SIFA 9.5 Client classification
You need to take reasonable steps to establish the classification of each client that you intend to conduct investment business with or for, and classify them appropriately. Provisions in MCOB relate to customers and in ICOB relate to retail customers and commercial customers, so firms must be guided by the specific provisions for advising and selling in each sourcebook.
Why do you need to classify your customers?
When and how should you classify your clients?
You must classify your clients before conducting any investment business with them, by taking reasonable steps to establish which category is most appropriate for them (COB 4.1.4 R).
The three client categories are listed below: (the full definitions are in the Handbook Glossary) |
Likelihood of a small personal investment firm dealing with each type of customer: |
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Private customer: |
Private customers are mainly private individuals. They are given additional protections under COB rules covering financial promotions, know your customer and suitability. |
Most of your clients will fall into this category |
Intermediate customer: |
Examples of intermediate customers could include individuals with substantial investment experience and businesses for whom the firm is arranging group schemes. |
Possibly |
Market counterparty: |
An example of a market counterparty is a central bank. A large intermediate customer may be classified as a market counterparty in some circumstances. |
Very unlikely |
Other considerations when classifying customers:
Very occasionally, customers who would normally be classed as one type of customer can be classed differently. To do this, you are required to obtain written consent from your customer. For example, an expert private customer could be classed as an intermediate customer. But this is only if you have taken reasonable care to determine that they have sufficient experience and understanding of the relevant products and services.
If you propose classifying an individual as an intermediate customer, COB 4.1.9 R requires you to give them a written warning to say that they would lose some protections under the regulatory system. You should keep a copy of this warning letter. You must also give your client sufficient time to consider the implications of being classified as an intermediate customer and obtain their written consent. The contents of the warning are set out at COB 4.1.11 E. This should include advising the client that they will lose the protection afforded by the rules in COB 5.1: Advising on packaged products.
Where are the relevant Handbook sections?
There are two relevant sections:
- the rules and guidance in section 4.1 of COB; and
- classifying clients under a different category and when to review the classifications in COB 4.1.9 R to COB 4.1.15 R.
Record keeping
You must keep a record of the classification you make for each customer and enough information to support the classification (COB 4.1.16 R). Listed below are details of how long you must keep the record. Each retention period starts from when the customer ceases to be a customer of your firm. These are minimum requirements and you may decide to keep material for longer.
Period of retention: |
When client classification relates to: |
Indefinitely |
Pension transfer, pension opt-out or FSAVC |
At least six years |
Life policy or pension contract |
At least three years |
In any other case |
The following sections of the Guide are also relevant: |
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'Terms of business' - Chapter 9.6 |
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'Know your customer' - Chapter 9.8 |
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'Suitability' - Chapter 9.9 |
If you do mortgage and general insurance business you should also refer to MOGI 2 and GIGI 3. |
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