The FCA proposes to introduce an alternative route for very wealthy individuals to opt out of retail protections. Firms will be able to categorise individuals as elective professional clients where the risk to the client of giving up retail protection is lower as a result of their having substantial resources. The opt-up will be available to clients with investable assets (a portfolio of designated investments and/or cash) above £10m who elect to opt out of retail protections and to be treated as an elective professional client. The FCA has also confirmed that a structured qualitative assessment will not be required. To reduce the risk of poor outcomes, firms must secure the client’s informed consent and comply with wider safeguarding rules, including the client’s best interests rule and the Consumer Duty (see 5 below). This is to address the risk which arise where clients have substantial wealth, but insufficient knowledge of investments to understand the risks of products they invest in. 

Under the current client opt up test for MIFID business, firms must meet two out of three financial criteria based on transactions carried out over prescribed time periods, the size of a client’s investment portfolio and their experience in the financial sector. This is known as the “quantitative test”. The FCA recognises that the current criteria are not fit for purposes; the FCA considers that there are two risks under the current regime. First, the “quantitative test” has become open to misuse, leading to some consumers being inappropriately opted out of retail protections. Second, individuals with significant expertise or substantial resources are sometimes failing to meet the rigid criteria and consequently being unable to access products and services that would better meet their needs. The FCA has therefore proposed to remove this test for all clients. Consideration of a client’s capacity to bear losses will still be relevant when undertaking the newly enhanced qualitative assessment (see 3 below).

The FCA proposes to retain the requirement that firms undertake a robust qualitative assessment of a client’s expertise, experience and knowledge. Under the new rules however, firms will need to do more to assess a client as meeting the requisite standard. The FCA wants to ensure that the qualitative assessment is an outcome‑based assessment and that firms obtain from clients sufficient information to form a reasonable assurance the clients meet the threshold. Firms will need to establish, implement and maintain a documented and robust process that ensures the qualitative assessment is adequate, holistic and effective. In particular, the proposals prescribe factors to be known as “relevant factors” that firms must consider in undertaking the assessment. ‘Relevant factors’ include: 

• a client’s own account investment history (both from professional experience and their personal trading and investment history);
• financial resilience (i.e. the client’s financial capacity, risk tolerance and understanding of and ability to bear the potential losses they may incur);
• the client’s knowledge, understanding and ability to assess risk;
• the client’s objectives for opting out of retail client protections; and
• any information reasonably available to the firm which is indicative that the client should not be treated as a professional client, for example, relevant characteristics of vulnerability, the client’s trading history or their communications with the firm, in either case where suggestive of a lack of expertise.

Underscoring these proposals is the need for firms to exercise careful judgement. This is the case when both weighing up the impact of relevant factors for the qualitative assessment and in accepting evidence from clients. In respect of the former, the FCA has said that it is not always necessary for a client to demonstrate strong indicators of expertise in every individual factor, but weakness in one should be compensated by proportionally greater strength in others. On the latter, whilst the FCA has previously made clear that firms should not rely exclusively on self-certification by clients, the FCA now proposes to formalise its existing expectations. The FCA proposes adding a rule that a firm may not rely solely on representations from the client, nor on any representation or information from the client that is manifestly inaccurate, deficient or out of date. 

The FCA has proposed additional measures to prevent firms inappropriately opting clients out of the retail protection they need. The proposals make clear that a firm may share information about the option to opt out with a client they reasonably believe would meet the threshold of a professional client, to help the client decide whether requesting to opt out is right for them. However, any attempt to incentivise, mislead or put pressure on a client to opt out will be strictly prohibited. The FCA confirms that how a firm approaches client categorisation should be compatible with the firm’s existing obligations under the Consumer Duty and the “client’s best interests” Principle for Business.

The FCA’s proposals also build on the protections in the existing regime which currently require firms to give clients a clear written warning of the protections and investor compensation rights they may lose by opting up. Under the proposals, firms will need to obtain informed (rather than basic) consent from clients to opt out of all retail protections. Consent will not be informed unless: 

• the client is given sufficient information about the protections they are opting out of and sufficient time to consider the implications of being classified as a professional client, before they are asked to consent to opting out; and 

• at the time of being asked to give consent, the client is given a clear and prominent warning that they are consenting to opt out of retail protections including, where relevant, access to regulatory redress. 

Firms will need to be able to demonstrate that their process for obtaining informed consent from clients is effective in enabling clients to understand the protections they forfeit. Firms could do this by considering their Consumer Duty customer understanding obligations when designing the content, format and delivery mechanism of these disclosures and warnings, and by conducting appropriate testing or monitoring.

Although the FCA has not introduced a requirement for periodic reviews of client categorisation, they have proposed amendments to the existing requirement that where a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for opting up, they must take action. Under the proposals, there will be a greater onus on firms to consider if a reassessment is required. Firms will have an obligation to reassess a client’s opt-up status 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 could not reasonably assume their circumstances remain unchanged.

The FCA has also proposed changes to simplify the per se professional client criteria. In particular, the FCA proposes to remove the list of different types of entities in COBS 3.5.2R(1) to make it clearer that any entity authorised or regulated in the UK or a third country to operate in the financial markets can be treated as a per se professional client, without firms needing to identify the specific sub-criteria met by the client. The FCA also proposes to streamline the size thresholds for categorising large undertakings as per se professional so that all firms apply the existing MIFID thresholds.

In response to FCA concerns regarding poor record keeping in certain sectors, the FCA has proposed amendments to chapter 3.8 of COBS (Policies, procedures and records). This is in order to clarify that maintaining records to support the client categorisation includes keeping records which explain the basis for the categorisation and how the categorisation assessment of elective professional clients was undertaken. Records will need to include information obtained from the client, any verification the firm undertook and the firm’s justification/reasoning for determining that the client meets the threshold to be categorised as an elective professional client. The FCA also extends the application of chapter 3.8 of COBS to all firms categorising clients for any purpose. This is relevant in particular for firms making financial promotions to investors which will be treated as a “client” under COBS 3.2.1R.¹

Due to forthcoming changes regarding consolidation of pension schemes, the FCA is not proposing to extend the changes to the rules for categorising local authorities or local authority pension schemes.

The FCA proposes that firms will be required to review the categorisation of all existing elective professional clients against the new rules within one year of them coming into force. For the purposes of the review, firms will need to consider if their existing classifications meet the new standards in relation to both the qualitative assessment and the requirements for “informed consent”. 

Firms will need to consider whether existing documentation or information they have on or from the client, including their dealings with the client since the original categorisation, is sufficient to enable them to undertake the qualitative assessment, having regard to whether such information is current. The FCA confirms that firms which had conducted an adequately robust qualitative assessment under the current rules (rather than relying only on assessment of whether a client meets the minimum quantitative thresholds, or on the client’s self‑certification) may not need to request new information from existing clients for the purposes of the review. Although the FCA makes clear that it will be for each firm to consider whether it has obtained informed consent from existing clients that they wished to be opted out of retail protections, it expects that many firms may conclude they need to obtain new consent.