2.1.1. Obligation to classify Clients

An Authorised Firm providing any Financial Products or Financial Services to any Person must classify that Person as one of the following categories of Client:

• (a) a Retail Client;
• (b) a Professional Client; or
• (c) a Market Counterparty

2.1.2. Obligation to notify classification to Clients

An Authorised Firm must notify a new Client of its classification as a Retail Client, Professional Client, or Market Counterparty in accordance with COB 2.1.1 in respect of the Financial Product or Financial Service being provided to that Client.

2.1.3. Person may be classified as more than one category of Client

An Authorised Firm may classify a Person as belonging to different categories of Client in respect of:

• (a) a specific Financial Product, Financial Service, or Transaction; or
• (b) different types of Financial Product or Transaction, which are to be provided to, or carried out on behalf of, that Person.

2.2.1. Classification as a Retail Client

An Authorised Firm must classify as a Retail Client any Client that is not a Professional Client or a Market Counterparty.

2.2.2. Authorised Firm may choose to treat any Person as a Retail Client

An Authorised Firm may choose to provide Financial Products or Financial Services to any Person as a Retail Client simply by classifying that Person as a Retail Client. If the Authorised Firm classifies the Person as a Retail Client in this way, it will not be required to assess whether that Person would otherwise be classified as a Professional Client or a Market Counterparty.

2.3.1. Classification as a Professional Client

An Authorised Firm may classify a Person as a Professional Client if that Person:

1. (a) meets the requirements to be a Deemed Professional Client; or
2. (b) meets the requirements to be an Assessed Professional Client, in accordance with COB 2.5.1 or 2.5.5, provided that Person has not been classified as a Retail Client in accordance with COB 2.6.

2.4.1. Requirements to be a Deemed Professional Client

For the purposes of COB 2.3.1, each of the following entities is a Deemed Professional Client unless it is a Market Counterparty or is given a different classification under COB 2:

1. (a) a national or regional government;
2. (b) a public body that manages public debt;
3. (c) a central bank;
4. (d) an international or supranational institution (such as the World Bank, the International

Monetary Fund, or the European Investment Bank) or other similar international organisation;

1. (e) an Authorised Firm, or any other authorised or regulated financial institution, including a bank, securities firm or insurance company;
2. (f) an Authorised Market Institution, or any other authorised or regulated exchange, trading facility, central securities depository, or clearing house;
3. (g) a Collective Investment Scheme or its management company, or any other authorised or regulated collective investment undertaking or the management company of such an undertaking;
4. (h) a pension fund or the management company of a pension fund;
5. (i) a commodity dealer or a commodity derivatives dealer;
6. (j) a Large Undertaking as specified in COB 2.4.2;
7. (k) a Body Corporate whose shares are listed or admitted to trading on any exchange of an IOSCO member country;
8. (l) a trustee of a trust which has, or had during the previous 12 months, assets of at least USD 10 million; or
9. (m) any other institutional investor whose main activity is to invest in financial instruments, including an entity dedicated to the securitisation of assets or other financial transactions.

2.4.2. Large Undertakings

A Person is a Large Undertaking for the purposes of COB 2.4.1(j) if it met, as at the date of its most recent financial statements, at least two of the following requirements:

• (a) it has total assets of at least USD 20 million on its balance sheet;
• (b) it has a net annual turnover of at least USD 40 million; or
• (c) it has own funds of at least USD 2 million.

2.5.1. Assessed Professional Clients: Individual Clients

For the purposes of COB 2.3.1, an Authorised Firm may treat an individual Client as an Assessed Professional Client if:

• (a) the Client has net assets of at least USD 100,000; and
• (b) either:

(i) the Authorised Firm assesses the Client, on reasonable grounds, to have sufficient experience and understanding of relevant Financial Products, Financial Services, Transactions and any associated risks; or

(ii) the Client works or has worked in the previous two years in an Authorised Firm or any other authorised or regulated financial institution, including a bank, securities firm or insurance company, in a position that requires knowledge of the type of Financial Products, Financial Services or Transactions envisaged; and

• (c) the following procedure is followed:

(i) the Client must confirm in writing to the Authorised Firm that it wishes to be treated as a Professional Client either:

(1) generally;

2) in respect of a specific Financial Product, Financial Service, or Transaction; or

(3) in respect of a type of Financial Product, Financial Service, or Transaction;

(ii) the Authorised Firm must give the Client a clear warning in writing setting out the protections that the Client may lose as a result of giving up its classification as a Retail Client; and

(iii) the Client must confirm in writing, in a separate document from the client agreement or other contract, that it is aware of the consequences of losing such protections.

Guidance: Meaning of an "individual"

For the purposes of COB 2.5.1, an "individual" means a Person who is a natural person and not an Undertaking.

2.5.2. Calculation of an individual's net assets

For the purposes of COB 2.5.1(a), the calculation of an individual Client's net assets:

• (a) must exclude the value of the primary residence of the Client; and
• (b) may include any assets held directly or indirectly by the Client.

2.5.3. Assessment of experience and understanding

For the purposes of the assessment required under COB 2.5.1(b)(i) and 2.5.6(a), an Authorised Firm must, where applicable, consider the following matters:

• (a) the Person’s knowledge and understanding of:

(i) the relevant Financial Products, Financial Services, and Transactions; and

(ii) any associated risks, either generally or in relation to a specific Financial Product, Financial Service, or Transaction;

• (b) the length of time during which the Person has participated in financial market activity;
• (c) the frequency with which the Person has carried out Transactions;
• (d) the extent to which the Person has previously relied on professional financial advice;
• (e) the size and nature of Transactions that have been undertaken by, or on behalf of, the Person in financial markets;
• (f) the Person’s relevant qualifications or training;
• (g) the composition and size of the Person’s portfolio of Investments;
• (h) in the case of insurance Transactions, relevant experience in relation to similar Transactions to be able to understand the risks associated with such Transactions; and
• (i) any other matters which the Authorised Firm considers relevant.

2.5.4. Legal structures or vehicles containing an individual's investment portfolio

An Authorised Firm may classify as an Assessed Professional Client a legal structure or vehicle, including an Undertaking, trust or foundation, that is set up solely for the purpose of managing the investment portfolio of an individual where that individual has been assessed as meeting the requirements in COB 2.5.1.

2.5.5. Individual joint account holders

An Authorised Firm may classify as a Professional Client an individual (the “joint account holder”) who has a joint account with an individual assessed as meeting the requirements in COB 2.5.1 (the “primary account holder”) if:

• (a) the joint account holder is a Family Member of the primary account holder;
• (b) the account is used for the purposes of managing Investments for the primary account holder and the joint account holder;
• (c) the following procedure is followed:

(i) the joint account holder must confirm in writing to the Authorised Firm that investment decisions relating to the joint account are generally made for, or on behalf of, him by the primary account holder;

(ii) the joint account holder must confirm in writing to the Authorised Firm that he wishes to be treated as a Professional Client either:

(1) generally;

(2) in respect of a specific Financial Product, Financial Service or Transaction; or

(3) in respect of a type of Financial Product or Transaction;

(ii) the Authorised Firm must give the joint account holder a clear warning in writing setting out the protections that the joint account holder may lose as a result of giving up his classification as a Retail Client; and

(iii) the joint account holder must confirm in writing, in a separate document from the client agreement or other contract, that he is aware of the consequences of losing such protections.

2.5.6. Assessed Professional Clients: Undertakings

For the purposes of COB 2.3.1, an Authorised Firm may treat an Undertaking as an Assessed Professional Client if:

• (a) the Authorised Firm assesses the Undertaking (which may involve assessing an individual or individuals authorised to make investment decisions on behalf of the Undertaking), on reasonable grounds, to have sufficient experience and understanding of the relevant Financial Products, Financial Services or Transactions and any associated risks; and
• (b) the Undertaking has own funds of at least USD 1 million.

2.5.7. Other types of Undertaking

An Authorised Firm may also classify an Undertaking as an Assessed Professional Client if the Undertaking has:

• (a) a Controller;
• (b) a Holding Company;
• (c) a Subsidiary (whether direct or indirect); or
• (d) a joint venture partner,

that meets the requirements in COB 2.5.6 to be classified as an Assessed Professional Client.

2.5.8. Client no longer meeting the requirements to be a Professional Client

If an Authorised Firm becomes aware that a Client no longer meets the requirements to be classified as a Professional Client, the Authorised Firm must, as soon as possible, inform the Client that this is the case and, where appropriate, discuss with the Client the steps that the Authorised Firm and the Client may take to address the situation, which may include the Authorised Firm notifying the Client of its reclassification.

2.6.1. Obligation to notify Professional Client of right to be treated as a Retail Client

If an Authorised Firm provides services to Retail Clients and Professional Clients, it must, when first establishing a relationship with a Person as a Professional Client, notify that Person in writing of:

• (a) that Person’s right to be classified as a Retail Client;
• (b) the higher level of protection available to Retail Clients; and
• (c) the period of time within which the Person may choose to be classified as a Retail Client.

If the Person does not choose to be classified as a Retail Client within the time specified by the Authorised Firm, the Authorised Firm may classify that Person as a Professional Client.

2.6.2. Authorised Firm not providing services to Retail Clients

If an Authorised Firm does not provide services to Retail Clients, it must inform its Clients of this fact and any relevant consequences.

2.6.3. Professional Client that asks to be treated as a Retail Client

If a Professional Client makes a request to the Authorised Firm to be treated as a Retail Client, the Authorised Firm must classify it as a Retail Client, unless the Authorised Firm does not provide services to Retail Clients.

Guidance: Request to an Authorised Firm that does not provide services to Retail Clients

An Authorised Firm that does not provide services to Retail Clients may receive a request from a Professional Client asking to be classified as a Retail Client. If the nature of the Client or the level of protection that it requires are such that it no longer meets the requirements to be a Professional Client, then the Authorised Firm should cease providing services to that Client.

2.7.1. Classification as a Market Counterparty

An Authorised Firm may classify a Person as a Market Counterparty, unless and to the extent that Person is given a different classification under this chapter COB 2, if that Person meets the requirements to be:

1. (a) a Deemed Professional Client; or
2. (b) an Assessed Professional Client and is the subsidiary of a Holding Company that is a Deemed Professional Client by virtue of being a Large Undertaking falling within COB 2.4.1(j), provided that the arrangement meets the conditions in COB 2.7.2.

2.7.2. Requirement for confirmation by the Client

In order for an Authorised Firm to classify a Person as a Market Counterparty, the Authorised Firm must ensure that:

• (a) the Person has been given prior written notification of its classification as a Market Counterparty; and
• (b) the Person has not requested to be classified other than as a Market Counterparty within the time specified in the notification.

2.8.1. Trusts

If an Authorised Firm intends to provide Financial Products or Financial Services to a trust, it must, unless otherwise provided in COB, treat the trustee of the trust, and not the beneficiaries of the trust, as its Client.

2.8.2. Funds

If an Authorised Firm provides a Financial Product or Financial Service to a Fund that does not have a separate legal personality, that Fund will be the Client of the Authorised Firm.

2.9.1. General application of the "agent as client" rule

Subject to COB 2.9.2, if an Authorised Firm is aware that a Person (the "agent"), with or for whom it is intending to provide a service is acting as an agent for another Person (the "underlying client") in relation to that service, then the Authorised Firm must treat the agent as its Client in respect of the service.

2.9.2. Exclusion from the "agent as client" rule

The underlying client is treated, for the purposes of these Rules, as the Client of the Authorised Firm in respect of the service, if:

• (a) the Authorised Firm has agreed with the agent in writing to treat the underlying client as its Client; or
• (b) the agent is neither:

(1) another Authorised Firm; or

(2) an Authorised Market Institution, and the main purpose of the arrangements between the parties is the avoidance of duties that the Authorised Firm would otherwise have to the underlying client.

2.9.3. Agreement in relation to more than one underlying client

If an Authorised Firm makes an agreement with the agent under COB 2.9.2(a) in relation to more than one underlying client, the Authorised Firm may rely upon the agent to act as a single point of contact for all communications between the Authorised Firm and all of the underlying clients for which the agent is acting. Accordingly, where the Authorised Firm communicates with the underlying clients, the Authorised Firm may send to, or receive from, the agent a single communication covering all of the underlying clients, without having to notify or obtain consent from each underlying client. However, where the Authorised Firm is required to provide any communications to any single underlying client, relating to matters specific to that underlying client, the Authorised Firm will still be required to provide to the agent the information specific to that underlying client, including the following:

• (a) any risk warnings required by COB;
• (b) trade confirmations for the purposes of COB 9</a>; and
• (c) periodic statements for the purposes of COB 9.

2.10.1. Requirement to keep records

An Authorised Firm must keep records of:

• (a) the procedures which it has followed under COB 2, including any documents that evidence the Client’s classification; and
• (b) any notification sent to the Client under COB 2, together with evidence of despatch.

2.10.2. Length of recordkeeping requirement

The records in COB 2.10.1 must be kept for at least six years from the date on which the business relationship with a Client ended.

2.10.3. Date on which the business relationship ended

For the purposes of COB 2.10.2, an Authorised Firm may, if the date on which the business relationship with the Client ended is unclear, treat the date of the completion of the last transaction with the Client as the date on which the business relationship ended.

2.10.4. Obligation to provide access to the AFSA

An Authorised Firm must ensure that the AFSA has access to all of the records required under COB 2.10.1, including any records maintained by or at its head office or any other branch of the same legal entity, or a member of its Group. An Authorised Firm must notify the AFSA immediately if, for any reason, it is no longer able to provide access to these records.