• 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.