• COBS 2. COBS 2. CLIENT CLASSIFICATION

    • COBS 2.1 COBS 2.1 Application

      • COBS 2.1.1

        This chapter applies to an Authorised Person carrying on or intending to carry on any Regulated Activity with or for a Person.

      • COBS 2.1.2

        For the purposes of this chapter, a Person includes any organisation (including outside of the Abu Dhabi Global Market) whether or not it has a separate legal personality.

      • COBS 2.1.3 COBS 2.1.3

        This chapter does not apply to:

        (a) a Credit Rating Agency in so far as it carries on, or intends to carry on, the Regulated Activity of Operating a Credit Rating Agency;
        (b) an Authorised ISPV; or
        (c) an Authorised Person in so far as it carries on, or intends to carry on, the Regulated Activity of Providing Money Services.

        • Guidance

          1. The activity described in section 67 of Chapter 14 of Schedule 1 of FSMR refers to the marketing of Regulated Activities and Specified Investments which are offered in a jurisdiction outside the Abu Dhabi Global Market. Such marketing activities can be conducted by an Authorised Person that holds a Representative Office Financial Services Permission, provided the Regulated Activities or Specified Investments marketed by it are those offered by its head office, or a member of its Group.
          2. As a Representative Office conducting marketing activities of the kind described in section 67 of Chapter 14 of Schedule 1 of FSMR does not have a client relationship with a Person to whom it markets a Specified Investment or engages with in relation to carrying on a Regulated Activity, the client classification requirements in this chapter do not apply to the Authorised Person with regard to its engagement with that Person.
          3. Other Authorised Persons can also conduct marketing activities of the kind described in section 67 of Chapter 14 of Schedule 1 of FSMR under the exclusion in section 67(5) of Chapter 14 of Schedule 1 of FSMR.
          4. An Authorised Person undertaking the Regulated Activity of Providing Money Services, as described in Chapter 8 of Schedule 1 of FSMR does not have a client relationship with a Person to whom it Provides Money Services, either as Payer or Payee, so the client classification requirements in this chapter do not apply to that Authorised Person.

      • COBS 2.1.4

        This chapter does not apply to an Authorised ISPV.

      • Guidance

        • COBS 2.1.5

          The activity described in section 67 of Chapter 14 of Schedule 1 of FSMR refers to the marketing of Regulated Activities and Specified Investments which are offered in a jurisdiction outside the Abu Dhabi Global Market. Such marketing activities can be conducted by an Authorised Person that holds a Representative Office Financial Services Permission, provided the Regulated Activities or Specified Investments marketed by it are those offered by its head office, or a member of its Group.

          Amended on (3 February, 2020).

        • COBS 2.1.6

          As a Representative Office conducting marketing activities of the kind described in section 67 of Chapter 14 of Schedule 1 of FSMR does not have a client relationship with a Person to whom it markets a Specified Investment or engages with in relation to carrying on a Regulated Activity, the client classification requirements in this chapter do not apply to the Authorised Person with regard to its engagement with that Person.

        • COBS 2.1.7

          Other Authorised Persons can also conduct marketing activities of the kind described in section 67 of Chapter 14 of Schedule 1 of FSMR under the exclusion in section 67(5) of Chapter 14 of Schedule 1 of FSMR.

    • COBS 2.2 COBS 2.2 Client Categorisation

      • COBS 2.2.1

        An Authorised Person must categorise each of its clients into an appropriate Client category. There are three Client categories:

        (a) Retail Client;
        (b) Professional Client; and
        (c) Market Counterparty.

      • COBS 2.2.2

        A Person may be classified into one category of Client in relation to the carrying on of a Regulated Activity where this involves provision of a service to a Client, product or Transaction, but another category of Client in relation to another such Regulated Activity and corresponding service, product or Transaction. An Authorised Person must ensure that a client is appropriately and correctly classified with respect to each Regulated Activity, service, product or Transaction.

      • COBS 2.2.3

        If an Authorised Person is aware that a Client, with or for whom it is intending to carry on a Regulated Activity where this involves provision of a service to a Client, is acting as an agent for another Person (the "second person") in relation to a particular Transaction, then unless the Client is another Authorised Person or a Recognised Body, the Authorised Person must also treat that second person as its Client in relation to that Transaction.

      • COBS 2.2.4 COBS 2.2.4

        If an Authorised Person intends to carry on any Regulated Activity where this involves provision of a service to a client which is a trust, it must unless otherwise provided in the Rules, treat the trustee of the trust, and not the beneficiaries of the trust, as its Client.

        • Guidance

      • COBS 2.2.5

        The point at which a Person becomes a Client of an Authorised Person is a question of fact that needs to be addressed by the Authorised Person in light of the nature of the relevant Regulated Activity (or Specified Investment) involved, and the relations and interactions which the Authorised Person has with that Person. For instance, in certain types of Regulated Activities (such as corporate advisory services), a number of conversations (such as marketing and promotional activities) may occur between an Authorised Person and a potential client before it may appear to the Authorised Person on a reasonable basis that the Authorised Person is likely to be carrying on a Regulated Activity where this involves provision of a service to a Client, at which point a client classification is required.

      • COBS 2.2.6

        The client classification must take place before an Authorised Person carries on a Regulated Activity where this involves provision of a service to a Client. However, this does not preclude marketing prior to such classification being documented and notified.

      • COBS 2.2.7

        The Regulator expects Authorised Persons to adopt practices which are consistent with the underlying intent of the client classification provisions, which is to provide Clients with an appropriate level of regulatory protection in light of the resources and expertise available to such Clients. Therefore, as soon as it is reasonably apparent that an Authorised Person is likely to carry on a Regulated Activity where this involves provision of a service to a potential customer, it should undertake the client classification process relating to that customer.

      • COBS 2.2.8

        For example, an Authorised Person is not expected to undertake advising or arranging activities relating to a Regulated Activity or Specified Investment which is suited to Professional Clients (e.g. complex derivatives) with a potential customer without having a reasonable basis to consider that such a customer has sufficient knowledge and experience relating to the relevant activity or product. Whilst a formal client classification may not be needed at the early stages of interaction, an Authorised Person is expected to form a reasonable view about the professional status of a potential Client when exposing such a customer to Regulated Activities or Specified Investment (such as investments in a Qualified Investor Fund) which are intended for Professional Clients.

    • COBS 2.3 Retail Clients

      A Person who cannot be classified as a Professional Client or Market Counterparty in accordance with these Rules is a Retail Client. If an Authorised Person chooses to provide Regulated Activities to a Person as a Retail Client, it may do so by simply classifying that Person as a Retail Client without having to follow any further procedures as compared to those required for classifying Persons as Professional Clients or Market Counterparties.

    • COBS 2.4 COBS 2.4 Professional Clients

      • COBS 2.4.1

        There are three routes through which a Person may be classified as a Professional Client:

        (a) "deemed" Professional Clients;
        (b) "Service-based" Professional Clients; and
        (c) "assessed" Professional Clients.

      • COBS 2.4.2 "Deemed" Professional Clients

        (a) A Person is a "deemed" Professional Client if that Person is:
        (i) a Person which, as at the date of its most recent financial statements, met at least two of the following requirements:
        (A) a balance sheet total of US$20 million;
        (B) a net annual turnover of US$40 million; or
        (C) own funds or called up capital of at least US$2 million
        (a "Large Undertaking");
        (ii) a supranational organisation whose members are either countries, central banks or national monetary authorities;
        (iii) a properly constituted government, government agency, central bank or other national monetary authority of any country or jurisdiction;
        (iv) a public authority or state investment body;
        (v) a Recognised Body;
        (vi) an Authorised Person;
        (vii) the management company of a regulated pension fund;
        (viii) a Collective Investment Fund or a regulated pension fund;
        (ix) a Body Corporate whose shares are listed or admitted to trading on any exchange of an IOSCO member country;
        (x) any other institutional investor whose main activity is to invest in Financial Instruments, including an entity dedicated to the securitisation of assets or other financial transactions;
        (xi) a trustee of a trust which has, or had during the previous twelve months, assets of at least US$10,000,000. An individual trustee on the board of such a trust is only a "deemed" Professional Client in relation to that particular trust;
        (xii) a holder of a licence under the Single Family Office Regulations with respect to its activities carried on exclusively for the purposes of, and only in so far as it is, carrying out its duties as a Single Family Office; or
        (xiii) a Subsidiary or a Parent of any of the Persons described in Rules 2.4.2(a)(i)–(xii).
        (b) An Authorised Person must have a reasonable basis for classifying a Person as falling within the list of "deemed" Professional Clients above, including by inspecting copies of any necessary supporting documentation and keeping records of the same.

      • COBS 2.4.3 COBS 2.4.3 "Service-based" Professional Clients

        (a) A Person is a "Service-based" Professional Client if:
        (i) the Regulated Activity carried on, where this involves provision of a service to a Client, is Providing Credit;
        (ii) the Person is an Undertaking;
        (iii) the Credit Facility in question is provided for use in the business activities of:
        (A) the Person;
        (B) a Controller of the Person;
        (C) any member of the Group to which the Person belongs; or
        (D) a joint venture of a Person referred to in Rules 2.4.3(a)(iii)(A)–(C);
        (iv) the Regulated Activity carried on, where this involves provision of a service to a Client, is "Advising on Investments", "Advising on Credit", "Arranging Credit" or "Arranging Deals in Investments" and the service is provided for the purposes of Corporate Structuring and Financing; and
        (v) the Person has not opted-in to be classified as a Retail Client.
        (b) A "Service-based" Professional Client may elect to be treated as a Retail Client in accordance with Rule 2.6.1.
        (c) An Authorised Person must have a reasonable basis for classifying a Person as falling within the list of "Service-based" Professional Clients above such as inspecting copies of any necessary supporting documentation and keeping records of the same.

        • Guidance

          1. An Authorised Person may classify an Undertaking as a Professional Client for the purposes of Providing Credit for business purposes, not only for the Undertaking itself, but also for its related entities (such as a Controller or member of its Group), provided that the Undertaking has not opted-in to be classified as a Retail Client.
          2. An Authorised Person must decide whether to classify an Undertaking, that is a "deemed" Professional Client but would also qualify as a "Service-based" Professional Client, as a "deemed" Professional Client or as a "Service-based" Professional Client. "Deemed" Professional Clients are not able to opt to be classified as a Retail Client, but "Service-based" Professional Clients are. Generally, it would be more appropriate to classify such a Person as a "deemed" Professional Client rather than a "Service" based" Professional Client.
          3. Joint ventures may be in the form of contractual arrangements under which parties contribute their assets and expertise to develop or to undertake specified business activities. Where an Undertaking is set up by participants in such a joint venture for the purposes of their joint venture, the Undertaking itself can be treated as a Professional Client provided a joint venture partner meets the Professional Client criteria. To be able to rely on a joint venture partner's Professional Client status, such a partner should generally be a key decision maker with respect to the business activities of the joint venture, and not just a silent partner.
          4. Advisory and arranging services given to an individual who is a wealth management client for the purposes of their investment activities or portfolio management are excluded because such clients are not necessarily Professional Clients. Therefore, for such a client to qualify as a Professional Client, he would need to be an "assessed" Professional Client.

      • COBS 2.4.4 COBS 2.4.4 "Assessed" Professional Clients

        Individuals

        (a) An individual may be treated as an "assessed" Professional Client (instead of a Retail Client) if:
        (i) the individual has net assets of at least US$500,000, or US$1,000,000 in the case of the Promotion of a Passported Fund (including any assets held directly or indirectly by that person), the calculation of which must exclude:
        (A) property which is that person's primary residence or any loan secured on that residence;
        (B) any rights of that person under a qualifying Contract of Insurance within the meaning of FSMR; or
        (C) any benefits (in the form of pensions or otherwise) which are payable on the termination of that person's service or on death or retirement and to which that person or that person's dependents are, or may be, entitled;
        (ii) either:
        (A) the individual is, or has been, in the previous twelve months, or two years in the case of the Promotion of a Passported Fund, an Employee in a professional position of an Authorised Person or a Recognised Body; or
        (B) the individual appears, on reasonable grounds, to have sufficient experience and understanding of relevant financial markets, products or transactions and any associated risks, following the analysis set out in Rule 2.6.2; and
        (iii) the individual has not opted to be classified as a Retail Client.
        (b) An Authorised Person may classify any legal structure or vehicle, such as an Undertaking, trust or foundation, which is set up solely for the purpose of facilitating the management of an investment portfolio of an individual assessed as meeting the requirements in Rule 2.4.4(a) as a Professional Client.
        (c) An Authorised Person may classify as a Professional Client an individual (a "joint account holder") who has a joint account with an individual assessed as meeting the requirements in Rule 2.4.4(a) (the "primary account holder") if:
        (i) the joint account holder is a Family Member of the primary account holder;
        (ii) the account is used for the purposes of managing investments for the primary account holder and the joint account holder; and
        (iii) the joint account holder has confirmed in writing (or, in the case of a joint account operated by a primary account holder who is a parent or legal guardian of a minor, that parent or guardian exercises its authority to act for the minor in accordance with any necessary formalities) that investment decisions relating to the joint account are generally made for, or on behalf of, him by the primary account holder.
        (d) An individual classified as a Professional Client may operate a joint account with more than one Family Member. Provided that each such Family Member meets the requirements set out in Rule 2.4.4(c), they may all be classified as Professional Clients.
        (e) A legal structure or vehicle of a Professional Client which is itself classified as a Professional Client may not opt to be treated as a Retail Client, as that right belongs to the Professional Client for whose purposes the vehicle is set up.
        (f) A Family Member of a Professional Client classified as a Professional Client under Rule 2.4.4(c) does not per se have a right to opt to be classified as a Retail Client with regard to the operation of the joint account.
        (g) A Family Member of a Professional Client classified as a Professional Client under Rule 2.4.4(c) may withdraw his confirmation given to have decisions on behalf of him made by the Professional Client who is the primary account holder of the joint account. An Authorised Person must ensure that once such a withdrawal is made, the withdrawing individual is no longer classified as a Professional Client.

        Undertakings

        (h) An Authorised Person may classify an Undertaking as an "assessed" Professional Client if the Undertaking, or (as assessed by the Authorised Person) its Controller (provided that if such controller is a natural person, it meets the Professional Client criteria in Rule 2.4.4(a)), Holding Company, Subsidiary or joint venture partner:
        (i) either:
        (A) has own funds or called up capital of at least US$500,000;
        (B) appears, on reasonable grounds, to have sufficient experience and understanding of relevant financial markets, products or transactions and any associated risks, following the analysis set out in Rule 2.6.2; and
        (C) has not opted to be classified as a Retail Client; or
        (ii) meets any of the criteria in Rule 2.4.2 for a "deemed" Professional Client.
        Amended on (3 February, 2020).

        • Guidance

          1. In the calculation of net assets in Rule 2.4.4(a)(i), the reference to "assets held directly or indirectly" is designed to include assets held by direct legal ownership, by beneficial ownership (e.g. as a beneficiary in a trust), or by both legal and beneficial ownership. Such assets may be held, for instance, through a special purpose or personal investment vehicle, a foundation, or similar. Similarly, any real property held subject to an Islamic mortgage, where the lender has the legal title to the property, may be counted as indirectly held property of a Client, less the amount owing on the mortgage, where it is not a primary residence. As the test is to determine the net assets (not gross assets) of an individual, any mortgages or other charges held over the property to secure any indebtedness of the individual should be deducted from the value of the assets. An individual's primary residence is excluded from the calculation of their net assets. If an individual who is an expatriate has a primary residence in his home country, such a residence should not generally be counted for the purposes of meeting the net asset test. However, if the current residence in the host country is owned by the individual, then that may be treated as their primary residence and the value of the residence in the home country of the individual may be counted for the purposes of meeting the net asset test, provided there is sufficient evidence of ownership and an objective valuation of the relevant premises. An Authorised Person should be able to demonstrate that it has objective evidence of the ownership and valuation of any assets taken into account for the purposes of meeting the net asset test.
          2. Joint ventures may be in the form of contractual arrangements under which parties contribute their assets and expertise to develop or to undertake specified business activities. Where an Undertaking is set up by participants in such a joint venture for the purposes of their joint venture, the Undertaking itself can be treated as a Professional Client provided a joint venture partner meets the Professional Client criteria. To be able to rely on a joint venture partner's Professional Client status, such a partner should generally be a key decision maker with respect to the business activities of the joint venture, and not just a silent partner.

    • COBS 2.5 Market Counterparties

      (a) An Authorised Person may classify a Person as a Market Counterparty if:
      (i) that Person is a "deemed" Professional Client; and
      (ii) the requirements in Rule 2.5(b) have been met.
      (b) An Authorised Person must, before classifying a Person as a Market Counterparty, ensure that such a Person has:
      (i) been given a prior written notification of the classification as a Market Counterparty in relation to a particular Regulated Activity or Transaction, or in respect of all Regulated Activities and Transactions; and
      (ii) not requested to be classified otherwise within the period specified in the notice.
      (c) The notification in Rule 2.5(b)(i) need only be given to:
      (i) in the case of a Fund, either to the Fund or its Fund Manager; and
      (ii) in the case of a pension fund, either to such fund or its management company.

    • COBS 2.6 COBS 2.6 Client Classification Procedures

      • COBS 2.6.1 COBS 2.6.1 Option for a Professional Client to be classified as a Retail Client

        (a) A Professional Client has the right to elect to be classified as a Retail Client. An Authorised Person must, when first establishing a relationship with such a Person as a Professional Client, inform that Person of:
        (i) that Person's right to be classified as a Retail Client;
        (ii) the higher level of protection available to Retail Clients; and
        (iii) the time within which the Person may elect to be classified as a Retail Client.
        (b) If the Person does not expressly elect to be classified as a Retail Client within the time specified by the Authorised Person, the Authorised Person may classify that Person as a Professional Client.
        (c) If such a Person already classified as a Professional Client by an Authorised Person expressly requests the Authorised Person to be re-classified as a Retail Client, the Authorised Person must re-classify such a Person as a Retail Client.
        (d) If an Authorised Person does not provide Regulated Activities to Retail Clients, it must inform the Person of this fact and any relevant consequences.

        • Guidance

          1. The obligation in Rule 2.6.1(a) applies to an Authorised Person when it first carries on or intends to carry on a Regulated Activity where this involves provision of a service to a Professional Client.
          2. Once an Authorised Person has first classified a Person as a Professional Client, that Professional Client has a right at any time thereafter to ask to be re-classified as a Retail Client to obtain a higher level of protection. Although the right to ask the Authorised Person to be re-classified as a Retail Client is available to the Professional Client, as a matter of good practice:
          (i) the Authorised Person should also periodically review whether the circumstances relating to the particular Client remain the same; and
          (ii) if the Authorised Person becomes aware of any circumstances which would warrant a re-classification of the Client, initiate the process with the Client to give that Client a more appropriate classification.
          3. An Authorised Person cannot provide Regulated Activities to a Retail Client unless it has a Retail authorisation on its Financial Services Permission. However, such an Authorised Person may refer any Person who opts to be treated as a Retail Client to another Authorised Person with the appropriate Financial Services Permission.

      • COBS 2.6.2 Assessment of knowledge and experience

        (a) For the purpose of the analysis required to classify a Person as an "assessed" Professional Client, an Authorised Person must include, where applicable, consideration of the following matters:
        (i) the Person's knowledge and understanding of the relevant financial markets, types of financial products or arrangements and the risks involved either generally or in relation to a proposed Transaction;
        (ii) the length of time the Person has participated in relevant financial markets, the frequency of dealings and the extent to which the Person has relied on professional financial advice;
        (iii) the size and nature of transactions that have been undertaken by, or on behalf of, the Person in relevant financial markets;
        (iv) the Person's relevant qualifications relating to financial markets;
        (v) the composition and size of the Person's existing financial investment portfolio;
        (vi) in the case of credit or insurance transactions, relevant experience in relation to similar transactions to be able to understand the risks associated with such transactions; and
        (vii) any other matters which the Authorised Person considers relevant.
        (b) Where the analysis is being carried out in respect of an Undertaking, the analysis must be applied to those individuals who are authorised to undertake transactions on behalf of the Undertaking.

      • COBS 2.6.3 COBS 2.6.3 Reliance on a classification made elsewhere

        (a) An Authorised Person may rely on a client classification made, if it is a Branch, by its head office or any other branch of the same legal entity, or if it is a member of a Group, by any other member of its Group, if it has reasonable grounds to believe that such a client classification is substantially similar to the client classification required under these Rules.
        (b) If any gaps are identified between the requirements applicable to the Authorised Person under these Rules and the requirements under which the client classification is carried out by such other entity, the Authorised Person may rely on such a client classification only if it has effectively addressed the identified gaps.

        • Guidance

          1. Generally, an Authorised Person relying on this Rule should be able to demonstrate to the Regulator the due diligence process that it had undertaken to assess whether the client classification made by its head office or other branch of the same legal entity or a member of its Group substantially meets the client classification requirements in these Rules (e.g. documents verified and available) and, if any gaps are identified, how those gaps are effectively addressed.
          2. If an Authorised Person wishes to use any client classification undertaken by any third party other than its head office or another branch of the same legal entity, or a member of its Group, such an arrangement is generally treated as an outsourcing arrangement. In such case, the Authorised Person would need to meet the requirements in GEN 3.3.32 relating to outsourcing.

      • COBS 2.6.4 COBS 2.6.4 Group clients

        (a) An Authorised Person that is a member of a Group and carries out one or more Regulated Activities where the Regulated Activities carried out by the Authorised Person form part of a bundle of Regulated Activities carried out for the benefit of that Client and its Group members must ensure that:
        (i) the client classification it adopts for any Regulated Activity carried on which involves the provision of a service to a Client is both consistent with the requirements in these Rules and appropriate for the overall bundle of Regulated Activities which involve the provision of services to a Client;
        (ii) the Client has a clear understanding of the arrangement under which Regulated Activities are carried out for the Client's benefit by the Authorised Person in conjunction with the other members of the Group; and
        (iii) any risks arising from such arrangements are identified and appropriately and effectively addressed.

        • Guidance

          1. Different entities in a Group may have different arrangements under which they provide to their Clients one or more Regulated Activities. Such arrangements may involve, instead of each member within a Group carrying on a discrete stand-alone Regulated Activity, different members of the Group carrying on different aspects of the bundle of Regulated Activities carried on for the Client's benefit. An example is where a number of members within a Group provide discrete aspects of expertise that facilitate merger and acquisition activity of a Client. In such a situation, different members of the Group could prepare and provide:
          (i) Advice relating to a proposed restructure;
          (ii) Advice relating to financing of the restructure; and
          (iii) Arranging Credit for financing the restructure.
          2. In order to provide flexibility for Authorised Persons which are members of a Group to provide such services to their Clients in a manner that suits the Client's needs and the nature of the service, this Rule 2.6.4 sets out the overarching objectives that must be achieved, rather than any detailed requirements.
          3. Depending on the nature of the arrangement under which Group members choose to carry on Regulated Activities for the benefit of the same Client, and the nature of the Regulated Activities involved, the risks associated with such arrangements may vary. Some of the common risks that could arise, and therefore would need to be addressed, include:
          (i) conflicting legal requirements applicable to the carrying on of the Regulated Activities, particularly if the members of the Group are located in different jurisdictions; and
          (ii) a Client not being able to clearly identify the actual service provider or providers and resulting exposure to legal accountability to the Client that may arise for all members of the Group.
          4. An Authorised Person must comply with, and must be able to demonstrate compliance with, the systems and controls requirements set out in GEN when relying on this Rule 2.6.4.

    • COBS 2.7 COBS 2.7 Record Keeping

      • COBS 2.7.1

        In addition to any applicable rules under GEN relating to record keeping, and the remainder of these Rules, an Authorised Person must keep records of:

        (a) the procedures which it has followed under these Rules, including any documents which evidence the Client's classification; and
        (b) any notice sent to the Client pursuant to these Rules and evidence of despatch.

      • COBS 2.7.2

        The records must be kept by an Authorised Person for at least six years from the date on which the business relationship with a Client has ended.

      • COBS 2.7.3

        An Authorised Person may, if the date on which the business relationship with the Client ended is unclear, treat the date of the completion of the last Transaction with the Client as the date on which the business relationship ended.

      • COBS 2.7.4

        An Authorised Person must ensure that in relation to reliance on a classification made elsewhere (Rule 2.6.3) and in relation to Group Clients (Rule 2.6.4), the Regulator has unrestricted access to all the records required for the Authorised Person to be able to demonstrate to the Regulator its compliance with the applicable requirements, including any records maintained by or at its head office or any other branch of the same legal entity, or a member of its Group.

      • COBS 2.7.5

        An Authorised Person must notify the Regulator immediately if, for any reason, it is no longer able to provide unrestricted access to records.