of a professional client or eligible counterparty to ask for a higher level of protection when it deems it is unable to properly assess or manage the risks involved.

[Note: third paragraph of section I and fourth paragraph of section II.2 of annex II to

MiFID and second paragraph of article 50(2) of the MiFID implementing Directive]

COBS 3.7.3 R RP

A firm may, either on its own initiative or at the request of the client concerned:

  1. (1)

    treat as a professional client or a retail client a client that might otherwise be categorised as a per se eligible counterparty;

  2. (2)

    treat as a retail client a client that might otherwise be categorised as a per se professional client;

and if it does so, the client will be re-categorised accordingly. Where applicable, this re-categorisation is subject to the requirement for a written agreement in COBS 3.7.5 R.

[Note: second paragraph of article 24(2) of, and second paragraph of section I of annex II to, MiFID and article 28(3) and the second paragraph of article 50(2) of the MiFID implementing Directive]

COBS 3.7.4 R RP

If a per se eligible counterparty requests treatment as a client whose business with the firm is subject to conduct of business protections, but does not expressly request treatment as a retail client and the firm agrees to that request, the firm must treat that eligible counterparty as a professional client.

[Note: first paragraph of article 50(2) of the MiFID implementing Directive]

COBS 3.7.5 R RP

  1. (1)

    If, in relation to MiFID or equivalent third country business a per se professional client or a per se eligible counterparty requests treatment as a retail client, the client will be classified as a retail client if it enters into a written agreement with the firm to the effect that it will not be treated as a professional client or eligible counterparty for the purposes of the applicable conduct of business regime.

  2. (2)

    This agreement must specify the scope of the re-categorisation, such as whether it applies to one or more particular services or transactions, to one or more types of product or transaction or to one or more rules.

[Note: fourth paragraph of section I of annex II to MiFID and second paragraph of article 50(2) of the MiFID implementing Directive]

COBS 3.7.6 G RP

  1. (1)

    In accordance with Principle 7 (communications with clients) if a firm at its own initiative re-categorises a client in accordance with this section, it should notify that client of its new category under this section.

  2. (2)

    If the firm already has an agreement with the client, it should also consider any contractual requirements concerning the amendment of that agreement.

COBS 3.7.7 G RP

The ways in which a client may be provided with additional protections under this section include re-categorisation:

  1. (1)

    on a general basis; or

  2. (2)

    on a trade by trade basis; or

  3. (3)

    in respect of one or more specified rules; or

  4. (4)

    in respect of one or more particular services or transactions; or

  5. (5)

    in respect of one or more types of product or transaction.

[Note: second paragraph of article 24(2) of MiFID]

COBS 3.7.8 G RP

Re-categorising a client as a retail client under this section does not necessarily mean it will become an eligible complainant under DISP.

COBS 3.8 Policies, procedures and records

Policies and procedures

COBS 3.8.1 R RP

A firm must implement appropriate written internal policies and procedures to categorise its clients.

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

Records

COBS 3.8.2 R RP

  1. (1)

    A firm must make a record of the form of each notice provided and each agreement entered into under this chapter. This record must be made at the time that standard form is first used and retained for the relevant period after the firm ceases to carry on business with clients who were provided with that form.

  2. (2)

    A firm must make a record in relation to each client of:

    1. (a)

      the categorisation established for the client under this chapter, including sufficient information to support that categorisation;

    2. (b)

      evidence of despatch to the client of any notice required under this chapter and if such notice differs from the relevant standard form, a copy of the actual notice provided; and

    3. (c)

      a copy of any agreement entered into with the client under this chapter.

    This record must be made at the time of categorisation and should be retained for the relevant period after the firm ceases to carry on business with or for that client.

  3. (3)

    The relevant periods are:

    1. (a)

      indefinitely, in relation to a pension transfer, pension conversion, 1pension opt-out or FSAVC;

    2. (b)

      at least five years, in relation to a life policy or pension contract;

    3. (c)

      five years in relation to MiFID or equivalent third country business; and

    4. (d)

      three years in any other case.

[Note: article 51(3) of the MiFID implementing Directive]

COBS 3.8.3 G RP

If a firm provides the same form of notice to more than one client, it need not maintain a separate copy of it for each client, provided it keeps evidence of despatch of the notice to each client.