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 Firmmust, subject to (4), when first establishing a relationship with a Personas a Professional Client, inform that Personin writing of:(a) that Person'sright to be classified as a Retail Client;(b) the higher level of protection available to Retail Clients; and(c) the time within which the Personmay elect to be classified as a Retail Client.(2) If the Persondoes not expressly elect to be classified as a Retail Clientwithin the time specified by the Authorised Firm, the Authorised Firmmay classify that Personas a Professional Client.(3) If a Personal classified as a Professional Clientby an Authorised Firmexpressly requests the Authorised Firmto be re-classified as a Retail Client, the Authorised Firmmust, subject to (4), re-classify such a Personas a Retail Client.(4) If an Authorised Firmdoes not provide Financial Services to Retail Clients, it must inform the Personof this fact and any relevant consequences.
COB 2.4.1 Guidance1. The obligation in Rule 2.4.1(1) applies to an
Authorised Firmwhen it first provides, or intends to provide, a to a Financial Service Professional Client.2. Once an Authorised Firmhas first classified a Personas a Professional Client, under the procedures in Rule 2.3.3(1), that Professional Clienthas a right at any subsequent time to ask, under Rule 2.4.1(3), to be re-classified as a Retail Clientto obtain a higher level of protection. Although the right to ask the firm to be re-classified as a Retail Clientis 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 Clientremain the same; andb. 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 Clientis offered a new Financial Serviceor new financial product, a re-classification might be appropriate if:a. the new Financial Serviceor financial product is substantially different to those previously offered to that Client; andb. the Client'sexperience and understanding appears not to extend to the new Financial Serviceor financial product.4. An Authorised Firmcannot provide Financial Servicesto a Retail Clientunless it has a Retail Endorsementon its Licence. However, such a firm may refer to another appropriately licensed firm any Personwho elects to opt-in as a Retail Client.
Assessment of net assets
COB 2.4.2 COB 2.4.2
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.
COB 2.4.2 Guidance1. 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 Firmshould 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.
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 Firmmust include, where applicable, consideration of the following matters:(a) the Person'sknowledge 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 Personhas participated in relevant financial markets, the frequency of dealings and the extent to which the Personhas relied on professional financial advice;(c) the size and nature of transactions that have been undertaken by, or on behalf of, the Personin relevant financial markets;(d) the Person'srelevant qualifications relating to financial markets;(e) the composition and size of the Person'sexisting 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 Firmconsiders 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.
COB 2.4.3 Guidance
Authorised Firmmay consider a Personto 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 Firmreasonable assurance that the Personis able to make decisions of the relevant kind, understanding the type of risks involved; orb. is found to be acting, in relation to the particular transaction involved, in reliance on a recommendation made by an Authorised Firmor Regulated Financial Institution.
Reliance on a classification made elsewhere
COB 2.4.4 COB 2.4.4(1) This Rule applies to an
Authorised Firmwhich is a Branchor is a member of a Group.(2) An Authorised Firmmay, 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 Firmunder this chapter and the requirements under which the client classification is carried out by another entity referred to in (2), the Authorised Firmmay only rely on such a client classification if it has effectively addressed the identified gaps.
COB 2.4.4 Guidance1. Generally, an
Authorised Firmrelying on this Rule should be able to demonstrate to the DFSAthe 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 Groupsubstantially 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 DFSAdue compliance with this Rule.2. If an Authorised Firmwishes 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 Firmwould need to meet the GEN requirements relating to outsourcing.
COB 2.4.5 COB 2.4.5(1) This Rule applies to an
Authorised Firmwhich:(a) is a member of a Group; and(b) provides to a Clientone or more Financial Serviceswhere the services provided by the firm form part of a bundle of financial services provided to that Client by it and its Groupmembers.(2) An Authorised Firmreferred to in (1) must ensure that:(a) the client classification it adopts for any Financial Servicewhich it provides to the Clientis both consistent with the requirements in this chapter and appropriate for the overall bundle of financial services provided to that Client;(b) the Clienthas a clear understanding of the arrangement under which Financial Servicesare provided to the Clientby 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.
COB 2.4.5 Guidance1. The provision of a 'bundle' of financial services may involve different arrangements within different
Groups. The DFSAconsiders that the provision of a 'bundle' of financial services occurs where:a. several members of a Groupprovide 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 Groupgives investment advice to the Client, another member of the Groupexecutes the transaction (based on the advice) relating to a financial product and yet another member of the Groupis the issuer of that financial product;b. several members of a Groupprovide different aspects of the same financial service to a single Client; orc. 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 Groupproviding discrete aspects of expertise that go to facilitate a merger and acquisition project of a Client. In such a situation, different members of the Groupcould prepare and provide:a. advice relating to a proposed restructure;b. advice relating to financing of the restructure; andc. arranging credit for financing the restructure.3. In order to provide flexibility for Authorised Firmswhich are members of a Groupto provide such bundles of financial services to their Clients in a manner that suits the Client'sneeds 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 Groupunder Rule 18.104.22.168. Depending on the nature of the arrangement under which Groupmembers choose to provide to the same Clienta bundle of Financial Services, and the nature of the Financial Servicesinvolved, 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 Groupare located in different jurisdictions; andb. a Clientnot being able to identify clearly the actual service provider or providers and resulting legal exposure to the Clientthat may arise for all members of the Group. To address this risk, it is good practice for each member of the Groupto 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 Firmrelying on Rule 2.4.5 should consider, at a minimum, having the following:a. a clear description of the Grouparrangement under which a bundle of financial services is provided – such as which member of the Groupis responsible for which aspects of the bundle of Financial Serviceprovided to the Client, or alternatively, that collective responsibility would be assumed by all or some members of the Group;b. how the Clientis classified for the purposes of the relevant Financial Serviceprovided by the firm;c. identification of where records relating to client classification and Financial Services provided to the Clientare 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 Firmor by a member of its Groupunder Rule 3.3.4) which adequately covers all the financial services provided to the Client, including those provided by the firm; andf. 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 DFSAdue 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 Groupmembers providing a bundle of services when providing Financial Servicesto a Clientin 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 Clientin conjunction with its head office or other branches of the same legal entity.