COB 4.1 Client classification

1. (1)

   This section applies to a firm intending to conduct, or conducting designated investment business or ancillary business relating to designated investment business (but not to a firm which in relation to any customer intends only to provide basic advice on a stakeholder product)7.

2. (2)

   For the purposes of COB only, the following provisions in COB 4.1 also apply to a firm intending to carry on, or carrying on, any other regulated activity to which COB applies5:

   1. (a)

      COB 4.1.12 R and COB 4.1.13 G (Large intermediate customer classified as a market counterparty); and

   2. (b)

      COB 4.1.14 R (Client classified as a private customer).

1. (1)

   Before conducting designated investment business with or for any client, a firm must take reasonable steps to establish whether that client is a private customer, intermediate customer or market counterparty.

2. (2)

   A firm which takes reasonable steps to classify its clients, as required by the rules in this section, and treats a client in accordance with the classification it has established for that purpose, does not breach any other rule in COB to the extent that the breach arises only from inappropriate classification of that client.3

1. (1)

   If a firm ("F") is aware that a person ("C1") with or for whom it is conducting designated investment business, or related ancillary activities, is acting as agent for another person ("C2") in relation to that business, C1, and not C2, is the client of F in respect of that business, if:

   1. (a)

      C1 is another firm or an overseas financial services institution; or

   2. (b)

      C1 is any other person, provided that avoidance of duties which F would otherwise owe to C2 is not the main purpose of the arrangements between the parties.

2. (2)

   Paragraph (1) does not apply if F has agreed with C1 in writing to treat C2 as its client.

3. (3)

   If there is an agreement under (2) in relation to more than one client (C2) represented by C1, F may discharge any requirement to notify, obtain instructions or consent from, or enter into an agreement with each C2 by sending to, or receiving from, C1, a single communication which is expressed to cover each C2, except that:

   1. (a)

      separate risk warnings under COB 5.4 (Customers' understanding of risk);

   2. (b)

      confirmations under COB 8.1 (Confirmation of transactions); and

   3. (c)

      periodic statements under COB 8.2 (Periodic statements) are required for each C2

   are required for each C2.

4. (4)

   If paragraph (1) does not apply, because of the proviso in (1)(b) or an agreement under (2), C2, and not C1, is the client of F in respect of that business.2

1. (1)

   When a firm ("F") conducts designated investment business, or related ancillary activities, with or for:

   1. (a)

      another firm; or

   2. (b)

      an overseas financial services institution;3

   ("C1"), C1 is a market counterparty of F, unless (2), (3) or (4) applies.

2. (2)

   C1 is an intermediate customer of F when the activity carried on by F would be inter-professional business (if C1 were a market counterparty), and:

   1. (a)

      C1 is acting for an underlying customer ("C2"); and

   2. (b)

      [deleted]

   3. (c)

      F and C1 have agreed that F should classify C1 as an intermediate customer when C1 is acting for C2.3

3. (3)

   C1 is an intermediate customer of F when the activity carried on would not be inter-professional business (if C1 were a market counterparty) and:

   1. (a)

      C1 has not indicated that it is acting on its own behalf in relation to that activity; or

   2. (b)

      C1 is a long-term insurer acting on behalf of its life fund.

4. (4)

   If C1 is a collective investment scheme, C1 is an intermediate customer of F.4

5. (5)

   [deleted]4

3A firm must classify a client which is a recognised investment exchange, designated investment exchange, regulated market or clearing house as either a market counterparty or an intermediate customer.

1. (1)

   A firm may classify a client who would otherwise be a private customer as an intermediate customer if:

   1. (a)

      the firm has taken reasonable care to determine that the client has sufficient experience and understanding to be classified as an intermediate customer; and

   2. (b)

      the firm:

      1. (i)

         has given a written warning to the client of the protections under the regulatory system that he will lose;

      2. (ii)

         has given the client sufficient time to consider the implications of being classified as an intermediate customer; and

      3. (iii)

         has obtained the client's written consent, or is otherwise able to demonstrate that informed consent has been given.

2. (2)

   For the purposes of (1), a client's consent to being classified as an intermediate customer may be limited to one or more types of:

   1. (a)

      designated investment; or

   2. (b)

      designated investment business.

A firm may classify a client (other than another firm, regulated collective investment scheme, or an overseas financial services institution) who would otherwise be an intermediate customer as a market counterparty if:4

1. (1)

   the client at the time he is classified is one of the following:

   1. (a)

      a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least £10 million (or its equivalent in any other currency at the relevant time);

   2. (b)

      a body corporate that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:

      1. (i)

         a balance sheet total of 12.5 million euros (or its equivalent in any other currency at the relevant time);

      2. (ii)

         a net turnover of 25 million euros (or its equivalent in any other currency at the relevant time);

      3. (iii)

         an average number of employees during the year of 250;

   3. (c)

      a local authority or public authority;

   4. (d)

      a partnership or unincorporated association which has net assets of at least £10 million (or its equivalent in any other currency at the relevant time) (and calculated, in the case of a limited partnership, without deducting loans owing to any of the partners);

   5. (e)

      a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme9 or stakeholder pension scheme) with assets of at least £10 million (or its equivalent in any other currency), calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;

   6. (f)

      a trustee of an occupational pension scheme or9 SSAS, or a trustee or operator of a personal pension scheme9 or stakeholder pension scheme where the scheme9has (or has had at any time during the previous two years):

      99
      1. (i)

         at least 50 members; and

      2. (ii)

         assets under management of not less than £10 million (or its equivalent in any other currency at the relevant time); and

2. (2)

   the firm has, before commencing business with the client on a market counterparty basis:

   1. (a)

      advised the client in writing that he is being classified as a market counterparty;

   2. (b)

      given a written warning to the client that he will lose protections under the regulatory system;

   3. (c)

      for a client falling under (1)(a) or (b):

      1. (i)

         taken reasonable steps to ensure that the written notices required by (2)(a) and (b) have been delivered to a person authorised to take such a decision for the client; and

      2. (ii)

         not been notified by the client that the client objects to being classified as a market counterparty;

   4. (d)

      for a client falling under (1)(c), (d), (e) or (f):

      1. (i)

         taken reasonable steps to ensure that the written notices required by 2(a) and (b) have been delivered to a person authorised to take such a decision for the client; and

      2. (ii)

         obtained the client's written consent or is otherwise able to demonstrate that consent has been given.

1. (1)

   A firm may classify as a private customer any client (other than a firm, unless it is an ICVC, or an overseas financial services institution) who would otherwise be a market counterparty or an intermediate customer, and must notify any such client accordingly.4

2. (2)

   A notice under (1) must advise the client that he may not necessarily have rights under the Financial Ombudsman Service or the compensation scheme as a result of such classification.

1. (1)

   If a firm classifies:

   1. (a)

      a client as an intermediate customer under COB 4.1.9 R (Expert privatecustomer classified as an intermediate customer); or

   2. (b)

      a client as a market counterparty under COB 4.1.12 R (Large intermediate customer classified as a market counterparty);

   it must review that classification at least annually to ensure that it remains appropriate to the designated investment business which the firm carries on with or for that client, unless (2) applies.

2. (2)

   If a firm has not conducted designated investment business with or for a client during the previous 12 month period, the firm may defer the review referred to in (1) until the firm next conducts designated investment business with or for the client.

1. (1)

   A firm must make a record of the classification established for each client under this section, including sufficient information to support that classification. 3

2. (2)

   A firm must retain the record referred to in (1) for a minimum period after the date on which the firm ceases to carry on business with or for that client, as follows:

   1. (a)

      indefinitely, if relevant to a pension transfer, pension opt-out or FSAVC;

   2. (b)

      for a period of at least six years, if relevant to a life policy or pension contract;

   3. (c)

      for a period of at least three years in any other case.