This post is an essential introduction to MiFID client categorisation. We’ll explain the three categories and discuss why it’s important that your clients are correctly categorised.
What is the Markets in Financial Instruments Directive (MiFID)?
The Markets in Financial Instruments Directive (MiFID) is a European legislation designed to encourage transparency and standardise regulation across financial markets. As part of this directive, all of a financial institution’s clients are placed under one of three categories.
Why Do MiFID Client Categorisations Exist?
MiFID client categorisations are designed to determine the relative levels of protection and transparency required for investors.
What Are the Three MiFID Client Categorisations?
- Eligible Counterparties
Clients in the professional or eligible categories can also fall into a subcategory of “elective” or “per se”. So technically, there are five possible categorisations for your clients: Retail, Per Se Professional, Elective Professional, Per Se Eligible Counterparties, and Elective Eligible Counterparties.
Per se clients, whether they’re professional or eligible counterparties, are categorised automatically based on certain criteria. For example, any entity that’s required to be authorised or regulate to operate in financial markets will usually fall under one of the per se categories.
Elective clients must meet certain requirements set out in two tests – a qualitative test and a quantitative test:
- The qualitative test involves assessing a client’s knowledge, experience, and expertise in making investment decisions, and in understanding the risks involved.
- The quantitative test involves assessing a client’s transaction sizes and frequency, their portfolio value, and their years of experience in the sector.
Examples of MiFID Retail Clients
A retail client is any client that does not meet the criteria for being a professional or eligible client, whether elective or per se.
So let’s take a look at the criteria for these other categories.
Examples of MiFID Professional Clients
These are entities that are authorised to operate in the financial markets, or which have certain regulation requirements.
Per se professional clients might include:
- Credit and investment firms
- Insurance companies
- Pension management companies
- Commodity dealers
- Collective investment schemes
- Public bodies, central banks, international institutions and both national and regional governments.
Professional clients are “large undertakings”, and so must meet at least two of the following criteria:
- A balance sheet total that’s at least €20 million in value.
- A net turnover of at least €40 million.
- Access to funds of at least €2 million.
Examples of MiFID Eligible Counterparty Clients
These are clients who carry out “eligible counterparty business”. They might carry out the same financial activities as professional clients, but they do so in the capacity of a counterparty.
So a client in your portfolio might be classified as professional or eligible counterparty depending on whether they act as a party or a counterparty in a transaction.
Summary – Getting The Classification Right, and Changing Classifications
Under MiFID, you have a legal obligation to follow this client classification framework in order to determine the correct level of protection and transparency required.
Each of your clients will either be an eligible counterparty, a professional client, or a retail client. And it’s possible for clients to move between these categories. For example, you might reclassify a retail client as a professional client once they meet the qualitative and quantitative requirements. And they might be classed as a professional or an eligible counterparty depending on their role in a transaction.
The different types of classification result in different levels of protection and transparency. So certain clients may wish to be treated as professional clients, as this will afford them the most protection.
If you wish to reclassify a client, it’s up to you to carry out the adequate qualitative and quantitative assessments. For more information, please consult the relevant section of the FCA handbook.
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