Client classification in the ADGM – a comprehensive guide
This guide presents the complexities of client categorisation as mandated by the FSRA and provides a thorough understanding of the requirements and best practices.
How are clients classified under the FSRA Conduct of Business Rulebook (“COBS”)?
An Authorised Person must categorise each of its clients into one of two categories:
- Retail client – individuals or entities that do not qualify as professional clients are classified as retail clients.
- Professional clients – there are two routes through which a person may be classified as a professional client; deemed professional clients and assessed professional clients.
It is mandatory that clients are appropriately and correctly classified with respect to each regulated activity, service, product, or transaction.
Classifications of professional clients
1. Deemed professional clients
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- Entities such as large undertakings, automatically qualify as deemed professional clients if they meet specific criteria, such as financial thresholds or regulatory status.
- Government bodies, authorised persons, regulated financial institutions, including all Persons listed in paragraph 2.4.2 of the COBS automatically qualify as deemed Professional Clients.
2. Assessed professional clients
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- Individuals may be classified as assessed professional clients based on their financial assets, professional experience, and understanding of relevant financial markets and products.
- For example, an individual with net assets of at least USD1,000,000, relevant professional experience or qualifications, and who has waived his rights to be classified as a retail client, can be classified as an assessed professional client.
Market counterparties
An authorised person may classify a professional client as a market counterparty if:
- the person qualifies as a deemed professional client
- the person has been notified in writing of the classification and has not requested otherwise.
What is the FSRA’s client classification process?
1. Determining the client classification
Client classification must be done before carrying out any regulated activity involving the provision of services to a client. However, marketing activities can occur before formal classification is documented and notified.
2. Ensuring appropriate regulatory protection
The FSRA expects authorised persons to adopt practices aligned with the intent of the client classification provisions, ensuring clients receive suitable regulatory protection based on their resources and expertise.
For instance, an authorised person should not engage in advising or arranging activities involving a regulated activity or specified investment that is intended for professional clients (such as complex derivatives) with a potential customer unless there is a reasonable basis to believe that the customer has adequate knowledge and experience concerning the relevant activity or product.
3. Multiple classifications for different activities
A person may be classified differently for various regulated activities, services, or products. It is crucial to assess each scenario independently.
Regulatory requirements: what are the differences between client categories?
The regulatory requirements differ between retail and professional clients, with more stringent rules generally applied to retail clients to ensure their protection.
1. Communication and marketing
Communications addressed to professional clients do not need to include the same level of detail or be presented in the same manner as those addressed to retail clients.
Marketing material intended for professional clients or market counterparties must not be directed at persons who are not professional clients or market counterparties. Reasonable steps must be taken to prevent misuse of such material.
2. Past performance and forecasts
Information related to past performance or future forecasts provided to retail clients must present a fair, balanced, and up-to-date view, including comparable data for at least five years where available. It must also include a prominent warning that past performance is not necessarily indicative of future results.
3. Key information and client agreement
Rules regarding the provision of key information and client agreements do not apply to professional clients classified as market counterparties.
4. Suitability
The rules requiring suitability assessments do not apply when undertaking transactions with professional clients classified as market counterparties.
5. Best execution
The obligation to achieve best execution does not apply to transactions with professional clients classified as market counterparties.
6. Aggregation and allocation
Rules related to the aggregation and allocation of transactions do not apply to transactions with professional clients classified as market counterparties.
7. Other dealing rules
Rules against excessive trading (churning) and requirements for timely and fair execution and allocation of transactions do not apply to transactions with professional clients classified as market counterparties.
8. Confirmation notes and periodic statements
Requirements to provide confirmation notes and periodic statements do not apply to transactions with professional clients classified as market counterparties.
9. Client money rules
For professional clients classified as market counterparties, authorised persons engaging in investment business may exclude the application of client money rules with the prior written consent of the client.
How Waystone Compliance Solutions can help
Accurate client classification is a fundamental aspect of regulatory compliance within the FSRA framework. By adhering to the guidelines and ensuring appropriate classifications, authorised persons can provide clients with suitable levels of protection and maintain robust regulatory compliance.
For further information and support with client classification, financial institutions are encouraged to consult with our team of regulatory experts.
If you have any questions or concerns about how this impacts your firm, please contact our Middle East Compliance Solutions team or contact us below.