Are your clients who YOU say they are?

If you work in UK asset management and haven’t yet heard the distant rumble… don’t worry  …that’s just the FCA quietly re-shaping client categorisation.

Yes, the same framework, we all definitely understood perfectly the first time around and was correctly implemented in its fullest…. Retail? Professional? Elective? Per se? Simple… until it isn’t. such as how someone can be expected to undertake 40+ private equity trades in a year to meet the quantitative requirements….? Is about to be changed.

The upcoming changes look set to revisit how firms assess and document whether clients really are who they say they are (from a regulatory perspective, at least). Ensuring that firm’s have not only adequate systems and controls but have a robust documented rational…but there’s also another angle creeping in…How are firms categorising the clients they’re targeting, not just the ones they already have?

Because it’s one thing to justify an existing professional client under COBS 3 whether per se or elective, with the right quantitative tests and qualitative assessment. It’s another to explain why your target market is “professional only”, how that aligns with your distribution strategy under MiFID II product governance (PROD 3), and whether your financial promotions are actually reaching only that audience. And that’s without the added complications of Certified High Net Worth and Self-certified Sophisticated investors, Restricted  Mass Market Investments and non-Mass Market investments.

What we’re likely to see is a shift away from comfortable assumptions toward something more evidence-driven. Not just “this client is professional”, but how that conclusion was reached—including whether elective opt-ups genuinely meet the experience, knowledge and expertise test, and whether that assessment is being refreshed where appropriate. The FCA are already undertaking work through recently issued surveys to identify outliers. Undoubtably this will lead to follow-up questions and potential s166 reviews (or VREQs).

At the same time, firms may be challenged on whether their target market definitions are credible in practice. If your product is defined as suitable only for professional clients, but your distribution channels or marketing approach don’t effectively restrict access, that disconnect is likely to attract attention.

For many firms, this will trigger a familiar sequence. It usually starts with confidence (“we’re fine”), moves quickly to a light review (“maybe tweak a template”), and then inevitably lands in a deeper dive where slightly inconsistent approaches start to appear. At that point, questions tend to get more interesting, and we can provide more value and support.

Change is often seen as a negative, however the new changes are ultimately designed to make it easier to do business and create better outcomes for clients. This is a good opportunity to turn regulatory obligations into a commercial advantage, if applied correctly, appropriately and in the clients best interest. It will definitely spur firms to revisit how they categorise clients, sense check how they define their target market, and make sure the overall story holds together from onboarding through to marketing.

Because the FCA’s direction of travel is pretty clear: If you say a client is professional or that you only target professionals, you should be able to explain why, without relying on the idea that “they know what they are doing,” or “they have been investing for years,”.

So if you haven’t looked at your client categorisation framework recently… now might be the moment.

fscom can assist firms in reviewing, updating and implementing robust and compliant client categorisation process, marketing process, as well as the complete client on-boarding and on-going review process.