2.) Accepting Client: Client Categorisation Flashcards
When is a firm required to categorise its clients?
If it’s carrying on designated investment business
MiFID Business
MiFID laid down rules on how client categorisation has to be carried out for MiFID business
Non-MiFID Business
The FCA uses the same client categorisation terminology but the rules on how the categories must be applied are modified in some cases
It a firm provides a mix of MiFID and non-MiFID services
- it must categorise clients in accordance with the MiFID requirements
- unless the MiFID business is conducted separately from the non-MiFID
(Example, if a firm were to advise a client in investing in a CIS (advise about which would fall within the scope of MiFID) and also about a life policy (which would not), it should use the MiFID client categorisation
How does COBS define a client?
- as someone to whom a firm provides, intends to provide, or has provided a service in the course of carrying on a regulated activity
- and in the same case MiFID or equivalent third country business, anything which is an ancillary service
- the term includes potential clients and people acting as agent for another person
The Definition of a Client: in addition
- in relation to the financial promotion rules, it includes persons with whom the firm communicated, whether or not they are actually clients
- clients of a firms appointed representative or tied agent are also regarded as clients of the firm
Under COBS, clients may be categorised as:
- a retail client
- a professional client, or
- an eligible counterparty
(The classification determines the level of protection the client receives, with retail clients being afforded the most protection, and eligible counter-parties the least)
Client Categories: Retail Client
- a retail client is any client who is not a professional client or an eligible counter-party
(Note: the term customer is an umbrella term covering both retail clients and professional clients)
Client Categories: Professional Clients
Professional clients may be either Per se professional clients or elective professional clients
Client Categories: Per se Professional Clients
- Per se professional clients are, generally, those which fall into a range of categories
(Unless they are an eligible counter-party, or are categorised differently under other specific provisions)
Per se Professional Client Categories:
(An entity required to be authorised or regulated to operate in the financial markets), This includes:
- a credit institution
- an investment firm
- any other authorised or regulated financial institution
- an insurance company
- a CIS or the management company of such a scheme
- a pension fund or the management company of a pension fund
- a commodity or commodity derivatives dealer
- a local
- any other institutional investor
The list of Per se Professional Clients also include:
- governments
- certain public bodies
- central banks
- International / supranational institutions
- institutional investors whose main business in investment in financial instruments
Eligible Counter-parties (ECPs)
COBS contains a list of the types of client which can be classified as eligible counter-parties (ECPs)
A Client can only be categorised as an ECP 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
(This means that if the same ECP wants to engage in other types of business, for example, investment management or investment advise, it will have to be classified as Per se professional client)
MiFID 2: local authorities and / or municipalities (default classification)
MiFID 2 introduces extra protections for local authorities and / or municipalities, which must by default now be classified as retail clients
