Client categorisation
Here, we provide links to the information on client categorisation:
The new rules on client categorisation
The new rules on client categorisation are set out in COBS 3. You can access them via our full Handbook online through 'Business Standards' and 'COBS'.
| FSA publications |
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We published Implementing MiFID’s Client Categorisation requirements [PDF] in August 2006 to focus early attention on key implementation issues. The paper set out the (then) current views on:
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Chapter 7, 'Client categorisation', in CP06/19: Reforming Conduct of Business Regulation provides detailed feedback on of the following issues from the August paper above:
It also set out our proposals on deleting the Inter-professional Conduct code (IPC) from the Handbook. |
| Chapter 2 of PS07/2: Implementing the Markets in Financial Instruments Directive (MiFID), states that the respondents to CP06/19 were broadly content with our proposals for copying out the MiFID provisions on client categorisation into COBS and replacing the existing client classification framework for all MiFID business (January 2007). |
| Chapter 7 of PS07/6: Reforming Conduct of Business Regulation - Feedback on CP06/19 and CP06/20 provides feedback on responses to our proposals on client categorisation (May 2007). |
| We also consulted separately on certain client categorisation issues for wholesale non-MiFID firms and business in Chapter 15 of CP07/9 - Conduct of Business regime: non-MiFID deferred matters (May 2007). There will be a follow-up Policy Statement to this towards the end of October. |
Client Categorisation in the Level 1 and Level 2 MiFID text
MiFID comprises two levels of European legislation. 'Level 1', a Directive of the European Parliament and Council, was adopted in April 2004. In several areas, including client categorisation, Level 1 provides for its requirements to be supplemented by 'technical implementing measures' – known as Level 2 measures.
MiFID Level 1 Directive - Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004.
- Article 24 governs transactions executed with eligible counterparties.
- Article 71 (6) details transitional provisions for professional clients.
- Annex II provides detail on professional clients.
The Level 2 Directive Commission Directive.
- Article 28 provides for information concerning client classification to be given to the client.
- Article 50 governs which clients are eligible counterparties.
You may find it easier to look at Annex 2 of our Implementing MiFID’s Client Categorisation requirements (August 2006) which gathers together all the MiFID client categorisation reference material from both Level 1 and Level 2.
Q&A on client categorisation
What are the main differences between the MiFID categorisation regime and the COB classification regime?
Boundaries between categories
- The boundaries between categories of client are different between MiFID and COB. For this reason, some clients may be categorised differently under MiFID with a corresponding change in the level of regulatory protection when compared to their previous classification under COB.
- Unlike the current market counterparty category under COB, the eligible counterparty category is only available for a limited range of investment services. This means that clients previously classified as market counterparties are professional clients for that business outside the "eligible counterparty regime".
Changes in criteria and procedures
- While MiFID permits clients to move between categories to obtain more or less regulatory protection, the criteria and the procedures for doing so are different from those in COB. In particular, MiFID introduces a quantitative test for retail clients requesting professional client status.
- Also, investment firms are required to notify their clients of their right to request a different categorisation and any limitations to the level of client protection that would entail.
- Further, MiFID provides that the jurisdiction in which a client is established shall determine whether certain professional clients can be treated as eligible counterparties.
More retail clients
- MiFID introduces new quantitative thresholds for 'large undertakings' and a qualitative test for retail clients requesting treatment as a professional client. Fewer clients may be able to satisfy these, so we expect there to be more retail clients than are private customers at present.
Will retail non-scope firms and MiFID firms when doing non-scope business have to comply with all aspects of the MiFID client categorisation regime?
No. Please see the rules for more details.
- If a 'retail' client wants to be treated as 'professional' the quantitative test in MiFID (where clients must fulfil two out of three conditions) is not applied, leaving the firm and client free as now to agree on the most suitable category (the firm has the final decision);
- Firms can still choose to categorise all clients as 'retail' (currently 'private') but they must tell clients that this is their policy.
What are the grandfathering arrangements for client categorisation?
MiFID provides substantial scope for firms to grandfather their existing clients to the new MiFID client categories and thereby avoid the cost and effort that would otherwise be involved in newly categorising them under the MiFID regime. The procedures for grandfathering will vary for different types of client. Existing private and intermediate customers may be grandfathered to their equivalent MiFID categories without the need to notify them of their categories. The client classification transitional provisions are set out in COB TP1.