Client Categorisation Under COBS 3: The Rules and Where Firms Get Them Wrong

Client categorisation is the decision that determines every other conduct obligation a firm owes. Suitability, appropriateness, disclosure, best execution, reporting and the right to complain to the Financial Ombudsman all vary by category. Get the categorisation wrong and the firm has applied the wrong rulebook to that relationship from the start.

The FCA published a multi-firm review of client categorisation in corporate finance firms on 20 October 2025, and its summary finding was blunt: it found gaps in firms’ assessments and records. Most firms were doing something; a number were doing it superficially, and many were not documenting it at the time.

The three categories

COBS 3 builds the structure negatively. A retail client is defined at COBS 3.4.1R as a client who is neither a professional client nor an eligible counterparty — so retail is the default, and a firm has to establish its way out of it rather than into it.

A professional client (COBS 3.5.1R) is either per se or elective. An eligible counterparty (COBS 3.6.1R) is likewise per se or elective, and can only be one in relation to eligible counterparty business.

Per se professional clients

COBS 3.5.2R lists them: regulated entities such as credit institutions, investment firms, insurance companies, collective investment schemes and their managers, pension funds and their managers, commodity dealers and locals; national or regional governments, central banks and supranational bodies; and large undertakings.

The large undertaking thresholds differ by business type, which is a frequent source of error:

• MiFID business — two of: balance sheet total €20,000,000; net turnover €40,000,000; own funds €2,000,000
• Non-MiFID business — any one of several tests, including a body corporate with called up share capital or net assets of at least £5 million; an undertaking meeting two of €12,500,000 balance sheet, €25,000,000 net turnover and an average of 250 employees; a partnership with net assets of at least £5 million; a trust trustee with assets of at least £10 million; or a pension scheme trustee or operator where the scheme has at least 50 members and assets under management of at least £10 million

Local authorities are treated separately. Under COBS 3.5.2BR a local public authority or municipality that does not manage public debt must be categorised as retail, unless it can be treated as an elective professional client under the specific provisions at COBS 3.5.3BR to 3.5.3ER.

The elective professional client test

This is where the FCA found the weakest practice, and it has three limbs under COBS 3.5.3R.

The qualitative test. The firm must assess the client’s expertise, experience and knowledge, giving reasonable assurance that the client can make its own investment decisions and understand the risks involved.

The quantitative test, for MiFID business, requires at least two of:

• transactions of significant size on the relevant market averaging 10 per quarter over the previous four quarters
• a financial instrument portfolio, including cash deposits, exceeding €500,000
• at least one year working in the financial sector in a professional position requiring relevant knowledge

The procedure. The client states in writing that it wishes to be treated as a professional client; the firm gives a clear written warning of the protections it may lose; and the client separately confirms in writing that it is aware of those consequences. Three documents, in that order. COBS 3.5.6R then requires the firm to take all reasonable steps to confirm the tests are met before accepting the request.

For UK local public authorities the quantitative test is different again: a portfolio exceeding £10,000,000, plus one of ten transactions per quarter, a professional authorised person with a year’s financial sector experience, or acting as an LGPS administering authority.

Eligible counterparties

Per se eligible counterparties under COBS 3.6.2R include investment firms, credit institutions, insurance companies, UCITS schemes and their managers, pension funds and their managers, other UK-regulated financial institutions, national governments, central banks and supranational organisations.

Elective eligible counterparty status requires the client to be an undertaking and already a per se professional client, and to request the categorisation. For non-MiFID business COBS 3.6.4R adds a size condition — called up share capital of at least £10 million, or two of the quantitative tests. COBS 3.6.4BR requires a clear written warning of the consequences and written confirmation from the client.

Notification is a rule, not a courtesy

COBS 3.3.1AR(1) requires a firm to notify a new client, and any existing client it has newly categorised, of its categorisation. COBS 3.3.1AR(2) requires the firm to inform the client in a durable medium of any right to request a different categorisation and of any limits on protection that would follow. COBS 3.3.1BR requires this before services are provided, and COBS 3.3.2G confirms that professional clients and eligible counterparties must be told of their right to request re-categorisation whether or not the firm would agree to it.

Clients can also move up. COBS 3.7.1R requires a firm to allow a professional client or eligible counterparty to request a higher degree of protection. An eligible counterparty’s request must be in writing and specify the services, transactions or products covered (COBS 3.7.3B); for MiFID business a per se professional client requesting retail treatment is only classified as retail if it signs a written agreement specifying the scope (COBS 3.7.5R). Re-categorisation can be general, trade by trade, or limited to particular rules, services or product types (COBS 3.7.7G).

Where firms got it wrong

The FCA’s October 2025 review is unusually specific about the failure modes, and they are worth reading as a checklist.

No assessment, or none recorded. Some firms carried out no categorisation assessment at onboarding, or did not document one. The FCA’s view is that such firms fail to meet the rule requirements.

Tick-box categorisation without reference to which criteria were met or how. Some firms assessed contacts “by ‘feel’” with no formal assessment at all.

Criteria that do not support the conclusion. Firms relied on facts such as a public listing, or capital not yet raised, which do not establish per se professional status.

The consequence of getting it wrong. This is the most important sentence in the review: a client wrongly categorised as professional, where the criteria are not met, is a retail client regardless of the terms of business they have signed. Documentation does not cure a misclassification — the client’s actual status is determined by the rules, and the retail protections apply.

Disclaimers. The FCA said it would not regard information buried in a disclaimer as meeting a requirement to clearly indicate something.

Financial promotion exemptions misapplied, including reliance on exemptions that do not cover shares in listed or AIM-traded companies, promotions sent without a valid investor statement, and reliance on statements that had expired — these are valid for twelve months.

Records and refresh. Firms often did not keep supporting records at the time of assessment, had no process to validate initial assessments against the COBS 3 criteria, and did not revisit categorisation when a client returned for a new transaction even though a company’s size may have changed. Several did not consider whether a natural person remained eligible after a change in health or capacity, and some treated individuals as per se professionals on the strength of a job title.

What good looks like

The FCA’s identified good practice is essentially documentary discipline: recording the assessment against the COBS 3 criteria in a defined document such as a new business committee form, reviewed by compliance and saved with its supporting evidence at the time; a clear process to obtain, review and verify signed investor statements with annual renewal, expiry alerts and blocks on promotions to uncertified investors; making contacts aware at several points that they are not clients and will not receive client protections; and policies tailored to the firm’s own business lines and permissions rather than copied from the Handbook, with flow charts and templates.

The FCA’s stated expectation is that firms use structured assessments to evaluate whether a client meets the specific criteria. Structured means a defined methodology, defined criteria and a template — the absence of which was the common thread in the firms that fell short. That is a training and supervision problem rather than a systems one: the judgement sits with the person onboarding the client, and they need to know what the criteria are and what evidence satisfies them.

Firms handling client assets alongside this should read it with our guide to the CASS client money rules, and investment firms with our guide to the Investment Firms Prudential Regime. Our CPD course library covers the conduct and compliance foundations these assessments rely on.

Frequently asked questions

What happens if a client is wrongly categorised as professional?

They are a retail client. The FCA’s position is that where the criteria are not met the client is retail regardless of the terms of business signed, so the retail protections apply and the firm has been applying the wrong obligations.

Can a local authority be a professional client?

Only electively, and under specific provisions. COBS 3.5.2BR requires a local public authority or municipality that does not manage public debt to be categorised as retail unless it can be treated as an elective professional client under COBS 3.5.3BR to 3.5.3ER, where the UK quantitative test requires a portfolio exceeding £10,000,000 plus one further condition.

How many of the quantitative criteria must an individual meet?

At least two of the three for MiFID business: ten significant transactions per quarter averaged over the previous four quarters, a portfolio including cash exceeding €500,000, or a year working in the financial sector in a relevant professional position. The qualitative test must also be satisfied, and the written procedure followed.

Does categorisation need to be revisited?

In substance, yes. The FCA criticised firms that did not reconsider categorisation when a client returned for a new transaction, noting that a company’s size may change, and firms that did not consider whether a natural person remained eligible following a change in health or capacity.

How long is an investor statement valid?

Twelve months. The FCA found firms relying on statements that had expired, and identified expiry alerts and annual renewal as good practice.