Entire Section

  • COB 2.3 COB 2.3 Types of Clients

    • COB 2.3.1 COB 2.3.1

      (1) An Authorised Firm must, before carrying on a Financial Service with or for a Person, classify that Person as a:
      (a) Retail Client;
      (b) Professional Client; or
      (c) Market Counterparty,
      in accordance with the requirements in this chapter.
      (2) An Authorised Firm may classify a Person as a different type of a Client for different Financial Services or financial products that are to be provided to such a Client.
      (3) If an Authorised Firm is aware that a Person ('the agent'), with or for whom it is intending to carry on a Financial Service is acting as an agent for another Person ('the principal') in relation to the service then, unless the agent is another Authorised Firm or a Regulated Financial Institution, the Authorised Firm must treat the principal as its Client in relation to that service.
      (4) If an Authorised Firm intends to provide any Financial Service to a trust, it must, unless otherwise provided in the Rules, treat the trustee of the trust, and not the beneficiaries of the trust, as its Client.
      Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

      • COB 2.3.1 Guidance

        1. When a Person becomes a Client of an Authorised Firm is a question of fact that needs to be addressed by the firm in light of the nature of the relevant Financial Service (or financial product) involved, and the relations and interactions which the firm has with that Person. For instance, in certain types of Financial Services (such as corporate advisory services), a number of conversations (such as marketing and promotional activities) may occur between an Authorised Firm and a potential client before it may appear to the firm on a reasonable basis that the Person is likely to obtain a Financial Service from the firm, at which point a client classification is required.
        2. Given the many different circumstances in which interactions between a potential client and an Authorised Firm take place, it is not possible to include a more specific requirement than the current provision which requires the client classification to occur "before" a firm provides a Financial Service to a Person — see Rule 2.3.1(1). This provides an Authorised Firm flexibility to determine when exactly it would be appropriate for the firm to undertake client classification.
        3. The DFSA expects Authorised Firms to adopt practices which are consistent with the underlying intent of the client classification provisions, which is to provide Clients an appropriate level of regulatory protection in light of the resources and expertise available to such Clients. Therefore, as soon as it is reasonably apparent that a potential customer is likely to obtain a Financial Service from the firm, it would need to undertake the client classification process relating to that customer (unless such a customer is classified as a Retail Client for the purposes of the Rules — see Rule 2.3.2).
        4. For example, an Authorised Firmis not expected to undertake advising or arranging activities relating to a Financial Service or financial product which is suited to Professional Clients (such as complex derivatives) with a potential customer without having a reasonable basis to consider that such a customer has sufficient knowledge and experience relating to the relevant service or product. While a formal client classification may not be needed at the early stages of interaction with a potential customer, a firm is expected to form a reasonable view about the professional status of a potential customer when exposing such a customer to Financial Services or financial products (such as investments in a Qualified Investor Fund) which are intended for Professional Clients.
        5. Rule 2.3.1(2) allows an Authorised Firm to classify a Client as a Retail Client in respect of some Financial Services and a Professional Client in respect of other Financial Services. For example, a Client classified as a 'service-based' Professional Client under Rule 2.3.5 for the Financial Service of Providing Credit may not necessarily meet the criteria to be classified as an 'assessed' Professional Client under Rule 2.3.7 or Rule 2.3.8 in respect of any other Financial Service to be provided to that Client. Therefore, such a Client would need to be classified as a Retail Client with respect to Financial Services other than Providing Credit.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • Retail Clients

      • COB 2.3.2

        An Authorised Firm must classify as a Retail Client any Person who is not classified as a Professional Client or a Market Counterparty.

        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
        [Amended] DSFA RM185/2016 (Made 7th December 2016). [VER28/02-17]

    • Professional Clients

      • COB 2.3.3 COB 2.3.3

        (1) An Authorised Firm may classify a Person as a Professional Client if that Person:
        (a) meets the requirements to be:
        (i) a "deemed" Professional Client pursuant to Rule 2.3.4;
        (ii) a "service-based" Professional Client pursuant to Rule 2.3.5, Rule 2.3.6 or Rule 2.3.6A; or
        (iii) an "assessed" Professional Client pursuant to either Rule 2.3.7 or Rule 2.3.8; and
        (b) has not opted-in to be classified as a Retail Client in accordance with the requirements in Rule 2.4.1.
        (2) If an Authorised Firm becomes aware that a Professional Client no longer fulfils the requirements to remain classified as a Professional Client, the Authorised Firm must, as soon as possible, inform the Client that this is the case and the measures that are available to the firm and the Client to address that situation.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
        [Amended] DFSA RMI202/2017 (Made 14th June 2017). [VER29/08-17

        • COB 2.3.3 Guidance

          The measures referred to in Rule 2.3.3(2) may include classifying the Client as a Retail Client with respect to any future Financial Services to be provided to that Client or, if the firm does not have a Retail Endorsement, discontinuing the provision of Financial Servicesto that Client.

          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • 'Deemed' Professional Clients

      • COB 2.3.4 COB 2.3.4

        (1) For the purposes of Rule 2.3.3(1)(a)(i), a Person is a 'deemed' Professional Client if that Person is:
        (a) a supranational organisation whose members are either countries, central banks or national monetary authorities;
        (b) a properly constituted government, government agency, central bank or other national monetary authority of any country or jurisdiction;
        (c) a public authority or state investment body;
        (d) an Authorised Market Institution, Regulated Exchange or regulated clearing house;
        (e) an Authorised Firm, a Regulated Financial Institution or the management company of a regulated pension fund;
        (f) a Collective Investment Fund or a regulated pension fund;
        (g) a Large Undertaking as specified in (2);
        (h) a Body Corporate whose shares are listed or admitted to trading on any exchange of an IOSCO member country;
        (i) any other institutional investor whose main activity is to invest in financial instruments, including an entity dedicated to the securitisation of assets or other financial transactions;
        (j) a trustee of a trust which has, or had during the previous 12 months, assets of at least $10 million; or
        (k) a holder of a licence under the Single Family Office Regulations with respect to its activities carried on exclusively for the purposes of, and only in so far as it is, carrying out its duties as a Single Family Office.
        (2) A Person is a Large Undertaking if it met, as at the date of its most recent financial statements, at least two of the following requirements:
        (a) it has a balance sheet total of at least $20 million;
        (b) it has a net annual turnover of at least $40 million; or
        (c) it has own funds or called up capital of at least $2 million.
        (3) In (2):
        (a) a 'balance sheet total' means the aggregate of the amounts shown as assets in the balance sheet before deducting both current and long-term liabilities;
        (b) 'own funds' mean cash and investments as shown in the balance sheet; and
        (c) 'called up capital' means all the amounts paid-up on allotted shares, less any amounts owing on allotted shares.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.3.4 Guidance

          1. Although an Authorised Firm is not required to undertake a detailed assessment of a 'deemed' Professional Client's expertise or net assets (as is required in the case of an 'assessed' Professional Client), a firm still needs to have a reasonable basis for classifying a Person as falling within the list of 'deemed' Professional Clients in Rule 2.3.4(1) or (2). For example, in order to verify whether a trustee of a trust can be classified as a 'deemed' Professional Client under Rule 2.3.4(1)(j), an Authorised Firm should obtain a verified copy of the most recent balance sheet of the relevant trust.
          2. An individual trustee on the board of a trust where the trust has at least $10 million assets under its control can qualify as a 'deemed' Professional Client under Rule 2.3.4(1)(j) but only in relation to that particular trust.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • 'Service-based' Professional Clients

      • Guidance

        Rule 2.3.5, Rule 2.3.6 and Rule 2.3.6A each set out different circumstances in which a Person can be classified as a 'service-based' Professional Client. The professional status allowed under these three 'service-based' Professional Client categories can only be used for those three Financial Services and not for any other Financial Service provided to the same Client. If such a Client also obtains other Financial Services from the same firm, unless the Client can qualify either as a 'deemed' or 'assessed' Professional Client, that Client will need to be classified as a Retail Client for those other Financial Services.

        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
        [Amended] DFSA RMI202/2017 (Made 14th June 2017). [VER29/08-17]

      • COB 2.3.5 COB 2.3.5

        (1) For the purposes of Rule 2.3.3(1)(a)(ii), a Person is a 'service-based' Professional Client if:
        (a) the Financial Service provided to that Person is Providing Credit;
        (b) the Person is an Undertaking; and
        (c) the Credit Facility in question is provided for use in the business activities of:
        (i) the Person;
        (ii) a controller of the Person;
        (iii) any member of the Group to which the Person belongs; or
        (iv) a joint venture of a Person referred to in (i)–(iii).
        (2) In (1)(c)(ii), a controller is an individual who:
        (a) owns a majority of the shares of the Undertaking;
        (b) is able to appoint or remove a majority of the board members of the Undertaking; or
        (c) controls a majority of the voting rights of the Undertaking (or that of a Holding Company of the Undertaking).
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.3.5 Guidance

          1. Rule 2.3.5(1)(c) enables an Authorised Firm to classify an Undertaking as a Professional Client for the purposes of Providing Credit for businesses purposes, not only for the Undertaking itself, but also for its related entities (such as a controller or member of its Group) as specified in that Rule, provided that the Undertaking has not opted-in to be classified as a Retail Client.
          2. It is possible that an Undertaking obtaining credit may also fall within the category of a 'deemed' Professional Client under Rule 2.3.4 — see, for example, a Large Undertaking under Rule 2.3.4(2). An Authorised Firm may Provide Credit to such a Person without having to meet the requirements in Rule 2.3.5.
          3. Joint ventures are generally contractual arrangements under which parties contribute their assets and/or expertise to develop or to undertake specified business activities. An Undertaking can be set up by a number of joint venture partners for obtaining credit for use in the ordinary course of their joint venture business. Although joint venture partners would themselves not have a controlling interest in the joint venture, as credit is obtained for use in the joint venture business, they have the benefit of the professional client status available to the Undertaking under Rule 2.3.5.
          4. While an Authorised Firm is not required to undertake a detailed assessment of a 'service-based' Professional Client's expertise or net assets (as required in the case of an 'assessed' Professional Client), a firm still needs to have a reasonable basis for classifying a Person as falling within the circumstances specified in this Rule (or Rule 2.3.6). For example, to verify that an Undertaking is obtaining credit for use in the business of its Holding Company or another member of its Group, a firm would need some documentation to demonstrate the Group member relationship. Such documents may include a diagram of the Group structure and copies of certificates of incorporation and shareholdings of the relevant companies.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

      • COB 2.3.6 COB 2.3.6

        (1) For the purposes of Rule 2.3.3(1)(a)(ii), a Person is a 'service-based' Professional Client if:
        (a) the Financial Service provided to that Person is "Advising on Financial Products", "Arranging Deals in Investments", or "Arranging Credit and Advising on Credit"; and
        (b) the service in (a) is provided for the purposes of 'corporate structuring and financing'.
        (2) In (1), 'corporate structuring and financing':
        (a) includes:
        (i) providing advice relating to an acquisition, disposal, structuring, restructuring, financing or refinancing of a corporation or other legal entity; or
        (ii) arranging credit for a purpose referred to in (i); and
        (b) excludes any Advising on Financial Products, Arranging Deals in Investments or Arranging Credit and Advising on Credit, provided to an individual for the purposes of, or in connection with, the management of that individual's investments.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
        [Amended] DSFA RM185/2016 (Made 7th December 2016). [VER28/02-17]

        • COB 2.3.6A COB 2.3.6A

          For the purposes of the reference in Rule 2.3.3(1)(a)(ii) to this Rule, a Person is a 'service-based' Professional Client if:

          (a) the Financial Service being provided to the Person is Loan Crowdfunding or Investment Crowdfunding; and
          (b) the Person is a Body Corporate and is using the service to borrow funds from lenders or to obtain funds from investors.
          [Added] DFSA RMI202/2017 (Made 14th June 2017). [VER29/08-17]

          • COB 2.3.6 Guidance

            1. This Rule enables an Authorised Firm to classify a Person obtaining advice or arranging credit for the purposes of corporate structuring and financing as a Professional Client based on the nature of such activities, which are generally sought by Persons with greater expertise and resources than Retail Clients. Such advice and arranging occurs in the context of takeovers and merger activities and capital raising activities of companies, including any Initial Public Offerings or other offers of securities for capital raising purposes.
            2. If a Client seeking corporate structuring and financing services is also a Person who falls within the category of a 'deemed' Professional Client under Rule 2.3.4, an Authorised Firm may provide to such a Person those services without having to meet the requirements in Rule 2.3.6.
            3. Under Rule 2.3.6(2)(b), any advisory and arranging services given to an individual who is a wealth management Client for the purposes of their investment activities or portfolio management are excluded because such Clients are not necessarily Professional Clients. Therefore, for such a Client to qualify as a Professional Client, he would need to be an 'assessed' Professional Client, which requires an assessment of his net assets and expertise against the requirements in Rules 2.4.2 and 2.4.3.
            Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • 'Assessed' Professional Clients

      • Individuals

        • COB 2.3.7 COB 2.3.7

          (1) For the purposes of Rule 2.3.3(1)(a)(iii), an individual is an 'assessed' Professional Client if:
          (a) the individual has net assets of at least $1 million calculated in accordance with Rule 2.4.2; and
          (b) either:
          (i) the individual is, or has been, in the previous two years, an Employee in a relevant professional position of an Authorised Firm or a Regulated Financial Institution; or
          (ii) the individual appears, on reasonable grounds, to have sufficient experience and understanding of relevant financial markets, products or transactions and any associated risks, following the analysis set out in Rule 2.4.3.
          (2) An Authorised Firm may classify any legal structure or vehicle, such as an Undertaking, trust or foundation, which is set up solely for the purpose of facilitating the management of an investment portfolio of an individual assessed as meeting the requirements in (1) as a Professional Client.
          (3) An Authorised Firm may also classify as a Professional Client another individual (the "joint account holder") who has a joint account with an individual assessed as meeting the requirements in (1) (the "primary account holder") if:
          (a) the joint account holder is a family member of the primary account holder;
          (b) the account is used for the purposes of managing investments for the primary account holder and the joint account holder; and
          (c) the joint account holder has confirmed in writing that investment decisions relating to the joint account are generally made for, or on behalf of, him by the primary account holder.
          (4) In (3), a 'family member' of the primary account holder is:
          (a) his spouse;
          (b) his children and step-children, his parents and step-parents, his brothers and sisters and his step-brothers and step-sisters; and
          (c) the spouse of any individual within (b).
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

          • COB 2.3.7 Guidance

            1. Under Rule 2.6.3, the net asset test referred to in Rule 2.3.7(1)(a) remains $500,000 until 1 April 2016.
            2. An individual can generally only be classified as a Professional Client if he meets the requirements in Rule 2.3.7(1) or (3). This is because all the other criteria relevant to Professional Clients in this chapter apply to Undertakings and not to individuals, with the possible exception of a trustee of a trust under Rule 2.3.4(j).
            3. An individual classified as a Professional Client may operate a joint account with more than one family member. Under the general principle of interpretation that the singular includes the plural, provided each such family member meets the requirements set out in Rule 2.3.7(3), they can all be classified as Professional Clients.
            4. A legal structure or vehicle of a Professional Client, which is itself classified as a Professional Client under Rule 2.3.7(2), does not have a right to opt-in as a Retail Client, as that right belongs to the Professional Client for whose purposes the vehicle is set up.
            5. A family member of a Professional Client classified as a Professional Client under Rule 2.3.7(3) also does not per se have a right to opt-in to be classified as a Retail Client with regard to the operation of the joint account. However, such an individual has the right to withdraw his confirmation given under Rule 2.3.7(3)(c) to have decisions on behalf of him made by the Professional Client who is the primary account holder of the joint account. An Authorised Firm must ensure that once such a withdrawal is made, the withdrawing individual is no longer classified as a Professional Client. The joint account arrangements would also need to be reviewed as the primary account holder would no longer have the power to make decisions on behalf of the withdrawing individual.
            6. In the case of a joint account operated by a primary account holder who is a parent or legal guardian of a minor, the procedures for obtaining the formal consent referred to in Rule 2.3.7(3)(c) would generally not be required, as such parent or guardian would have the authority to act for the minor where he is the joint account holder.
            Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

      • Undertakings

        • COB 2.3.8 COB 2.3.8

          (1) For the purposes of COB Rule 2.3.3(1)(a)(iii), an Undertaking is an 'assessed' Professional Client if the Undertaking:
          (a) has own funds or called up capital of at least $1 million; and
          (b) appears, on reasonable grounds, to have sufficient experience and understanding of relevant financial markets, products or transactions and any associated risks, following the analysis set out in COB Rule 2.4.3.
          (2) An Authorised Firm may also classify an Undertaking as a Professional Client if the Undertaking has:
          (a) a controller;
          (b) a Holding Company;
          (c) a Subsidiary; or
          (d) a joint venture partner,
          who meets the requirements to be classified as an 'assessed' Professional Client pursuant to either COB Rule 2.3.7(1)(a) and (b)(ii) or COB Rule 2.3.8(1) as applicable, or a 'deemed' Professional Client pursuant to COB Rule 2.3.4(1).
          (3) For the purposes of classifying an Undertaking that is an industry or professional body or association as an ‘assessed’ Professional Client, the requirement in (1)(a) does not apply.
          (4) In this Rule:
          (a) the terms 'own funds' and 'called up capital' in (1)(a) have the meaning given under COB Rule 2.3.4(3)(b) or (c) as the case may be; and
          (b) the term 'controller' in (2)(a) means an individual who meets the criteria in COB Rule 2.3.5(2).
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
          [Amended] DFSA RMI267/2020 (Made 26th February 2020). [VER36/04-20]

          • COB 2.3.8 Guidance

            1. Under COB Rule 2.6.3, the asset test referred to in COB Rule 2.3.8(1)(a) remains $500,000 until 1 April 2016.
            2. Where an Authorised Firm proposes to classify an Undertaking as a Professional Client under (2), the firm must assess whether the Person on whom reliance is placed, i.e. a Person referred to in (2)(a) to (d) as is relevant, meets the Professional Client criteria, unless that Person falls within a category of 'deemed' Professional Client.
            3. Where an Undertaking is set up by partners in a joint venture for the purposes of their joint venture, the Undertaking itself can be treated as a Professional Client provided a joint venture partner meets the Professional Client criteria (see Guidance paragraph 3 under COB Rule 2.3.5 for a description of a joint venture). To be able to rely on a joint venture partner's Professional Client status, such a partner should generally be a key decision maker with respect to the business activities of the joint venture, and not just a silent partner.
            4. An Authorised Firm is not required to assess if an Undertaking meets the asset test referred to in COB Rule 2.3.8(1)(a), where the Undertaking is an industry or professional body or association i.e. a body or association that represents a particular industry sector or that oversees, or provides services to, members of a particular profession. The Authorised Firm will, however, still need to assess if the Undertaking meets the knowledge and experience requirement in COB Rule 2.3.8(1)(b).
            Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
            [Amended] DFSA RMI267/2020 (Made 26th February 2020). [VER36/04-20]

      • Market Counterparties

        • COB 2.3.9 COB 2.3.9

          (1) An Authorised Firm may classify a Person as a Market Counterparty if:
          (a) that Person is:
          (i) a 'deemed' Professional Client pursuant to COB Rule 2.3.4;
          (ii) an 'assessed' Professional Client pursuant to COB Rule 2.3.8(2)(b) which is wholly owned by a Holding Company that is a 'deemed' Professional Client pursuant to COB Rule 2.3.4(1)(g) or (h); or
          (iii) a 'deemed' Market Counterparty pursuant to Rule (1A); and
          (b) in the case of Persons referred to in (a)(i) and (ii), the requirements in (2) have been met.
          (1A) An Insurer, Insurance Intermediary or Insurance Manager may 'deem' any one or more of the following Persons to be a Market Counterparty:
          (a) a ceding insurer; and
          (b) in respect of the services provided to that ceding insurer, any reinsurer, insurance agent or insurance broker that facilitates the provision of the services to the ceding insurer.
          (2) For the purposes of (1)(b), an Authorised Firm must, before classifying a Person as a Market Counterparty, ensure that:
          (a) the Person has been given a prior written notification of the classification as a Market Counterparty; and
          (b) that Person has not requested to be classified otherwise within the period specified in the notice.
          (3) The notification in (2)(a) may be given in respect of particular Financial Services or Transactions or in respect of all Financial Services and Transactions.
          (4) The notification in (2)(a) need only be given:
          (a) in the case of a Fund, either to the Fund or its Fund Manager; and
          (b) in the case of a pension fund, either to such fund or its management company.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
          [Amended] DFSA RM182/2016 (Made 19th June 2016) [VER27/08-16]

          • COB 2.3.9 Guidance

            When an Authorised Firm carries on, or provides or obtains, Financial Services with or from another Authorised Firm or a Regulated Financial Institution, as those entities are 'deemed' Professional Clients under Rule 2.3.4(1), they could be classified as Market Counterparties, provided the procedures set out in Rule 2.3.9(2) are complied with. For example, such services may include providing the Financial Services of custody, managing assets, or fund administration services to a Fund Manager of a Collective Investment Fund or a pension fund.

            Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
            [Amended] DFSA RM182/2016 (Made 19th June 2016) [VER27/08-16]