Emmy Crosby, 30 March 2015

Emmy Crosby, Capita Employee Benefits, on the importance of categorising clients correctly to give them the right level of protection.

While I am sure we all sympathise with the comments of the man who for some will always be Johnny Rotten, when it comes to advising trustees on investments, there is no escaping the need to pigeonhole clients.

Under Financial Conduct Authority (FCA) rules, advisers must categorise all of their actual or potential investment clients and ensure those clients are notified of the category under which they are being treated. Advisers need to determine whether clients are:

  • professional clients
  • retail clients
  • eligible counterparties (such as investment firms).

For the vast majority, this final category will not be relevant to the services being provided. So, ordinarily, the focus will be on the first two.

Different categories

The main distinction between these categories – professional and retail clients – relates to the level of protection afforded to the client under FCA rules. Retail clients receive a greater degree of regulatory protection and fall under the auspices of the Retail Distribution Review.

Generally, professional clients are those who can reasonably be considered to have an appropriate level of expertise, experience and knowledge to be capable of making their own investment decisions and understanding the risks involved. Retail clients tend to be investors who cannot be considered to have this level of understanding.

There are clients who can be treated as professional upon notification. The FCA defines these per se professional clients. A pension scheme can be treated as a per se professional client if it has (or has had during the preceding two years) over 50 members and assets in excess of £10m.

It should be noted that all clients are able to request that they be treated as being in a different category: per se professional clients may choose to be treated as retail clients; and retail clients can request professional status (elective professional).

It is important for advisers to consider whether or not they are able or wish to service retail clients, given the regulatory implications. Some firms may withdraw their services if the client is, or wishes to be treated as, a retail client.

"I don’t like the monikers, and I don’t like being pigeonholed. You know, I’m a human being." John Lydon

Important distinction

There is another important distinction: retail client status is a choice and a right, while the move from retail to elective professional client is not. Given the reduced regulatory protection afforded to professional clients, an adviser must be satisfied that the client meets the necessary criteria around experience and understanding.

There are regulatory processes for determining whether a client can be treated as an elective professional. These are dependent upon the adviser firm’s status: for firms subject to the Markets in Financial Instruments Directive (MiFID), this is quite a high bar criterion; for non-MiFID firms, it is more at the discretion of the firm.

“Relevant evidence” which might be used to make an assessment on a retail client’s suitability to move into the elective professional category should include (but is not necessarily limited to):

  • relevant qualifications (eg from the Pensions Management Institute, Financial Planning Association)
  • membership of a professional body
  • significant role within sponsoring employer (eg financial director, chief executive officer), with relevant qualifications or experience
  • demonstrable and verifiable experience in making investment decisions for the scheme across various market conditions
  • successful completion of the Pensions Regulator’s Trustee Toolkit
  • any key individual “experts” within the trustees or the presence of a professional trustee.

Where the client is a corporate entity, the qualitative test should be performed in relation to the person authorised to carry out transactions on its behalf. Firms must reiterate to the client the regulatory impact of the change of status before finally agreeing to it.

No-one likes to be pigeonholed, but a failure to categorise clients appropriately could lead to some.

Published in PensionsWorld, April 2015

About the author

Emmy Crosby Head of Business Controls

Emmy Crosby

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