Entire Section

  • COB 2.4 COB 2.4 Procedures relating to client classification

    • Option for a Professional Client to be classified as a Retail Client

      • COB 2.4.1 COB 2.4.1

        (1) For the purpose of Rule 2.3.3(1)(b), an Authorised Firm must, subject to (4), when first establishing a relationship with a Person as a Professional Client, inform that Person in writing of:
        (a) that Person's right to be classified as a Retail Client;
        (b) the higher level of protection available to Retail Clients; and
        (c) the time within which the Person may elect to be classified as a Retail Client.
        (2) If the Person does not expressly elect to be classified as a Retail Client within the time specified by the Authorised Firm, the Authorised Firm may classify that Person as a Professional Client.
        (3) If a Person al classified as a Professional Client by an Authorised Firm expressly requests the Authorised Firm to be re-classified as a Retail Client, the Authorised Firm must, subject to (4), re-classify such a Person as a Retail Client.
        (4) If an Authorised Firm does not provide Financial Services to Retail Clients, it must inform the Person of this fact and any relevant consequences.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.4.1 Guidance

          1. The obligation in Rule 2.4.1(1) applies to an Authorised Firm when it first provides, or intends to provide, a Financial Service to a Professional Client.
          2. Once an Authorised Firm has first classified a Person as a Professional Client, under the procedures in Rule 2.3.3(1), that Professional Client has a right at any subsequent time to ask, under Rule 2.4.1(3), to be re-classified as a Retail Client to obtain a higher level of protection. Although the right to ask the firm to be re-classified as a Retail Client is available to the Professional Client, as a matter of good practice:
          a. the firm should also periodically review whether the circumstances relating to the particular Client remain the same; and
          b. if the firm becomes aware of any circumstances which would warrant a re-classification of the Client, initiate the process with the Clientto give that Clienta more appropriate classification.
          3. Where an existing Professional Client is offered a new Financial Service or new financial product, a re-classification might be appropriate if:
          a. the new Financial Service or financial product is substantially different to those previously offered to that Client; and
          b. the Client's experience and understanding appears not to extend to the new Financial Service or financial product.
          4. An Authorised Firm cannot provide Financial Services to a Retail Client unless it has a Retail Endorsement on its Licence. However, such a firm may refer to another appropriately licensed firm any Person who elects to opt-in as a Retail Client.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • Assessment of net assets

      • COB 2.4.2 COB 2.4.2

        An Authorised Firm, when calculating net assets of an individual for the purposes of the requirement under Rule 2.3.7(1)(a):

        (a) must exclude the value of the primary residence of that Person; and
        (b) may include any assets held directly or indirectly by that Person.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.4.2 Guidance

          1. The reference to "assets held directly or indirectly" is designed to include assets held by direct legal ownership, by beneficial ownership (for example, as a beneficiary in a trust), or by both legal and beneficial ownership. Such assets may be held, for instance, through a special purpose or personal investment vehicle, a foundation, or the like. Similarly, any real property held subject to an Islamic mortgage, where the lender has the legal title to the property, may be counted as indirectly held property of a Client, less the amount owing on the mortgage, where it is not a primary residence.
          2. As the test is to determine the net assets (not gross assets) of an individual, any mortgages or other charges held over the property to secure any indebtedness of the individual should be deducted from the value of the assets.
          3. An individual's primary residence is excluded from the calculation of their net assets. If an individual who is an expatriate has a primary residence in his home country, such a residence should not generally be counted for the purposes of meeting the net asset test, particularly if the current residence in their host country is rented. However, if the current residence in the host country is owned by the individual, then that may be treated as their primary residence and the value of the residence in the home country of the individual may be counted for the purposes of meeting the net asset test, provided there is sufficient evidence of ownership and an objective valuation of the relevant premises.
          4. An Authorised Firm should be able to demonstrate that it has objective evidence of the ownership and valuation of any assets taken into account for the purposes of meeting the net asset test.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • Assessment of knowledge and experience

      • COB 2.4.3 COB 2.4.3

        (1) For the purpose of the analysis required under Rules 2.3.7(1)(b)(ii) and 2.3.8(1)(b), an Authorised Firm must include, where applicable, consideration of the following matters:
        (a) the Person's knowledge and understanding of the relevant financial markets, types of financial products or arrangements and the risks involved either generally or in relation to a proposed Transaction;
        (b) the length of time the Person has participated in relevant financial markets, the frequency of dealings and the extent to which the Person has relied on professional financial advice;
        (c) the size and nature of transactions that have been undertaken by, or on behalf of, the Person in relevant financial markets;
        (d) the Person's relevant qualifications relating to financial markets;
        (e) the composition and size of the Person's existing financial investment portfolio;
        (f) in the case of credit or insurance transactions, relevant experience in relation to similar transactions to be able to understand the risks associated with such transactions; and
        (g) any other matters which the Authorised Firm considers relevant.
        (2) Where the analysis is being carried out in respect of an Undertaking, the analysis must be applied, as appropriate, to those individuals who are authorised to undertake transactions on behalf of the Undertaking.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.4.3 Guidance

          Generally, an Authorised Firm may consider a Person to have relevant experience and understanding where such a Person:

          a. has been involved in similar transactions in a professional or personal capacity sufficiently frequently to give the Authorised Firm reasonable assurance that the Person is able to make decisions of the relevant kind, understanding the type of risks involved; or
          b. is found to be acting, in relation to the particular transaction involved, in reliance on a recommendation made by an Authorised Firm or Regulated Financial Institution.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • Reliance on a classification made elsewhere

      • COB 2.4.4 COB 2.4.4

        (1) This Rule applies to an Authorised Firm which is a Branch or is a member of a Group.
        (2) An Authorised Firm may, subject to (3), rely on a client classification made, if it is a Branch, by its head office or any other branch of the same legal entity, or if it is a member of a Group, by any other member of its Group, if it has reasonable grounds to believe that such a client classification is substantially similar to the client classification required under this chapter.
        (3) If any gaps are identified between the requirements applicable to the Authorised Firm under this chapter and the requirements under which the client classification is carried out by another entity referred to in (2), the Authorised Firm may only rely on such a client classification if it has effectively addressed the identified gaps.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.4.4 Guidance

          1. Generally, an Authorised Firm relying on this Rule should be able to demonstrate to the DFSA the due diligence process that it had undertaken to assess whether the client classification made by its head office or other branch of the same legal entity or a member of its Group substantially meets the client classification requirements in this chapter and, if any gaps are identified, how those gaps are effectively addressed. See Rule 2.5.3, which requires the provision of unrestricted access to records for demonstrating to the DFSA due compliance with this Rule.
          2. If an Authorised Firm wishes to use any client classification undertaken by any third party other than its head office or another branch of the same legal entity, or a member of its Group, such an arrangement is generally treated as an outsourcing arrangement. Therefore, the Authorised Firm would need to meet the GEN requirements relating to outsourcing.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

    • Group clients

      • COB 2.4.5 COB 2.4.5

        (1) This Rule applies to an Authorised Firm which:
        (a) is a member of a Group; and
        (b) provides to a Client one or more Financial Services where the services provided by the firm form part of a bundle of financial services provided to that Client by it and its Group members.
        (2) An Authorised Firm referred to in (1) must ensure that:
        (a) the client classification it adopts for any Financial Service which it provides to the Client is both consistent with the requirements in this chapter and appropriate for the overall bundle of financial services provided to that Client;
        (b) the Client has a clear understanding of the arrangement under which Financial Services are provided to the Client by the Authorised Firmin conjunction with the other members of the Group; and
        (c) any risks arising from the arrangements referred to in (b) are identified and appropriately and effectively addressed.
        Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]

        • COB 2.4.5 Guidance

          1. The provision of a 'bundle' of financial services may involve different arrangements within different Groups. The DFSA considers that the provision of a 'bundle' of financial services occurs where:
          a. several members of a Group provide discrete stand-alone financial services to a single Client but do so as part of providing a complete suite of related financial services to that Client. An example would be where one member of the Group gives investment advice to the Client, another member of the Group executes the transaction (based on the advice) relating to a financial product and yet another member of the Group is the issuer of that financial product;
          b. several members of a Group provide different aspects of the same financial service to a single Client; or
          c. the bundle comprises any combination of both (a) and (b).
          2. A bundle of financial services referred to in 1 above can be project specific. An example is where a number of members within a Group providing discrete aspects of expertise that go to facilitate a merger and acquisition project of a Client. In such a situation, different members of the Group could prepare and provide:
          a. advice relating to a proposed restructure;
          b. advice relating to financing of the restructure; and
          c. arranging credit for financing the restructure.
          3. In order to provide flexibility for Authorised Firms which are members of a Group to provide such bundles of financial services to their Clients in a manner that suits the Client's needs and the nature of the service, Rule 2.4.5 sets out the overarching objectives that must be achieved (i.e. outcome based requirements), rather than any detailed requirements. This Rule goes beyond a simple reliance on a 'client classification' made by another member of a Group under Rule 2.4.4.
          4. Depending on the nature of the arrangement under which Group members choose to provide to the same Client a bundle of Financial Services, and the nature of the Financial Services involved, the risks associated with such arrangements may vary. Some of the common risks that could arise, and therefore would need to be addressed, include:
          a. conflicting legal requirements applicable to the provision of the relevant Financial Services, particularly if the members of the Group are located in different jurisdictions; and
          b. a Client not being able to identify clearly the actual service provider or providers and resulting legal exposure to the Client that may arise for all members of the Group. To address this risk, it is good practice for each member of the Group to set out in writing (e.g. in the client agreement) the services for which it is responsible. See also Rule 3.3.4(3)(b) for the firm's obligations.
          5. GEN section 5.3 sets out the systems and controls requirements that apply to all Authorised Firms. In order to meet those GEN requirements, an Authorised Firm relying on Rule 2.4.5 should consider, at a minimum, having the following:
          a. a clear description of the Group arrangement under which a bundle of financial services is provided – such as which member of the Group is responsible for which aspects of the bundle of Financial Service provided to the Client, or alternatively, that collective responsibility would be assumed by all or some members of the Group;
          b. how the Client is classified for the purposes of the relevant Financial Service provided by the firm;
          c. identification of where records relating to client classification and Financial Services provided to the Client are maintained;
          d. which firm, if any, is responsible for the overall bundle of financial services and, if this is not the case, how the accountability for the financial services is apportioned among members within the Group;
          e. a client agreement (whether entered into by the Authorised Firm or by a member of its Group under Rule 3.3.4) which adequately covers all the financial services provided to the Client, including those provided by the firm; and
          f. what the identified risks are and how they are being addressed.
          6. See Rule 2.5.3 which requires the provision of unrestricted access to records for demonstrating to the DFSA due compliance with this Rule.
          7. Rule 2.4.5 is not expressly extended to a Branch as it is not a separate legal entity, and hence would generally have greater flexibility than Group members providing a bundle of services when providing Financial Services to a Client in conjunction with its head office or any other branch of the same legal entity. However, to the extent a Branch operates as a stand-alone entity, it may use the same outcome-based approach reflected in Rule 2.4.5 where it provides any Financial Services to a Client in conjunction with its head office or other branches of the same legal entity.
          Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]