Client categorisation: a reset, not a relaxation

The FCA’s proposals to overhaul the elective professional client regime represent one of the most significant changes to UK conduct regulation since Brexit. However, firms that read these proposals as a simple green light to categorise more clients as professional may be missing the point.

On 8 December 2025, the FCA published CP25/36, consulting on fundamental changes to how firms distinguish between retail and professional clients. The headline is the new £10 million wealth route to professional status. However, the substance is more nuanced.

CP25/36 was published as part of a suite of measures to boost investment culture in the UK including the new rules to replace EU-derived packaged retail investment products (“PRIIPs”) and Undertakings in Collective Investment in Transferable Securities (“UCITS”) disclosure requirements for packaged products (PS25/20: Consumer Composite Investments ).

The problem the FCA is trying to solve

The current regime has two well-documented failings. The first concerns legitimate clients who cannot access appropriate products. The second concerns ordinary retail clients who are pushed into giving up protections they need.

On one hand, the rigid quantitative test has become increasingly disconnected from modern investment behaviour. The test requires clients to demonstrate 10 trades per quarter and a €500,000 portfolio. Buy-and-hold strategies in illiquid assets, concentration in private business interests and the emergence of new asset classes have all exposed the limitations of criteria designed for active equity traders in 2007.

On the other hand, the FCA’s supervisory work has uncovered serious poor practice. Some firms have treated the quantitative criteria as determinative and ignored the requirement for a genuine qualitative assessment. Others have accepted tick-box self-certification. A few have actively incentivised clients to “opt up” to professional status to assess higher risk products. The regulator explicitly describes the last practice as “unacceptable”.

The recent Court of Appeal decision in Linear Investments v Financial Ombudsman Service demonstrates these concerns. The court upheld a FOS finding that a firm’s assessment process was inadequate. The firm had failed to probe an obvious inconsistency between an elective professional client’s tick-box answers claiming contracts-for-difference trading experience and his written explanation referring only to investments in “blue chip stocks”.

What the FCA is proposing regarding elective professionals

The consultation proposes three interconnected changes to the elective professional regime.

First, the removal of the mandatory ‘quantitative test’. The familiar “2 of 3” criteria (portfolio size, trading frequency and relevant employment) would be deleted entirely, except for local authorities. However, as part of the qualitative assessment, the concept will be retained that a firm must consider the client’s capacity to bear losses.

Second, a new £10 million wealth route. Clients with investable assets above this threshold could opt out of retail protections without a structured qualitative assessment. This remains subject to informed consent and compatibility with the client’s best interests rule and Consumer Duty.

Third, an enhanced qualitative assessment framework for everyone else. Firms must consider specified “Relevant Factors” including occupational experience (no longer limited to financial services), investment history, financial resilience, knowledge, understanding and the ability to assess risk, and the client’s objectives for seeking professional status and any adverse information.

Simplifying the per se professional criteria

The consultation also proposes to simplify the criteria for per se professional clients (those who are professional by virtue of what they are, rather than by election).

The current rules contain a long list of different types of authorised entity. The FCA proposes to replace this with a simpler formulation such that any entity “authorised or regulated to operate in financial markets” would qualify. This should make verification more straightforward, although the FCA acknowledges that there is a risk of unintended consequences and seeks feedback on whether a specific list should be retained.

Special purpose vehicles (“SPVs”) and other ‘below the fund’ vehicles controlled by authorised firms would be expressly included as per se professionals. This reflects the reality that these vehicles are professional investors in all practical respects, as they are controlled by funds and used to deploy their capital.

The FCA also proposes to harmonise the thresholds for categorising large undertakings as per se professional by removing the distinction between MiFID and non-MiFID business. All firms would apply the existing MiFID thresholds. Firms currently relying on the lower non-MiFID thresholds (other than pension trusts) with assets exceeding £10 million would be removed. Firms currently relying on these provisions will need to review affected clients although transitional provisions will apply.

What the FCA is not proposing

The proposals are notable as much for what they exclude as what they include.

There is no general relaxation of standards. The FCA is explicit that firms cannot rely on client self-certification, cannot use click-through online forms for assessment and cannot accept information that is “manifestly inaccurate, deficient or out of date”. The threshold of a professional client (someone capable of making their own investment decisions and understanding the risks involved) remains high.

There is no new quantitative test. Despite industry suggestions for alternative criteria such as lower portfolio thresholds, income tests or different trading metrics, the FCA has declined to substitute one set of rigid criteria for another.

There is no blanket exemption from Consumer Duty scrutiny. The £10 million wealth route still requires informed consent and must be “compatible with the firm’s obligations to act honestly, fairly and professionally in the best interests of the client and under the Consumer Duty”. The Consumer Duty applies right up to the point of categorisation.

The recategorisation requirement

Perhaps the most operationally significant proposal is the transitional requirement. Within 12 months of the new rules coming into force, firms must review all existing elective professional clients against the updated standards.

For firms that have historically conducted robust qualitative assessments and obtained meaningful informed consent, this may be a limited exercise. For firms that relied heavily on the quantitative test or accepted tick-box consent forms, the work will be substantial. Some clients will not meet the new threshold. Some consent processes will need to be repeated from scratch.

Firms without retail permissions face a particular challenge. If a client cannot be recategorised as professional under the new rules, the firm must inform the client that it cannot continue to do business with them and wind down any existing positions. This process must still be conducted in accordance with the client’s best interests.

Three questions for firms

1. What does your current client book actually look like?
   
   How many elective professional clients do you have? What proportion were categorised primarily on the basis of meeting the quantitative criteria? Do your records demonstrate a genuine qualitative assessment, or do they evidence a process that was designed to confirm a predetermined outcome? The answers will determine the scale of your recategorisation exercise.
   
   
2. Is the £10 million route right for your business?
   
   The new wealth route is attractive in its simplicity, but it is not a complete safe harbour. Firms must still obtain informed consent and act in the client’s best interests. For private banks and wealth managers with established ultra high net worth client relationships and strong advisory models, this route may make onboarding more efficient. For firms offering execution-only access to high-risk products, the absence of a qualitative assessment does not remove the obligation to ensure the categorisation serves the client’s interests.
   
   
3. How will you evidence “informed consent”?
   
   The proposals specify that consent must be “by signature” and cannot be informed unless the client has received sufficient information about the protections they are losing, sufficient time to consider the implications and a clear and prominent warning at the point of consent. Tick-box acceptance will not suffice. Firms should expect to need new consent processes and, for existing clients, new consent documentation that demonstrably meets these requirements.
   
   

The conflict of interest changes

The consultation also proposes to rationalise the conflicts of interest rules in SYSC 10 and SYSC 3. Unlike the client categorisation proposals, these changes are explicitly not intended to alter firms’ obligations. The FCA is merging duplicative provisions derived from the Markets in Financial Instruments Directives, the Alternative Investment Fund Managers Directive (“AIFMD”), UCITS and the Insurance Distribution Directive into a shorter and clearer set of rules with an express proportionality provision.

This is a welcome simplification. The current rules require firms (particularly those operating across multiple business lines) to navigate a complex web of provisions with minor differences in language that rarely reflect meaningful differences in substance. Firms will not need to update their policies before their next scheduled review.

Beyond the FCA Handbook

One complexity that the FCA acknowledges but cannot resolve concerns the legislative references to the COBS 3 definitions. The definitions of professional client are referenced in legislation outside the Handbook, including the Public Offers and Admissions to Trading Regulations 2024 definition of “qualified investor”, the AIFMD definition of “professional investor” and the Private Intermittent Securities and Capital Exchange System definition of “qualifying individual.” These sit in legislation rather than FCA rules.

The FCA is seeking views on whether alignment is desirable. For now, firms offering products that rely on these legislative exemptions should be cautious about assuming that a client categorised as professional under the new COBS 3 rules will automatically qualify under the corresponding legislative definitions.

Consultation timing

Responses are due by 2 February 2026. A policy statement will follow, and final rules are expected later in 2026. Firms will then have 12 months to complete the recategorisation exercise.

The FCA intends to monitor the effectiveness of the new rules primarily through supervision. However, it is also exploring the possibility of collecting client categorisation data through a new regulatory return. This sits somewhat in tension with the FCA’s concurrent efforts to reduce reporting burdens, but may reflect the regulator’s desire to build an evidence base on how categorisation practices evolve under the framework.

The direction of travel is more flexibility for firms dealing with genuinely sophisticated clients, combined with clearer expectations and stronger safeguards against inappropriate categorisation. Firms that have historically taken a robust approach to qualitative assessment should welcome these proposals. Firms that have not may find the recategorisation requirement a challenging but necessary reset.

For advice on how these proposals may affect your firm, or assistance with responding to the consultation, please contact Jamie Gray.

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