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Client classification 

01 December 2011

Impact Red traffic light

Medium/high impact – re-classification exercise required, and additional compliance obligations triggered where selling derivatives/structured products to non-retail clients

Other areas to consider

Exemptions for ECPs and Professional Clients; Best Interests of Clients; Appropriateness; Suitability

Current MiFID rules

Client: A client is anyone to whom the firm provides a MiFID service.

Categories: MiFID has three main client categories:

(i) Eligible counterparties include: MiFID investment firms and BCD credit institutions as examples, as well as those who are ‘opted up’ on the basis of their experience and expertise. A firm may only treat a client as an eligible counterparty in relation to eligible counterparty business, e.g. dealing/arranging activities.

(ii) Professional Clients include: credit institutions, investment firms and collective investment schemes as examples, as well as “opted up” retail clients.

(iii) Retail Clients are all other clients.

Classify: A firm must implement appropriate written internal policies and procedures to classify its clients.

MiFID Level 1 Directive Art: 4

FSA rules


Proposed changes
Draft Directive
Recital (67), Article 25 and Annex II

In response to alleged mis-selling practices, the Commission is proposing the following amendments in the draft Directive:

  • Prohibiting municipalities from being classified as eligible counterparties or per se professional clients (although they may be opted up to professional client status on their request);

Note that The Commission consulted on limiting the availability of the ECP regime for smaller firms and for very complex instruments, but subsequently watered this proposal down to requiring that more information is provided to ECPs by firms when doing business with them.

  • Presumption that professional clients have the necessary level of experience and knowledge to be limited to less complex financial instruments (in particular excluding financial instruments that embed a derivative or that incorporate a structure that make it difficult for the client to understand the risk involved), so as to grant to professional clients a more rigorous assessment of suitability or appropriateness.
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