Briefing: Client Categorisation: Important Changes: Consultation Paper (CP 25/36)
Executive Summary
The FCA’s Consultation Paper (CP 25/36) proposes significant changes to client categorisation, affecting how firms classify and manage professional clients. Key changes include the removal of financial thresholds for small entities, a simplified £10m investable assets test, enhanced qualitative assessments, and new record-keeping and reassessment obligations. Firms should begin reviewing their client categorisation processes and prepare for a comprehensive back book review once the rules are finalised.
Background
The FCA recently released a consultation paper (CP 25/36[1]) on changes to client categorisation, and this note summarises the key proposals, timelines, actions we recommend firms take and interaction with other policy areas. In this note, we are just focusing on the client categorisation proposals and not those that relate to conflicts of interest.
Key Proposals
(a) Removing the financial threshold for small entities to be categorised as per-se professional clients
The FCA previously permitted large undertakings1 and certain smaller entities (e.g. companies and partnerships with net assets of at least £5m) to be categorised as per-se professional clients. However, the FCA is proposing that whilst the threshold for larger undertakings is retained (although switching € for £[2]), it is proposing to remove the lower threshold for smaller entities (except for the numerical test for pension schemes). This will have the effect of meaning that it will only be large entities or entities which are authorised or regulated in the UK or abroad, or whose main business is investing in designated investments/financial instruments that can be treated as per se professional clients. All other clients will be required to go through the Elective Professional Client procedures.
(b) A simple £10m of investable assets [3] test
Previously, firms needed to conduct both a qualitative and a quantitative test. However, the FCA is proposing that no qualitative test is needed in situations where the client has investable assets over £10m. Firms will still need to comply with the other rules, which we have explained further below, and clients with investable assets of £10m or more will still need to opt out on an informed basis to Retail Client protections.
(c) Enhanced Qualitative Assessment Expectations
The FCA is requiring firms to consider a defined set of relevant factors when undertaking a holistic qualitative assessment to determine whether a client meets the threshold to be categorised as an elective professional client. In addition, the FCA has provided helpful guidance to support firms when evaluating and weighing up the evidence obtained through the assessment of these defined factors.
(d) Informed consent and positioning the opt-up
The FCA is proposing rules to ensure that firms do not incentivise, force or cajole Clients into opting out of Retail protections. Informed consent must be obtained. For example, the FCA is requiring firms to present this as an optional decision. Firms can still decide not to do business with these clients if they do not meet the relevant elective professional criteria.
(e) Back book review
The FCA is requiring a back-book review of all current clients who have been categorised under the “old” rules. The review must, in effect, either recategorise all clients or confirm that the previous process was consistent with the new rules. Any remediation must occur within 12 months from the date these new rules become effective. This means that there may be situations where current clients no longer meet the criteria to be an Elective Professional Client, and the Firm will need to cease doing business with them.
(f) Record keeping
The FCA is proposing some helpful and clear recordkeeping obligations for firms to assist in evidencing compliance with these enhanced rules.
(g) Reassessment timelines
Currently, Clients are required to inform the Firm if the circumstances have changed, which may cause the previous assessment to be invalid. The FCA is proposing that firms have an obligation to reassess a client’s categorisation as an elective professional if they become aware, or should reasonably suspect, that a client no longer meets the threshold of a professional client. This may be the case, for example, if the firm has had no interaction with the client who is a natural person for two years or more, so it could not reasonably assume their circumstances remain unchanged.
The FCA has not proposed a provisional timeline for when these rules will come into effect. However, given the consultation closes in early February, our expectation is that they would come into effect no earlier than July 2026.
Suggested Actions
Whilst this is still at the Policy Statement phase, the FCA’s direction of travel is clear, and we would suggest that firms undertake the following actions:
Opt-Up Process: Immediately adopt the FCA’s new Enhanced Qualitative Assessment Expectations and apply this to new Clients. This will mean updating internal policies, designing new client questionnaires, enhancing the assessment methodology and designing new record-keeping arrangements.
Scope of Permission: For firms without Retail Permission, it will be important to conduct analysis on your existing clients to see if there is a risk of losing substantial amounts of business that would warrant seeking a Variation of Permission to add this permission.
Sample check previous process: It would be beneficial at this stage to sample check historical processes against these new rules to forearm yourself with the scale of any remediation exercise that is required by [date].
Interaction with other policy areas
(a) Financial Promotion Rules
There are various rules and guidelines in COBS on financial promotions whose applicability turns on whether a client is a Professional Client. There is no suggestion in the Consultation Paper that the FCA is proposing some other definition.
(b) AIFMD
The FCA is proposing to amend COBS to make clear that, in the context of the manager of an AIF, the investors are not clients of the AIFM. However, COBS 18.5A.11 requires that full-scope AIFMs make available additional information to Retail Clients. Therefore, notwithstanding the amendments to COBS, AIFMs will still need to amend their investor categorisation process. In addition, the AIFM Regulations make reference to the definition of Professional client in Article 2(1)(8) and Schedule One of MiFIR. The FCA cannot directly amend primary legislation, but in CP 25/36, it has asked whether Firms would benefit if this definition were aligned. Watch this space.
(c) Consumer Duty
The Consumer Duty applies to the opt-up process of Retail Clients to Elective Professional Clients. Therefore, when designing new processes to comply with CP xx/xx, firms will need to ensure that they also comply with the Consumer Duty. In addition, it applies to business conducted with Retail Client, and it may well be that firms are brought within the scope of the Duty by virtue of these definition changes.
[1] net designated investments and/or cash (e.g. stocks, funds, debt instruments, derivatives, etc.)
[2] a large undertaking meeting two of the following size requirements on a company basis: (a) balance sheet total of £20,000,000; (b) net turnover of £40,000,000; (c) own funds of £2,000,000
[3] https://www.fca.org.uk/publication/consultation/cp25-36.pdf
