2)4) Client Categorisation Flashcards

1
Q

4.1.1 What does COBS define as a client?

A

‘someone to whom a firm provides, intends to provide, or has provided a service in the course of carrying on a regulated activity’

in the case of MiFID or equivalent third-country business, this includes anything which is an ancillary service

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2
Q

4.1.2 What are the three categories of client according to COBS?

A
  • retail
  • professional
  • eligible counterparty

This effects protections the clients receive, with retail being the most and counterparty being the least

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3
Q

4.1.2 What is a retail, professional or eligible counterparty client?

A

Retail is anybody that isn’t a professional client or eligible counterparty

Professional clients may be elective or professional. Elective professional clients choose to be treated as such subject to being compliant with certain rules
Professional clients are any who fall into the following categories, unless they are eligible counterparties
- Entities required to be authed or regulated to operate in the financial markets, ie:
- credit institutions
- investment firms
- any other authed or regulated financial institutions
- insurance companies
- CISs, or the management companies of such schemes
- pension funds or the management companies of a pension fund
- commodity or derivatives dealers
- local auth
- any other institutional investors
- Large undertakings - companies whose balance sheet, turnover or own funds meets certain levels. Specifically:
- For MiFID and equivalent third-country business, this means undertakings that meet any two of the following size requirements on a company basis, which are:
- a balance sheet total of 20mill EUR
- a net turnover of 40mill EUR, and
- own funds of 2mill EUR
- For other non-MiFID business, large undertakings are:
- companies whose called-up share capital or net assets are, or have at any time in the past two years been, at least £5mill, or currency-equivalent (or any company whose holding companies/subsidiaries meets this)
- companies which meet (or of which the holding companies/subsidiaries meet) any of the following criteria:
- a balance sheet total of 12.5mill EUR
- a net turnover of 25mill EUR
- an avg of 250 employees during the year
- partnerships or unincorporated associations whose net assets are, or have at any time in the past two years been, at least £5mill or currency equivalent. In the case of limited partnerships, this should be calculated without deducting any loans owing to the partners
- trustees of a trust (other than certain types of pension schemes dealt with in the next bullet point) which has, or has at any time in the past two years had assets of at least £10mill
- trustees of an occupational pension scheme or a small self-administered scheme, or the trustee/operator of a personal pension or stakeholder pension scheme, if the scheme has, or has had at any time in the past two years, had:
- at least 50 members
- AUM >= £10mill
The list also includes:
- governments, certain public bodies, central banks, international/supranational institutions, and similar, e.g. the World Bank and the IMF
- institutional investors whose main business is the investment in financial instruments

ECPs include:
- credit institutions
- investment firms
- other FIs authed or regulated under the law of the UK
- insurance companies
- CISs authed under the UCITS directive or their management companies
- pension funds or their management companies
- national govt or their corresponding offices, including public bodies that deal with public debt
- central banks
- supranational organisations (eg the World Bank or the European Investment Bank)
This list does not include large undertakings
Clients can only be classified as ECPs for the following types of business:
- executing orders, and/or
- dealing on own account, and/or
- receiving and transmitting orders
- ancillary services relating to the above activities
- arranging in relation to business which is not MiFID or equivalent third-country firm business but only to the extent that the service or activity is carried out with or for an eligible counterparty

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4
Q

4.1.2 Which conditions do a UK local public authority need to meet to be classified an elective professional client rather than a retail client?

A
  • the size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds £10mill
    and
    either:
  • the client has carried out txns, in significant size, on the relevant market at an avg frequency of 10 per quarter over the previous 4 years
  • the person authed to carry out txns on behalf of the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the provision of services envisaged
  • the client is an administering authority of the Local Government Pension Scheme (LGPS) and is acting in that capacity
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5
Q

4.1.2 What express obligations on firms when dealing with ECPs did MiFID II introduce?

A

Firms must:
- act honestly, fairly, and professionally in their dealings with eligible counterparties
- communicate in a way that is fair, clear and not misleading
- provide certain info to ECPs (further info on the ‘Information to Clients’ can be found in Article 30(1))
- provide certain reports to ECPs (‘reporting information to client’)

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6
Q

4.2.1 When a firm is providing services to A but knows that A is acting as an agent of B, who should the firm regard as the client?

A

Person A, unless otherwise agreed in writing with A that B should be treated as the client
A further exception is if the involvement of A in the arrangement is mainly for the purpose of reducing the firm’s duties to B

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7
Q

4.2.2 When can a retail client be treated as an elective professional client?

Elective professional clients must be given a clear written warning to the lost protections and the client must agree in writing to this
The client must state in writing to the firm that it wishes to be treated as a professional client
Similar actions must occur when a firm is reclassifying a client as retail

A
  • the firm has assessed their (or its) expertise, experience and knowledge and believes it can make its own investment decisions and understands the risks involved (the is call the ‘qualitative test’, and for MiFID business
  • any two of the following are true (this is called the ‘quantitative test’):
    • the client carried out, on avg, ten significantly sized txns on the relevant market in each of the past four quarters
    • the size of the client’s financial portfolio exceeds 500k EUR (defined as including cash deposits and financial instruments)
    • the client works, or has worked, as a professional in the financial services sector for at least a year on a basis which required knowledge of the transactions envisaged

For MiFID business, a client must meet both the qualitative and quantitative tests. Firms must take appropriate action if they become aware a client no longer applies to this category

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8
Q

4.2.3 When may a client be treated as an elective ECP in relation to business other than MiFID or equivalent third-country business?

A

If it:
- is a per se professional client (other than one which is only a professional client because it is an institutional investor)
- is aa body corporate (company) which has called-up share capital of at least £10mill
- meets the two quantitative tests noted in 4.2.2
- asks to be treated as such and is already an elective professional client (but only for the services for which it could be treated as a professional client)

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9
Q

4.2.3 When may a client be treated as an elective ECP in relation to MiFID or equivalent third-country business?

A

The client is:
- an undertaking
- a per se professional counterparty, except for a client that is a per se professional client because they are an institutional investor - ie, their main activity is to invest in financial instruments, including entities dedicated to securitisation or financing transactions
- request such an undertaking

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10
Q

4.2.6 When does a firm have to treat a corporate finance or venture capital client as a contact?

A

When the firm communicates or approves a financial promotion that is, or is likely to be, communicated to such a contact

The quantitative test does not need to be satisfied

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11
Q

4.3 How long must a firm keep a record of the form of each notice made to clients of their categorisation?

A

5 years for MiFID or equivalent third-country business
3 years for non-MiFID business

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