FCA proposes new rules for classifying investors

The financial regulator has proposed changes to the way investment firms classify their customers, in an effort to improve protection for ordinary investors while giving more flexibility to wealthy people with large investment portfolios.

At the moment, firms must follow different rules depending on whether a customer is treated as a ‘retail client’ (comes with the highest level of protection) or a ‘professional client’.

Professional clients can access a wider range of complex or higher-risk investments, but they also lose important protections and in some cases access to certain redress schemes.

However, the FCA says the current system is too rigid and may be stopping sophisticated wealthy investors from accessing products that might be suitable for them.

For example, some rules require investors to have made a high number of trades in the past year to be treated as professional, even if those trades are not relevant to their experience.

Under the new proposals, people with more than £10 million in investable assets could choose to be treated as professional clients without having to pass detailed knowledge tests.

However, the FCA said it has seen cases where firms have pushed unsuitable customers to opt out of retail protections, exposing them to unnecessary risks – so it is also proposing strenghtening the rules around opting out.

For example, for customers with less than £10 million in assets, firms would still need to assess whether they have the knowledge, experience and financial resilience to understand and bear the risks of investing without retail protections.

Firms would also have to give clear, balanced information about what protections a customer would lose before making any change.

The consultation on the changes is open until February next year, and final rules will be confirmed at a later date.