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Topic
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Areas for improvement
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Good practice identified
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Categorising clients: client categorisation
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- 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 which criteria are met and how.
- Applying invalid criteria to categorise a client as
'per-se' professional (e.g. a public listing or including
capital not yet raised in the balance sheet).
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- Recording the client categorisation assessment in a defined
document (e.g. the New Business Committee form).
- Setting out the assessment against the applicable COBS 3
criteria and how the client meets these criteria (e.g. by referring
to the Financial Services Register or specific metrics in the
accounts).
- Having Compliance review the form and saving it with supporting
documents in the client/deal file at the time of assessment.
- The FCA reminds firms that the effect of COBS 3.4.1R is that a
client incorrectly categorised as a professional client, where the
criteria in COBS 3.5 have not been met and who is not an eligible
counterparty, is a retail client, regardless of the terms of
business they have signed.
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Categorising clients: elective professional
categorisation
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- Gaps in the process of assessing clients as elective
professional.
- Taking an unstructured approach to conducting and documenting
the elective professional qualitative assessment.
- Not considering the ongoing eligibility of a client who is a
natural person and has been assessed as elective professional (i.e.
when it is appropriate to refresh a client categorisation
assessment).
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- The FCA expects firms to use structured assessments to evaluate
whether a client meets the specific criteria in COBS 3.5.3R for the
elective professional categorisation and to keep adequate
supporting records.
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Categorising corporate finance contacts: conducting an
assessment
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- Firms' client categorisation assessment process for the
purpose of communicating financial promotions was not always clear
or rigorous.
- Some firms did not conduct or record any kind of formal
assessment, instead relying on a close and longstanding
relationship with an investor for categorisation purposes.
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- Maintaining an organised list of contacts with a clear process
for adding an investor to the contacts list, assessing their
category and undertaking checks to verify it.
- Retaining records and supporting documents; reviewing and
updating the list periodically and before a promotion is
communicated.
- Re-categorising a contact that no longer meets the initial
criteria or receives promotions in a new capacity (e.g. for a new
employer or investing their personal funds).
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Categorising corporate finance contacts: meeting the
requirements to treat an investor as a corporate finance
contact
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- 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 a client.
- Disclaimers that do not clearly indicate the firm does not
advise or act for the contact. The FCA would not consider
information "buried in a disclaimer" to meet the
requirement to 'clearly indicate'.
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- Making the contact aware at multiple points in the contact
onboarding and transaction lifecycle that they are not a client of
the firm and will not be afforded these protections.
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Categorising corporate finance contacts: using the
elective professional categorisation
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- Purporting to rely, under COBS 3.5.8G, on a historic assessment
to send promotions without considering possible changes to the
natural person's eligibility (e.g. 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.
[Note: the FCA's observations were similar to those in
relation to the assessment of clients as elective professional (see
above).]
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- The FCA expects firms to use structured assessments to evaluate
whether a contact meets the qualitative assessment for the elective
professional categorisation and to keep adequate supporting
records.
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Certifying retail investors as high net worth or
sophisticated
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- Not always clear that firms identified the type of investment
and the applicable financial promotion provisions with which to
comply in order to market to retail investors. The FCA found a lack
of clarity on whether its rules or Financial Promotion Order (FPO)
provisions were relied on.
- Most firms had some process to form a reasonable belief of,
establish or ascertain the investor certification, but the FCA
identified gaps in these processes.
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- Identifying what financial promotion provisions were being
complied with to market to investors, the types of potential
investors and the investment type as part of the transaction
governance (e.g. in the New Business Committee form).
- Having a clear process for establishing the certification by
getting signed statements, reviewing them and taking reasonable
steps to verify them based on other information available to the
firm and in open sources.
- Having an annual renewal process, with alerts flagging investor
statements approaching expiry or expired; embargoing the
communication of financial promotions to persons with out-of-date
statements; having systems to prevent investors that were not
certified from accessing/receiving promotions.
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Policies and procedures
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- Firms' documented client categorisation policies were not
always tailored to the firms' business. In some cases, they
were high level or copied FCA Handbook rules without identifying
those that applied to the firm's activities and how the
firm's systems and processes complied with them in
practice.
- Some policies omitted parts of firms' processes or key COBS
rules (e.g. re-categorisation, records, or for when corporate
finance contacts are clients).
- The FCA found that firms with clear and comprehensive written
policies also appeared to have more effective client categorisation
processes.
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- Policies tailored to the firm's business model, detailing
its regulatory permissions, business lines, clients and investors
within the firm's risk appetite, and whether any investors are
corporate finance contacts.
- Identifying and referencing the applicable COBS 3 and COBS 4
rules and how the firm complies with them, including flowcharts or
diagrams and templates, covering all business lines and the entire
categorisation process lifecycle.
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