• 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.