The FCA wants to reset how firms distinguish between retail and professional clients, balancing promoting growth with consumer protection.
Key Points:
- The FCA is proposing a new approach to professional client categorisation, including a new wealth threshold.
- At the same time, it is proposing to increase safeguards to ensure retail clients are not opted up inappropriately.
- Firms would need to review the categorisation of all existing elective professional clients against the new rules, within one year of them coming into force.
Introduction
On 8 December 2025, the FCA published a Consultation Paper (CP25/36) containing proposals to amend the COBS 3 client categorisation rules, and to rationalise the rules in SYSC 10. The proposals on client categorisation highlight the tension the regulator is facing between championing competitiveness and growth, while also enhancing consumer protection, as they represent a partial liberalisation alongside a drive to curb poor practices.
Client Categorisation
The FCA intends to amend the client categorisation rules so that there is more flexibility to opt up sophisticated and/or wealthy clients to elective professional status, while enhancing protections to ensure that retail clients are not inappropriately opted up. The overarching aim is to improve access to investments for individuals with “deep expertise or substantial wealth”, which is meant to maintain a high bar.
Elective Professionals
The FCA is proposing that a firm would be able to treat a client as an elective professional if all of the following conditions are met:
- Either:
- the client has net investable assets (defined as a portfolio of designated investments or cash) in excess of £10 million; or
- the firm has undertaken a qualitative assessment of the expertise, experience, and knowledge of the client and is satisfied on reasonable grounds that the client is capable of making their own investment decisions and of understanding the risks in relation to the transactions the firm may undertake with the client and the products and services the firm may offer the client
- The client has requested categorisation as an elective professional and the firm has obtained the client’s informed consent, by signature, to opt out of retail protections
- The categorisation is compatible with the firm’s obligations to act honestly, fairly, and professionally in the best interests of the client, and under the Consumer Duty
This involves a number of key changes, discussed in more detail below.
Alternative wealth assessment: Firms would be able to categorise an individual as an elective professional if the client has investable assets of at least £10 million. This threshold is notably high, evidencing the FCA’s concerns about when retail protections may be disapplied.
Quantitative test: The FCA is proposing to remove the current COBS 3.5.3R(2) “quantitative test” (except in relation to local authorities). The limb “the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters” has always been difficult to satisfy, and the FCA considers that the test is simultaneously too open to misuse, while also excluding individuals with significant expertise and resources when applied correctly. The regulator could not see a workable way to reformulate the criteria, and also voices concerns that some firms rely on the quantitative criteria alone to determine a client’s capability to be a professional client.
Qualitative test: The FCA has concluded that the qualitative assessment, if undertaken correctly, remains fit for purpose. However, it also notes that no respondent to its earlier discussion on client categorisation indicated that current guidance on the qualitative test was sufficient or helpful. Consequently, it plans to enhance the qualitative test by identifying a set of relevant factors firms must consider to determine whether a client meets the threshold to be categorised as an elective professional client. These factors would include: occupational experience; investment history; financial resilience; knowledge, understanding, and ability to assess risk; and the client’s objectives. Firms would be able to retain the option to offer an opt-up for a limited range of products or services.
To provide additional safeguards, the FCA also proposes to add a rule that a firm may not rely solely on representations from the client, nor on any representation or information from the client that is manifestly inaccurate, deficient, or out of date. Firms would also be prohibited from inviting clients to undertake a self-assessment against the relevant factors, such as via an online form with click-through access.
Safeguards: The FCA stresses that how a firm approaches client categorisation should be compatible with the firm’s existing obligations under the Consumer Duty and the client’s best interests rule. It proposes that firms would be able to share information about the option to opt up with a client they reasonably believe would meet the conditions to become a professional client, to help the client decide whether requesting to opt out of retail protections is right for them. However, any attempt to incentivise, mislead, or put pressure on a client to opt up would be strictly prohibited.
The FCA’s discussion on this topic is somewhat confused. The paper suggests that allowing firms to share information about opting up is a liberalisation, whereas this is arguably already allowed under the existing rules. This may remind firms of the confusing commentary seen in the recent multi-firm review of client categorisation in corporate finance firms, which seemed to misread the existing rules.
The FCA proposes to expressly require firms to obtain informed consent, by signature (not a tick box), before categorising a client as elective professional. Why a signature, but not a tick box, indicates that informed consent has been received is not clear. Consent would not be classed as informed unless:
- the client is given sufficient information about the protections they are opting out of and sufficient time to consider the implications of being classified as a professional client, before they are asked to consent to opting out; and
- at the time of being asked to give consent, the client is given a clear and prominent warning that they are consenting to opt out of retail protections including, where relevant, access to regulatory redress.
While the FCA does not propose to introduce a requirement for firms to undertake periodic reviews of client categorisation, it does propose that firms reassess categorisation if they become aware, or should reasonably suspect, that a client no longer meets the threshold of a professional client. It indicates that this might include situations in which the firm has not had any interaction with a client for two years or more. We would not be surprised to see firms pushing back against this measure, as it could introduce a significant compliance burden.
Another issue with the proposals, as the FCA acknowledges, is that other investor classifications in different regimes are currently aligned with the MiFID definitions (such as the definition of a “qualified investor” under the UK prospectus regime). However, some of these sit in legislation, which the FCA does not have the power to amend. The FCA asks for feedback on any difficulties stakeholders envisage regarding future misalignment.
Firms will, however, be pleased to see that the FCA is not proposing any new obligations on firms to establish governance and implement ongoing systems and controls to ensure that their processes for categorising clients as elective professional, including their communications with clients prior to categorisation are effective, as it considers that existing obligations are sufficient in this regard.
Per Se Professionals
In addition to the changes relating to elective professionals, the FCA is proposing to simplify the rules for categorising per se professional clients, by removing the prescriptive list of entities that qualify. This is intended to clarify that any entity authorised or regulated in the UK or a third country to operate in the financial markets, can be treated as a per se professional client. It also intends to clarify that special purpose vehicles controlled by authorised firms can be considered as per se professionals. The FCA is also proposing to default to the MiFID financial thresholds for large undertakings to classify clients that do not fall within any of the other criteria for per se professionals. These measures are likely to receive broad industry support.
Record-Keeping
The FCA proposes to strengthen and clarify its expectations on record-keeping, such that firms would be expected to maintain records that explain the basis for the categorisation and how the categorisation assessment was undertaken. Records would need to include information obtained from the client, any verification the firm undertook, and the firm’s justification or reasoning for determining that the client meets the threshold to be categorised as an elective professional. The FCA also notes that it is exploring the possibility of collating client categorisation data through a regulatory return form, which could be used to develop monitoring metrics.
Transition
Importantly, the FCA expects that firms would review the categorisation of all existing elective professional clients against the new rules, within one year of them coming into force. This would be a significant undertaking for many firms. In addition, the FCA expects that this process could result in many firms concluding they need to obtain new consent. For example, if a firm has accepted a client ticking a box to indicate they consent, this will not demonstrate informed consent under the new rules.
Conflicts of Interest
In the second part of the Consultation Paper, the FCA is proposing to rationalise and streamline its conflicts of interest rules, while preserving the current policy approach. The aim is to reduce the length and complexity of the current rules, but not to change firms’ regulatory obligations. The main issues stem from the fact that these rules have accumulated over time, coming from different EU sectoral regimes. Therefore, many of the current provisions achieve the same or similar obligations, but are worded differently for different types of firm. The FCA is seeking to merge provisions that are very similar or duplicative, to reduce the overall volume of rules and make them easier to navigate.
While the FCA stresses that some of the resulting language changes do not represent any change in its expectations, in places it defaults to the more onerous obligation; for example, opting for “all appropriate steps” rather than “all reasonable steps”. Further, the changes would mean that some provisions apply to certain firms as rules rather than guidance, although the FCA plans to mitigate this by introducing an express proportionality provision.
However, the FCA helpfully proposes that firms would not be required to update their policies and processes to reflect the changes before their next scheduled review of their conflicts of interest policy.
Next Steps
Responses are requested by 2 February 2026. No prospective date is set for when the final rules might be published or take effect, although we would not expect to see any changes until at least 2027.
The proposals include a number of suggestions that appear practically difficult for firms to implement, so the FCA is likely to receive significant feedback on how it might create a workable solution.
