COB 2.2 COB 2.2 Overview
COB 2.2 Guidance1. This chapter sets out the manner in which an
Authorised Firmis required to classify its Clients, as well as good practice it may follow. The scope of application of the Rulebook modules will vary depending on whether the Personwith or for whom an Authorised Firmis carrying on Financial Servicesis classified as a Retail Client, Professional Clientor Market Counterparty.
Risk based approach2. The Rules in this chapter reflect the DFSA's risk based approach to regulation. Therefore, to achieve the underlying objective of client classification, which is to ensure that firms provide to their clients an appropriate level of regulatory protection, the Rules, for example:a. take into account the higher degree of knowledge and experience ('expertise') and resources available to certain institutional and wholesale clients (see Rule 2.3.4);b. take into account who primarily bears the risk associated with a particular type of a
Financial Service(see Rule 2.3.5);c. take into account the type of Personsto whom a Financial Serviceis usually provided (see Rules 2.3.6, 2.3.7 and 2.3.8);d. provide flexibility for an Authorised Firmto rely on a client classification made by its head office or a Groupmember, provided risks associated with such reliance are effectively addressed (see Rules 2.4.4 and 3.3.4);e. provide flexibility for group-based Financial Servicesto be provided where risks associated with such services are effectively addressed (see Rule 2.4.5); andf. provide flexibility for look-through arrangements where reliance can be placed on expertise and resources available to a Client, such as at its Holding Companyor controller level (see Rule 2.3.8(2)).
Types of clients3. There are three types of
Clients:a. a Retail Client;b. a Professional Client; orc. a Market Counterparty.However, a Personmay be classified as a Professional Clientin relation to one Financial Serviceor financial product, but a Retail Clientin relation to another. Similarly, a Personclassified as a Professional Clientmay be classified as a Market Counterpartyin relation to some Financial Servicesor financial products but not others (see paragraphs 8 and 9 below).
Retail clients4. A
Personwho cannot be classified as a Professional Clientor Market Counterpartyin accordance with the Rules is required to be classified as a Retail Client(see Rule 2.3.2). If an Authorised Firmchooses to provide Financial Servicesto a Personas a Retail Client, it may do so by simply classifying that Personas a Retail Clientwithout having to follow any further procedures as required for classifying Personsas Professional Clientsor Market Counterparties.
Professional Clients5. There are three routes through which a
Personmay be classified as a Professional Client:a. 'deemed' Professional Clientsunder Rule 2.3.4. As these Personshave significant assets under their control, and, therefore, either possess, or have the resources to obtain, the necessary expertise to manage such assets, they can be classified as 'deemed' Professional Clientswithout having to meet any additional net asset and expertise criteria;b. 'service-based' Professional Clientsunder Rule 2.3.5, Rule 2.3.6 or Rule 2.3.6A. Due to their inherent nature, certain Financial Servicesactivities such as credit provided to an Undertakingfor business purposes ('commercial credit'),. . . advisory and arranging activities relating to corporate structuring and financing and crowdfunding services provided to a Body Corporatethat is a borrower or an Issuer, are generally provided to Personswith sufficient expertise to obtain such services or are of relatively low risk to the Client. Therefore, a Personto whom such a Financial Service is provided can be classified as a 'service-based' Professional Client; andc. 'assessed' Professional Clientsunder Rules 2.3.7 and 2.3.8. These Personsare either individuals or Undertakings which can be classified as a Professional Clientonly if they meet the specified net assets and expertise requirements set out in Rules 2.4.2 and 2.4.3.Investment vehicles and family member joint account holders of individuals who are themselves Professional Clientscan also be classified as Professional Clientswhere certain conditions are met — see Rule 2.3.7(2) and (3).
Market Counterparties6. A 'deemed'
Professional Clientunder Rule 2.3.4 may be classified as a Market Counterpartyprovided the Authorised Firmhas complied with the procedures set out in Rule 2.3.9(2). When an Authorised Firmcarries on Financial Serviceswith a Market Counterparty, only a limited number of requirements in the Rulebook modules apply to such firms. This is because an Authorised Firmtransacts with a Market Counterpartyon an equal footing and, therefore, most of the client protection provisions in the Rulebook modules are not needed to protect such a party.7. When an Authorised Firmcarries on Financial Serviceswith another Authorised Firmor a Regulated Financial Institution, such services would generally qualify as Financial Servicesthat can be carried on with a Market Counterparty(provided the procedures in Rule 2.3.9(2) are met). Examples of such services include:a. providing reinsurance or insurance management services to an insurer; andb. providing one or more Financial Services of custody, managing assets, or fund administration services to a fund manager, collective investment fund or a pension fund.Such activities would not attract most of the client protection provisions contained in the Rulebook modules for the reasons set out under item 6 above.
Multiple classifications8. In some circumstances, an
Authorised Firmmay provide a Financial Serviceto a Personwho qualifies under more than one category of Professional Client. For example, a Clientto whom an Authorised Firmprovides commercial credit or corporate structuring and financing advice or arranging credit, in the circumstances specified in Rule 2.3.5 or Rule 2.3.6, may also be a 'deemed' Professional Clientunder Rule 2.3.4. In such circumstances, an Authorised Firmcan classify such a Personas a 'deemed' Professional Client, in which case the firm may also be able to classify that Clientas a Market Counterpartyfollowing the procedures in Rule 2.3.9(2).9. It is also possible that an Authorised Firmmay provide a range of Financial Servicesto a single Client. If the Clientcan be classified as a Professional Clientwith regard to certain Financial Services(such as Providing Creditunder the requirements in Rule 2.3.5, and similarly providing corporate structuring and financing advice or arranging credit under Rule 2.3.6), and not so with regard to other Financial Services, an Authorised Firmneeds to take care that the Clientis appropriately and correctly classified with respect to each Financial Service. This may mean that the same Clientmay receive both Professional Clienttreatment with regard to some Financial Servicesand Retail Clienttreatment with regard to other Financial Services. Where a Clientcannot be classified as a Professional Clientwith regard to some Financial Services, the Authorised Firmcan only provide such services to the Clientif it has a Retail Endorsementon its Licence.
Client classifications and Client Agreements10. Rule 2.4.4 provides a degree of flexibility for an
Authorised Firmwhich is a Branchoperation or member of a Group to rely on client classifications made by its head office or any other branch of the same legal entity, or by a member of its Group. Where such reliance is placed, the Authorised Firmshould be able to demonstrate to the satisfaction of the DFSAthat the reliance is reasonable because the applicable requirements are substantially similar and, where this is not the case, any identified differences (i.e. gaps) are suitably addressed to enable the firm to meet its obligations relating to client classification under this chapter.11. It is also possible that an Authorised Firmwhich is a member of a Groupmay have some Clientsto whom it provides Financial Servicesas a Retail Client, whilst other Groupmembers may provide Financial Servicesto the same Clientas a Professional Client. While an Authorised Firmmay rely on the client classifications made by a Groupmember under Rule 2.4.4, it is the responsibility of the firm to ensure that the correct classification is adopted by it for the purposes of the Financial Servicesit provides to the Client(see Rule 2.4.4). See also Rule 3.3.4, which provides a degree of flexibility for an Authorised Firmwhich is a Branchto rely on a Client Agreementmade by its head office or any other branch of the same legal entity, or by a member of the Group, provided the requirements in that Rule are met.
Group clients12. Rule 2.4.5 is designed to provide a greater degree of flexibility to an
Authorised Firmproviding Financial Servicesto a Clientin a Groupcontext, where more than one member of the Groupmay be providing Financial Serviceswhich form a bundle of services. Each Groupmay have different arrangements to provide a number of services to a Client. Depending on the nature of the arrangement the Groupadopts, and the Financial Servicesinvolved, risks associated with such arrangements could also differ. Therefore, Rule 2.4.5 sets out the outcomes which need to be achieved by an Authorised Firmwhere it participates in a Grouparrangement under which a bundle of Financial Servicesis provided to a Clientby different members within its Group. See also Rule 3.3.4, which provides a degree of flexibility for an Authorised Firmparticipating in an arrangement under which a bundle of Financial Servicesis provided to a Clientwhere reliance can be made on a Client Agreementexecuted by a Groupmember, provided the requirements in that Rule are met.
Transitional Rules13. Section 2.6 contains provisions designed to enable
Authorised Firmsto make a smooth transition to the new client classification regime that came into force on 1 April 2015. These Rules, among other things:a. keep in force the client classifications made under the old client classification regime for the Financial Servicesthat were provided to those Clientsunder that regime;b. provide for the increased asset threshold of $1 million to come into effect on 1 April 2016; andc. retain the asset threshold at $500,000 until 1 April 2016.