FCA consults on client categorisation

The FCA’s consultation paper CP25/36, published on 8 December 2025, sets out proposals on client categorisation and will inform firms’ planning for categorisation assessments and procedures. The consultation closes to comments on 2 February 2026. 

The consultation proposes amendments to the FCA’s Conduct of Business Sourcebook (COBS), Particularly the elective (i.e. ‘opted-up’) professional client regime has been updated with clearer qualitative standards with targeted flexibility for sophisticated individuals. The consultation arrives off the back of the FCA’s multi-firm review of client categorisation, published 20 October 2025, which highlighted superficial assessments, invalid criteria, and weak documentation as recurring issues. The consultation’s key proposals include: 

• A new alternative wealth-based route for opted-up professional status for individuals with at least £10 million in investable assets, contingent on the client’s informed, documented consent and subject to the firm’s qualitative assessment that elective professional status is appropriate in light of the products and services envisaged.
• Removal of the current quantitative “two out of three” test for individuals on the basis that it is both over- and under-inclusive in practice and has facilitated box‑ticking rather than substantive assessment of expertise and risk understanding. In its place, the FCA sets out an enhanced qualitative duty anchored in specified factors that require firms to make and retain an evidence‑based judgment about the client’s expertise, experience and knowledge, adequately calibrated to the complexity and risks of the relevant products and strategies; the FCA emphasises that firms should not rely on client assertions where red flags exist and should be able to demonstrate how the qualitative test is satisfied for the scope of services to be provided.
• Additional safeguards to ensure categorisation is client‑led, informed and free of pressure or inducement, while permitting firms to explain elective routes where they reasonably consider the criteria may be met; firms must ensure the customer’s decision is based on a fair description of the loss of retail protections and the implications for redress and disclosures.
• For per se professionals (i.e., investors who do not need to be ‘opted-up’), the FCA proposes to simplify criteria by focusing on whether an entity is authorised or regulated to operate in financial markets, and to remove the current prescriptive list, although it is expressly asking for feedback on any ambiguity this may create and on whether a retained list would be preferable for legal certainty. 

Transitional arrangements are also set out in the consultation. Once the new rules commence, firms would need to reassess all existing elective professional clients within one year, leveraging existing information where sufficiently current to support the refreshed qualitative analysis. 

Relatedly, a Court of Appeal’s judgment in October last year reinforces the legal expectation that firms go beyond client representations where red flags arise, and that qualitative assessment under COBS must be demonstrably adequate in light of the products and risks at issue. 

The court upheld the Financial Ombudsman Service’s (FOS’s) conclusion that reliance on tick‑box answers without reconciling inconsistencies or obtaining the required supporting evidence fell short of the qualitative test for opting up investors, and it confirmed that firms cannot assume a client’s understanding of high‑risk strategies absent a properly evidenced assessment.  Although the court remitted the case for reconsideration of contributory negligence, the above analysis serves as a timely judicial counterpart to the FCA’s focus on amending the qualitative test as outlined in the consultation. 

Key takeaway 

The proposals set out in the consultation will certainly be welcomed by asset managers in private markets particularly those targeting HNWIs. However, it is clear the FCA is focused on robust and evidence based qualitative assessments. As such, managers should monitor the development and be prepared to build out their assessment process.    

Nyah Clark, trainee, also contributed to this article.

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