Chapter 3 Client categorisation - Financial Services Authority

1 Conduct of Business SourcebookChapter 3 Client categorisationCOBS 3 : Client categorisationSection : Release 26l Feb 3 scope of this Chapter is the same as that of the rules in the Handbook towhich it Chapter relates to parts of the Handbook whose application depends onwhether a person is a Client , a retail Client , a professional Client or an eligiblecounterparty. However, it does not apply to the extent that another part ofthe Handbook provides for a different approach to Client categorisation . Forexample, a separate approach to Client categorisation is set out in thedefinition of a retail Client for a firm that gives basic to n COBS and n COBS , in this Chapter provisions marked UK apply to a firm s business other than MiFID business as if they sections in this Chapter on general notifications (n COBS ) and policies,procedures and records (n COBS ) do not apply in relation to a firm that isneither:(1) conducting designated investment business.

2 Nor(2) in the case of MiFID or equivalent third country business providing anancillary service that does not constitute designated a firm conducts business for a Client involving both:(1) MiFID or equivalent third country business; and(2) other regulated activities subject to this Chapter ;it must categorise that Client for such business in accordance with theprovisions in this Chapter that apply to MiFID or equivalent third countrybusiness, including those provisions applied to the equivalent business of athird country investment firm as a result of n COBS (1) For example, the requirement concerning mixed business will apply ifa MiFID investment firm or third country investment firm advises aCOBS 3 : Client categorisationSection : Application3n Release 26l Feb 3/3client on whether to invest in a scheme or a life policy.

3 This is becausethe former is within the scope of MiFID and the latter is not. In such acase, the MiFID Client categorisation requirements prevail.(2) The requirement does not apply where the MiFID or equivalent thirdcountry business is provided separately from the other regulatedactivities. Where this is the case, in accordance with Principle 7(communications with clients) the basis on which the differentactivities will be performed, including any differences in thecategorisations that apply, should be made clear to the 3 : Client categorisationSection : Release 26l Feb 3 (1) A person to whom a firm provides, intends to provide or hasprovided:(a) a service in the course of carrying on a regulated activity; or(b) in the case of MiFID or equivalent third country business, anancillary service,is a " Client " of that firm.

4 (2) A " Client " includes a potential Client .(3) In relation to the Financial promotion rules, a person to whom afinancial promotion is or is likely to be communicated is a " Client " ofa firm that communicates or approves it.(4) A Client of an appointed representative or, if applicable, a tied agentis a " Client " of the firm for whom that appointed representative, ortied agent, acts or intends to act in the course of business for whichthat firm has accepted responsibility under the Act or MiFID (seesections 39 and 39A of the Act).[Note: article 4(1)(9) of MiFID](1) A corporate finance contact or a venture capital contact is not a clientunder the first limb of the general definition.

5 This is because a firmdoes not provide a service to such a contact. However, it will be aclient under the third limb of the general definition for the purposesof the Financial promotion rules if the firm communicates or approvesa Financial promotion that is or is likely to be communicated to such acontact.(2) Communicating or approving a Financial promotion that is or is likelyto be communicated to such a contact is not MiFID or equivalentthird country business. In such circumstances, the "non-MiFID" clientcategorisations are relevant and, in categorising elective professionalclients, the "quantitative test" will not need to be 3 : Client categorisationSection : Release 26l Feb 3/5 Who is the Client ?

6 (1) If a firm provides Services to a person that is acting as an agent, theidentity of its Client will be determined in accordance with the ruleon agents as clients (see n COBS R).(2) In relation to a firm establishing, operating or winding up a personalpension scheme or a stakeholder pension scheme, a member orbeneficiary of that scheme is a Client of the firm.(3) If a firm that does not fall within (2) provides Services to a personthat is acting as the trustee of a trust, that person will be the firm'sclient and the underlying beneficiaries of the trust will not.(4) In relation to business that is neither MiFID or equivalent thirdcountry business, if a firm provides Services to a fund that does nothave separate legal personality, that fund will be the firm's Client .

7 (5) If a firm provides Services relating to a contribution to or interest in aCTF (except for a personal recommendation relating to a contributionto a CTF or in relation to the communication or approval of afinancial promotion), the firm's only Client is:(a) the registered contact, if there is one;(b) otherwise, the person to whom the statement must be sent inaccordance with Regulation 10 of the CTF 3 : Client categorisationSection : General Release 26l Feb 3 notifications[deleted]Articles 45(1) and (2) of the MiFID Org Regulation require firms to provideclients with specified information concerning Client (1)Investment firms shall notify new clients, and existing clientsthat the investment firm has newly categorised as required by UKlaw on markets in Financial instruments, of their categorisation as aretail Client , a professional Client or an eligible counterparty inaccordance with that Directive.

8 (2)Investment firms shall inform clients in a durable medium aboutany right that Client has to request a different categorisation andabout any limitations to the level of Client protection that a differentcategorisation would entail.[Note: articles 45(1) and (2) of the MiFID Org Regulation]The information referred to in article 45(2) of the MiFID Org Regulation (asreproduced at n COBS ) must be provided to clients prior to anyprovision of Services .[Note: paragraph 2 of section I of annex II to MiFID]This Chapter requires a firm to allow a Client to request re- categorisation as aclient that benefits from a higher degree of protection (see n COBS R).

9 Afirm must therefore notify a Client that is categorised as a professional clientor an eligible counterparty of its right to request a different categorisationwhether or not the firm will agree to such requests. However, a firm needonly notify a Client of a right to request a different categorisation involvinga lower level of protection if it is prepared to consider such 3 : Client categorisationSection : Retail Release 26l Feb 3 clientsA retail Client is a Client who is not a professional Client or an eligiblecounterparty.[Note: article 4(1)(11) of MiFID]If a firm provides Services relating to a CTF (except for a personalrecommendation relating to a contribution to a CTF), the firm's Client is aretail Client even if it would otherwise be categorised as a professional clientor an eligible counterparty under this 3 : Client categorisationSection : Professional Release 26l Feb 3 clientsA professional Client is a Client that is either a per se professional Client or anelective professional Client .

10 [Note: article 4(1)(10) of MiFID]Per se professional of the following is a per se professional Client unless and to the extentit is an eligible counterparty or is given a different categorisation under thischapter:(1) an entity required to be authorised or regulated to operate in thefinancial markets. The following list includes all authorised entitiescarrying out the characteristic activities of the entities mentioned,whether authorised in the UK or a third country:(a) a credit institution;(b) an investment firm;(c) any other authorised or regulated Financial institution;(d) an insurance company;(e) a collective investment scheme or the management company ofsuch a scheme;(f) a pension fund or the management company of a pension fund;(g) a commodity or commodity derivatives dealer;(h) a local Authority ;(i) any other institutional investor.