1The scope of this chapter is the same as that of the rules in the Handbook to which it relates.

The sections in this chapter on general notifications (COBS 3.3) and policies, procedures and records (COBS 3.8) do not apply in relation to a firm that is neither:

1. (1)

   conducting designated investment business; nor

2. (2)

   in the case of MiFID or equivalent third country business providing an ancillary service that does not constitute designated investment business.

If a firm conducts business for a client involving both:

1. (1)

   MiFID or equivalent third country business; and

2. (2)

   other regulated activities subject to this chapter;

it must categorise that client for such business in accordance with the provisions in this chapter that apply to MiFID or equivalent third country business.

1. (1)

   A person to whom a firm provides, intends to provide or has provided:

   1. (a)

      a service in the course of carrying on a regulated activity; or

   2. (b)

      in the case of MiFID or equivalent third country business, an ancillary service,

   is a "client" of that firm;

2. (2)

   A "client" includes a potential client.

3. (3)

   In relation to the financial promotion rules, a person to whom a financial promotion is or is likely to be communicated is a "client" of a firm that communicates or approves it.

4. (4)

   A client of an appointed representative or, if applicable, a tied agent is a "client" of the firm for whom that appointed representative, or tied agent, acts or intends to act in the course of business for which that firm has accepted responsibility under the Act or MiFID (see sections 39 and 39A of the Act and SUP 12.3.5 R).

1. (1)

   If a firm provides services to a person that is acting as an agent, the identity of its client will be determined in accordance with the rule on agents as clients (see COBS 2.4.3 R).

2. (2)

   In relation to a firm establishing, operating or winding up a personal pension scheme or a stakeholder pension scheme, a member or beneficiary of that scheme is a client of the firm.

3. (3)

   If a firm that does not fall within (2) provides services to a person that is acting as the trustee of a trust, that person will be the firm's client and the underlying beneficiaries of the trust will not.

4. (4)

   In relation to business that is neither MiFID or equivalent third country business, if a firm provides services to a fund3 that does not have separate legal personality, that fund3 will be the firm's client.

   33
5. (5)

   If a firm provides services relating to a contribution to or interest in a CTF (except for a personal recommendation relating to a contribution to a CTF or in relation to the communication or approval of a financial promotion), the firm's only client is:

   1. (a)

      the registered contact, if there is one;

   2. (b)

      otherwise, the person to whom the statement must be sent in accordance with Regulation 10 of the CTF Regulations.

      2

A1firm must:

1. (1)

   notify a new client of its categorisation as a retail client, professional client, or eligible counterparty in accordance with this chapter; and

2. (2)

   prior to the provision of services, inform a client in a durable medium about:

   1. (a)

      any right that client has to request a different categorisation; and

   2. (b)

      any limitations to the level of client protection that such a different categorisation would entail.

A retail client is a client who is not a professional client or an eligible counterparty.

If a firm provides services relating to a CTF (except for a personal recommendation relating to a contribution to a CTF), the firm'sclient is a retail client even if it would otherwise be categorised as a professional client or an eligible counterparty under this chapter.

A professional client is a client that is either a per se professional client or an elective professional client.

Each of the following is a per se professional client unless and to the extent it is an eligible counterparty or is given a different categorisation under this chapter:

1. (1)

   an entity required to be authorised or regulated to operate in the financial markets. The following list includes all authorised entities carrying out the characteristic activities of the entities mentioned, whether authorised by an EEA State or a third country and whether or not authorised by reference to a directive:

   1. (a)

      a credit institution;

   2. (b)

      an investment firm;

   3. (c)

      any other authorised or regulated financial institution;

   4. (d)

      an insurance company;

   5. (e)

      a collective investment scheme or the management company of such a scheme;

   6. (f)

      a pension fund or the management company of a pension fund;

   7. (g)

      a commodity or commodity derivatives dealer;

   8. (h)

      a local;

   9. (i)

      any other institutional investor;

2. (2)

   in relation to MiFID or equivalent third country business a large undertaking meeting two of the following size requirements on a company basis:

   1. (a)

      balance sheet total of EUR 20,000,000;

   2. (b)

      net turnover of EUR 40,000,000;

   3. (c)

      own funds of EUR 2,000,000;

3. (3)

   in relation to business that is not MiFID or equivalent third country business a large undertaking meeting any1of the following conditions:

   1. (a)

      a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) (or has had at any time during the previous two years) 1called up share capital or net assets 1of at least £51 million (or its equivalent in any other currency at the relevant time);

   2. (b)

      an 1undertaking that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:

      1. (i)

         a balance sheet total of EUR 12,500,000;

      2. (ii)

         a net turnover of EUR 25,000,000;

      3. (iii)

         an average number of employees during the year of 250;

   3. (c)

      a partnership or unincorporated association which has (or has had at any time during the previous two years) net assets of at least £5 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;1

   4. (d)

      a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) which has (or has had at any time during the previous two years) assets of at least £10 million (or its equivalent in any other currency at the relevant time) calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;1

   5. (e)

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

      1. (i)

         at least 50 members; and

      2. (ii)

         assets under management of at least £10 million (or its equivalent in any other currency at the relevant time);1

   6. (f)

      a local authority or public authority.1

4. (4)

   a national or regional government, a public body that manages public debt, a central bank, an international or supranational institution (such as the World Bank, the IMF, the ECP, the EIB) or another similar international organisation;

5. (5)

   another institutional investor whose main activity is to invest in financial instruments (in relation to the firm'sMiFID or equivalent third country business) or designated investments (in relation to the firm's other business). This includes entities dedicated to the securitisation of assets or other financing transactions.

1In relation to MiFID or equivalent third country business a local authority or a public authority is not likely to be a regional government for the purposes of COBS 3.5.2 R (4). 2In the FCA's opinion, a local authority may be a per se professional client for those purposes if it meets the test for large undertakings in COBS 3.5.2 R (2)2.

A firm may treat a client as an elective professional client if it complies with (1) and (3) and, where applicable, (2):

1. (1)

   the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");

2. (2)

   in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:

   1. (a)

      the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

   2. (b)

      the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;

   3. (c)

      the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;

   (the "quantitative test"); and

3. (3)

   the following procedure is followed:

   1. (a)

      the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;

   2. (b)

      the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and

   3. (c)

      the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.

If the client is an entity, the qualitative test should be performed in relation to the person authorised to carry out transactions on its behalf.

Before deciding to accept a request for re-categorisation as an elective professional client a firm must take all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the quantitative test.

1. (1)

   If a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for categorisation as an elective professional client , the firm must take the appropriate action.

2. (2)

   Where the appropriate action involves re-categorising that client as a retail client, the firm must notify that client of its new categorisation.

1. (1)

   An eligible counterparty is a client that is either a per se eligible counterparty or an elective eligible counterparty.

2. (2)

   A1client can only be an eligible counterparty in relation to eligible counterparty business (PRIN 1 Annex 1 R is an exception to this).1

Each of the following is a per se eligible counterparty (including an entity that is not from an EEA state that is equivalent to any of the following) unless and to the extent it is given a different categorisation under this chapter:

1. (1)

   an investment firm;

2. (2)

   a credit institution;

3. (3)

   an insurance company;

4. (4)

   a collective investment scheme authorised under the UCITS Directive or its management company;

5. (5)

   a pension fund or its management company;

6. (6)

   another financial institution authorised or regulated under EU2 legislation or the national law of an EEA State;

   2
7. (7)

   an undertaking exempted from the application of MiFID under either Article 2(1)(k) (certain own account dealers in commodities or commodity derivatives) or Article 2(1)(l) (locals) of that directive;

8. (8)

   a national government or its corresponding office, including a public body that deals with the public debt;

9. (9)

   a central bank;

10. (10)

    a supranational organisation.

A firm may treat a client as an elective eligible counterparty if:

1. (1)

   the client is an undertaking and:

   1. (a)

      is a per se professional client (except for a client that is only a per se professional client because it is an institutional investor under COBS 3.5.2 R (5)) and, in relation to business other than MiFID or equivalent third country business:1

      1. (i)

         is 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); or1

      2. (ii)

         meets the criteria in the rule on meeting two quantitative tests (COBS 3.5.2 R (3)(b)); or1

   2. (b)

      requests such categorisation and is an elective professional client, but only in respect of the services or transactions for which it could be treated as a professional client; and

2. (2)

   the firm has, in relation to MiFID or equivalent third country business, obtained express confirmation from the prospective counterparty that it agrees to be treated as an eligible counterparty.

A firm may obtain a prospective counterparty's confirmation that it agrees to be treated as an eligible counterparty either in the form of a general agreement or in respect of each individual transaction.

In the case of MiFID or equivalent third country business, in the event of a transaction where the prospective counterparties are located in different EEA States, the firm shall defer to the status of the other undertaking as determined by the law or measures of the EEA State in which that undertaking is established.

A firm must allow a professional client or an eligible counterparty to request re-categorisation as a client that benefits from a higher degree of protection.

A firm may, either on its own initiative or at the request of the client concerned:

1. (1)

   treat as a professional client or a retail client a client that might otherwise be categorised as a per se eligible counterparty;

2. (2)

   treat as a retail client a client that might otherwise be categorised as a per se professional client;

and if it does so, the client will be re-categorised accordingly. Where applicable, this re-categorisation is subject to the requirement for a written agreement in COBS 3.7.5 R.

If a per se eligible counterparty requests treatment as a client whose business with the firm is subject to conduct of business protections, but does not expressly request treatment as a retail client and the firm agrees to that request, the firm must treat that eligible counterparty as a professional client.

1. (1)

   If, in relation to MiFID or equivalent third country business a per se professional client or a per se eligible counterparty requests treatment as a retail client, the client will be classified as a retail client if it enters into a written agreement with the firm to the effect that it will not be treated as a professional client or eligible counterparty for the purposes of the applicable conduct of business regime.

2. (2)

   This agreement must specify the scope of the re-categorisation, such as whether it applies to one or more particular services or transactions, to one or more types of product or transaction or to one or more rules.

A firm must implement appropriate written internal policies and procedures to categorise its clients.

1. (1)

   A firm must make a record of the form of each notice provided and each agreement entered into under this chapter. This record must be made at the time that standard form is first used and retained for the relevant period after the firm ceases to carry on business with clients who were provided with that form.

2. (2)

   A firm must make a record in relation to each client of:

   1. (a)

      the categorisation established for the client under this chapter, including sufficient information to support that categorisation;

   2. (b)

      evidence of despatch to the client of any notice required under this chapter and if such notice differs from the relevant standard form, a copy of the actual notice provided; and

   3. (c)

      a copy of any agreement entered into with the client under this chapter.

   This record must be made at the time of categorisation and should be retained for the relevant period after the firm ceases to carry on business with or for that client.

3. (3)

   The relevant periods are:

   1. (a)

      indefinitely, in relation to a pension transfer, pension conversion, 1pension opt-out or FSAVC;

   2. (b)

      at least five years, in relation to a life policy or pension contract;

   3. (c)

      five years in relation to MiFID or equivalent third country business; and

   4. (d)

      three years in any other case.