FCA sets out client categorisation expectations for corporate finance firms

The FCA has published high-level observations from its multi-firm review of client categorisation in corporate finance firms.

The review considered compliance with client categorisation and certification rules under COBS 3 and 4, and overall found gaps in many firms’ assessments and records.

Where firms engage with contacts they categorise as professional clients or high net worth sophisticated investors, those contacts do not benefit from certain regulatory protections. The FCA wished to review whether certain practices in client categorisations were posing risks, particularly to retail issuers and individual investors.

The FCA highlighted the following key expectations:

• Firms that do not conduct and document a client categorisation assessment or do not keep supporting records fail to meet the rule requirements;
• A client incorrectly classified as a professional client where the relevant criteria has not been met and who is not an eligible counterparty is a retail client, regardless of the terms of business they have signed; and
• Firms should be using structured assessments to evaluate whether a client meets the specific criteria for elective professional categorisation and to keep adequate supporting records.

The FCA plans to update rules on client categorisation for all firms (including corporate finance firms), and will soon consult on proposals to modernise the rules.