In September 2023, the Financial Conduct Authority (FCA) indicated its intention to review how corporate finance firms were applying the client categorisation rules. In 2025, the FCA selected 10 firms from its 2024 corporate finance portfolio to perform a review. The firms selected met as much of the following criteria as possible:
- The firm’s clients categorised as elective professional
- The firm has corporate finance contacts
- The firm markets high-risk investments
- The firm raised funds from individual investors
These firms were asked for information about their client categorisation practices, their policies, procedures and samples of clients. They also met with the firms to understand their business models and processes.
FCA findings
The FCA found failures in some of the firms sample related to the below steps in the categorisation process:
When conducting an assessment to categorise clients, firms were:
- Failing to conduct and document a categorisation assessment at onboarding
- Failing to keep supporting records at the time of the assessment
- Undertaking superficial, tick-box categorisation
- Applying invalid criteria to categorise a client as a per-se professional
- Lacking a clear process for reviewing the responses and representations in a client or due diligence questionnaire
- Keeping only high-level policies and procedures on client categorisation with limited detail
- Failing to consider the ongoing eligibility of elective professionals
When categorising corporate finance contacts subject to financial promotions, firms were:
- Failing to conduct or validate a categorisation assessment on investors, instead relying on longstanding relationships
- Failing to maintain an organised list of contacts that received, or are likely to receive, financial promotions
- Using incomplete/incorrect legal names for the contact
- Assessing the categorisation of a separate person to the person/legal entity receiving the promotion
- Expecting professional contacts to update the firm of a change to their categorisation
When certifying retail investors as high net worth or sophisticated, some firms were:
- Marketing high-risk investments to retail investors without a process to clearly identify the investment category
- Failing to have clear systems and processes to form a reasonable belief that the potential investor satisfies investor statement conditions
- Relying on long standing relationships with investors without getting investor statements or failing to renew them
With regards to policies and procedures, some firms were:
- Failing to have written policies, or policies they did have were incomplete, fragmented, or merely high-level copies of the Handbook rules
- Lacking document version control and periodic reviews for updates relating to rule changes, the firm’s business model or systems
- Failing to distinguish between clients in different business lines, or between clients receiving regulated services and corporate finance contacts in their policies
Best practice
As reminder, best practice for corporate finance firms when categorising clients should be as follows
Categorising clients
Firms should record a new/existing client categorisation assessment in a defined document, setting out the assessment against the applicable COBS 3 criteria and noting how the client meets these criteria.
This form should be reviewed by compliance teams and saved with supporting documents in the client or deal file at the time of assessment. This assessment should be conducted on an ongoing basis or as and when there are triggers that may affect client categorisation.
Categorising corporate finance contacts (particularly those who receive financial promotions)
Firms should maintain an organised list of contacts, including investors. The list should be updated periodically and before a financial promotion is communicated.
Inform contacts, particularly those classified as retail clients, that they are not clients of the firm and will not be afforded protections. This is usually done through communications and including disclaimers in financial promotion materials.
Certifying retail investors as high-net-worth or sophisticated
Firms should ensure that financial promotions are compliant with the rules regarding marketing to potential retail investors, including the COBS 4 and FPO provisions.
Firms should ensure that they receive certified investor statements, which indicate that the investor satisfies the relevant client categorisation – these statements should be renewed at least annually.
Policies and procedures
Firms should have a clear, written policy regarding client categorisation, tailored to the firm’s business model. The policy should detail the firm’s regulatory permissions, business lines, clients and investors within the firm’s risk appetite. The policy should make notable reference to the applicable COBS 3 and COBS 4 rules.
Next steps
The FCA intends to update the COBS 3 rules on client categorisation for all regulated firms in scope. In advance of this update, the FCA will send out a consultation to firms on its proposals to modernise COBS 3. Firms should consider this consultation in advance of making changes to their own processes.
Looking for support with your client categorisation procedures? Our UK regulatory compliance team is here to support – get in touch today.
