The FCA's Handbook, particularly the Conduct of Business Sourcebook (COBS), outlines the criteria for client classification. There are two main types of professional clients:
* Per Se Professional Clients: These are entities that are inherently considered professional due to their nature, such as authorised financial institutions, governments, and large undertakings meeting specific size requirements.
* Elective Professional Clients: These are clients who may not meet the *per se* criteria but can opt up to professional status if they meet certain qualitative and quantitative tests, and the firm conducts an appropriate assessment.
Criteria for Elective Professional Clients
For a client to be categorised as an elective professional, the FCA mandates a two-stage test. Both stages must be satisfied, and the firm must assess the client's expertise, experience, and knowledge. The client must expressly request to be treated as a professional client and must state in writing that they are aware of the protections they will lose.
Qualitative Test (Expertise, Experience, Knowledge):
The firm must undertake an adequate assessment of the client's expertise, experience, and knowledge to ensure that the client is capable of making their own investment decisions and understanding the risks involved. This is not a box-ticking exercise; it requires a genuine evaluation.
Quantitative Test (Meeting Two Out of Three Criteria):
1. Portfolio Size: The client has carried out transactions of significant size (at least £50,000) on average 10 times per quarter over the previous four quarters, in the relevant market.
2. Trading Frequency: The client has a financial instrument portfolio, defined as including cash deposits and financial instruments, exceeding €500,000.
3. Professional Experience: The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
Crucially, firms must ensure that the client is *aware* of the protections they will lose as a professional client. These typically include:
* Lower Leveraged Products: Professional clients may access higher leverage levels than retail clients, which, while offering greater potential returns, also significantly amplifies losses.
* Product Intervention Measures: Professional clients are exempt from certain FCA product intervention rules, such as negative balance protection or restrictions on incentives.
* Information Requirements: Firms may provide less detailed information to professional clients, assuming a higher level of understanding.
Ongoing Obligations for Firms
Categorising a client as professional is not a one-off event. Firms have ongoing obligations:
* Periodic Review: Brokers should periodically review the professional status of their clients, especially elective professionals, to ensure they continue to meet the criteria. This should be done annually or when there
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