On Dec. 8, the Financial Conduct Authority published consultation paper 26/36, proposing reforms to the professional client categorization regime and targeted simplifications to the conflicts of interest rules.[1]
The proposals would remove the existing quantitative test for elective professional clients, introduce a new opt-out route for individuals with at least £10 million ($13.7 million) in investable assets, clarify the qualitative assessment firms must apply and streamline Chapter 10 of the FCA’s Senior Management Arrangements, Systems and Controls Handbook, or SYSC 1, without materially changing firms’ underlying conflicts obligations.
The consultation paper reflects a broader FCA policy objective of improving access to investment opportunities for sophisticated and wealthy investors while maintaining appropriate consumer protections.
In particular, the FCA considers that elements of the current client categorization framework, derived from the Markets in Financial Instruments Directive, or MiFID II, are overly rigid and insufficiently tailored to modern investment behaviors, especially in private markets and long-term investment strategies.
The paper identifies several drawbacks in the current regime, which restricts wealthy investors from accessing some investment opportunities, and limits financial firms from offering complex products and services that align with the objectives and risk appetite of some of their customers.
The paper recognizes that a recategorization may allow for a commensurate level of protection to be afforded to professional clients.
In parallel, the FCA has identified unnecessary complexity and duplication in the conflicts of interest rules in SYSC 10,[2] particularly for firms operating across multiple regulated sectors.
The deadline for responses to the consultation paper was Feb. 2, with the FCA intending to publish the final rules in a policy statement later in the year.
For further information, please contact:
Sebastian J. Barling, Partner, Skadden
sebastian.barling@skadden.com
