Multi-firm review of client categorisation in corporate finance firms: high-level observations

Conducting an assessment

Most firms appear to conduct a client categorisation assessment. But some took a superficial approach that did not evidence a compliant assessment. Firms often did not keep supporting records at the time of the assessment.

In some cases, firms made an initial assessment of a client’s category based on their own understanding. But they did not have a clear process to validate and record the assessment against COBS3 criteria or to update their records with the final outcome.

It was also unclear how firms approached categorising clients they had assessed for a specific transaction when those clients later engaged them for a different transaction. It was not always clear firms considered whether to conduct and record a revised client categorisation assessment, particularly as a company’s size may change.  

Areas for improvement:

• Not conducting and documenting a categorisation assessment when onboarding.
• Not keeping supporting records at the time of the assessment.

• Superficial, tick box categorisation without referring to what criteria are met and how.
• Applying invalid criteria to categorise a client as per-se professional. For example, a public listing or including capital not yet raised in the balance sheet.     

Elective professional categorisation

We found gaps in the process of assessing clients as elective professional.

Some firms had identified historic shortfalls in their compliance with the requirements of COBS3.5.3R (3) and taken steps to address these retrospectively and implement updates to their onboarding and engagement processes to ensure compliance. 

We often saw an unstructured approach to conducting and documenting the elective professional qualitative assessment in COBS3.5.3R (1). Firms generally did not use sufficient and clearly defined criteria to assess clients’ expertise, experience and knowledge and document the rationale for the categorisation. We did not see a clear methodology, or templates used for consistency.

Under COBS3.5.8G a professional client to which a firm provides investment services must inform the firm of changes affecting their categorisation. However, if the client is a natural person (eg, an individual investor the firm treats as a client rather than a contact), changes to their health could affect their capacity to do so. Firms are not considering this and when it is appropriate to refresh a client categorisation assessment, as part of their obligations under COBS3.5.9R or the client’s best interests rule in COBS 2.1.1R, when relying on aged assessments.  

Areas for improvement:

• Conducting checks in open or paid-for sources but not keeping records of the findings or adequately documenting their interpretation and assessment rationale.
• Taking a self-certification approach to the assessment, including questions in a client or due diligence questionnaire without a clear process for reviewing the responses and representations.  
• High-level policies and procedures that do not detail how the firm conducts the assessment and what records it seeks and retains, where and for how long.
• Not clarifying in what capacity the firm is conducting the qualitative assessment on an individual, when categorising a client that is an entity as elective professional (COBS3.5.4R).
• Not considering the ongoing eligibility of a client who is a natural person and has been assessed as elective professional. For example, for changes in their capacity to notify the firm of a change that might affect their categorisation.  

Conducting an assessment

For the financial promotion rules, a person who receives or is likely to receive a financial promotion, is a ‘client’ of the firm that communicates or approves the promotion. This includes a person the firm treats as a corporate finance contact under the relevant FCA rules.  

Promotions directed at retail clients are subject to more detailed regulatory requirements. Properly categorising potential recipients of financial promotions ensures that high-risk investments are only marketed to appropriate types of investor, in compliance with FCA retail marketing restrictions or within the provisions of an applicable Financial Promotion Order (FPO) exemption.

Most firms we reviewed treated potential investors as contacts and appeared to conduct some assessment of their client category for the purpose of communicating financial promotions to them. However, the assessment process was not always clear or rigorous.

We identified examples where firms did not conduct or record any kind of formal assessment. Instead, they relied on categorisation by ‘feel’ based on their understanding of the contact or knowledge of the investor.

Areas for improvement:

• Not maintaining an organised list of contacts that received or are likely to receive financial promotions or being able to evidence an assessment of their client category before communicating a financial promotion to them.
• Maintaining a list of contacts but without a clear process for assessing their client category, either when adding them to the list or before communicating a financial promotion.
• Relying on the close and longstanding relationship with an investor for categorisation and not conducting or validating the categorisation assessment.
• Using incomplete or incorrect legal names for the contact, hindering or casting doubt over the assessment’s accuracy.  
• Assessing the category of a different legal person to the one receiving the financial promotion without a clear rationale for this.
• Recording as the contact an employee receiving promotions on behalf of the institutional investor they work for, without clarifying the contact for categorisation is the institutional investor.
• Routinely expecting under COBS3.5.8G the professional contact to inform the firm of a change affecting their categorisation. 

Meeting the requirements to treat an investor as a corporate finance contact

The definition of a contact broadly requires firms to clearly indicate to the person they are not advising or acting for them or affording them client protections, and to not behave in a way that leads the person to believe they are a client of the firm. 

Most firms inform contacts they are not clients at some point in their communications and include disclaimers in financial promotion materials. We would not consider information buried in a disclaimer meets the requirement to ‘clearly indicate’.

Areas for improvement:

• Using wording in communications with contacts that implies a client relationship, where the firm may not meet the conditions to treat the person as a contact but is also failing to properly treat them as clients.
• Disclaimers that do not clearly indicate the firm does not advise or act for the contact.    

Using the elective professional categorisation for contacts

We saw varying practices for marketing to individual investors. Some firms only market to those they have assessed as elective professional; others only market to those certified as high net worth or sophisticated; other firms may do either. 

As COBS3.2.2G (2) explains, in treating a contact as elective professional for the purpose of applying the financial promotion rules, only a qualitative assessment of the person under COBS3.5.3R (1) is required. 

We found firms do one or more of: meeting the investor; using investor questionnaires; consulting databases they subscribe to; conducting open-source checks; and considering all information available to the firm, to confirm the investor meets the assessment criteria.  

However, we saw the same unstructured approach in conducting and documenting the qualitative assessment in COBS3.5.3R (1) as with clients. There was a lack of specific and sufficient criteria, and no clear methodology or templates used for consistency. We also found firms relied on historic assessments of contacts as elective professional clients without considering their ongoing eligibility.  

Areas for improvement:

• Similar observations to those we noted above in the assessment of clients as elective professional.
• Purporting to rely, under COBS3.5.8G, on a historic assessment to send promotions without considering possible changes to the natural person’s eligibility. For example, due to health issues or other incapacity.  
• Wrongly categorising individuals as ‘per-se’ professional, referencing their current or past job descriptions and failing to conduct and document an adequate assessment for the purpose of treating them as elective professional.  

We did not observe the restricted or certified sophisticated investor types in our review, so we focus on firms’ approach to treating individuals as certified high net worth and self-certified sophisticated investors.  

The certification requirements

Both the FCA financial promotion rules for high-risk investments (COBS4.12A, COBS4.12B) and the FPO exemptions (Article 48, Article 50A) permit, in certain circumstances, communicating financial promotions to investors who are certified high net worth or self-certified sophisticated.

While there are similarities between the FCA rules and the FPO exemptions (for example with respect to certification thresholds), they are separate sets of rules that differ in their scope, application, and requirements. In particular, the investor statements to use differ. Under the FCA financial promotion rules these are set out in COBS4 Annex 2, and Annex 4. Under the FPO exemptions these are set out in Schedule 5 of the FPO and were revised in January 2024.

Our observations

It was not always clear that firms identified the type of investment and the applicable financial promotion provisions they had to comply with to market to retail investors. We found a lack of clarity on whether FCA rules or FPO provisions were relied on.

Most firms had some process to form a reasonable belief of, establish or ascertain the investor certification. This involved one or more of: meeting the investor, requiring completed investor statements, reviewing the completed statements, and conducting open source or other checks.  

We saw gaps in these processes. Some firms had no process, relying on close and long-standing relationships with, or their knowledge of, the investor. Where firms required investor statements, we found examples where the process for requiring valid statements before communicating promotions was ad-hoc, with firms sometimes communicating promotions without a valid statement.

We found firms did not clearly consider the investment type. This determines the applicable FCA financial promotion rules and the availability of the relevant FPO exemptions. We identified firms purporting to rely on the FPO exemptions in Article 48 or 50A (which only apply to promotions of certain investments in, or relating to, unlisted companies) to promote investments in companies whose securities are listed, or traded on AIM or on overseas exchanges, without considering whether these meet the FPO exemption criteria.  

Areas for improvement:

Identifying the applicable financial promotion provisions

• Lack of clarity regarding whether COBS4 or FPO provisions were relevant.
• Marketing high-risk investments to retail investors without a process to clearly identify the investment category and applicable COBS4 requirements for certification.
• Relying on Article 48 and Article 50A of the FPO to market shares in companies that do not appear to be unlisted.
• Having no process for forming the reasonable belief, assuming the obligation sat with another person involved in the transaction. 

The investor statement templates being used

• Templates that were a mix of the COBS4 Annex 2, Annex 4 and the FPO Schedule 5.
• Templates that did not comply with the COBS4 Annexes, in some cases not reflecting the correct criteria, declarations and thresholds.
• Templates that did not conform with FPO Schedule 5, invalidating the statement under Article 48 (3) or Article 50A (2).

The process for requiring investor statements

• Not having clear systems and processes to form a reasonable belief that a completed and signed statement exists and that completion of that statement indicates that the potential investor satisfies the conditions in the statement, before communicating the promotion. We refer to paragraph 3.38 in the Treasury’s ‘Financial promotion exemptions for high net worth individuals and sophisticated investors: Consultation response’.
• Relying on close, long-standing relationships with investors without getting investor statements or, as investor statements under both FCA rules and the FPO are only valid for 12 months, failing to renew them.
• Issuing financial promotions to investors and relying on outdated investor statements or getting statements after communicating the promotion.
• Maintaining a database of investors with no process to identify missing or expired statements.
• Communicating the promotion to a different legal person to the one that signed the investor statement.
• Relying on incomplete statements, inferring the information from other sources. 

Circumstances where additional steps are taken

• Not having a clear policy and process on what reasonable steps are taken beyond collecting and checking the completed statement, and in what circumstances.   

Most firms had documented client categorisation policies and procedures. We saw that firms with clear and comprehensive written policies also appeared to have more effective client categorisation processes.

Policies were not always tailored to the firm’s business. In some cases, they were high level or copied the Handbook rules without identifying those that applied to the firm’s activities and how the firm’s systems and processes complied with these in practice.

Some policies were incomplete, omitting parts of the firm’s processes or key rules. For example, for re-categorisation (COBS3.7) and records (COBS3.8). Or for when corporate finance contacts are clients (COBS3.2.1R (3), COBS3.2.2G) and the firm’s approach to their categorisation and record keeping (COBS4.10.1G, SYSC6.1.1R, SYSC9.1.1R).

Areas for improvement:

• Not having a written policy, producing ad-hoc descriptions to respond to our information requests.
• Incomplete or fragmented policies, complemented by ad-hoc documents and clarifications.
• Lacking document version control and periodic reviews for updates in relation to rule changes, or the firm’s business model or systems.
• High-level policies or copy and paste of Handbook rules policies with no reference to the firm’s business model, regulatory permissions and practical processes.
• Not distinguishing between clients in different business lines (for example a corporate issuer, a trading client, an investor), and the relevant categorisation processes. 
• Not distinguishing between clients receiving regulated services and persons who are corporate finance contacts, and the relevant categorisation processes.