How are clients categorised as retail, professional or eligible counterparties?

A professional client has the experience, knowledge and expertise to take its own investment decisions and judge the risks properly. Four groups are professional for all services and instruments: entities that need authorisation or regulation to operate in financial markets, such as banks, investment firms, insurers, investment funds and their managers, pension funds and their managers, commodity dealers and other institutional investors; large undertakings; national and regional governments, bodies that manage public debt, central banks and international and supranational institutions such as the World Bank, the IMF, the ECB and the EIB; and other institutional investors mainly investing in financial instruments, including securitisation vehicles.

A large undertaking meets at least two of three size tests on a company basis: a balance sheet total of €20,000,000, a net turnover of €40,000,000 and own funds of €2,000,000. An individual is not a professional client per se because of their job or experience; they can only opt up.

A per se professional can ask for a higher level of protection, and the onus is on the client to ask. Before providing services the firm tells it that it will be treated as professional unless agreed otherwise and that it may request different terms. Higher protection is given through a written agreement to treat the client as non-professional, stating which services, transactions or products it covers.

Other clients, including public bodies, municipalities and individual investors, may waive some protections, but they are not presumed to have the market knowledge of per se professionals. The firm must first assess their expertise, experience and knowledge and be reasonably assured that they can make their own decisions and understand the risks; for small entities it assesses the person authorised to transact. At least two of three criteria must also be met: on average 10 transactions of significant size per quarter on the relevant market over the previous four quarters; a portfolio of cash and financial instruments exceeding €500,000; or at least one year working in the financial sector in a professional position requiring knowledge of the transactions or services envisaged.

The client asks in writing, the firm gives a clear written warning of the protections and compensation rights that may be lost, and the client confirms in a separate written statement that it understands the consequences. The firm keeps written internal policies for categorisation, takes reasonable steps to check the criteria, and acts if a client no longer qualifies; professional clients must tell the firm of changes that could affect their category.

Firms notify new clients, and clients they recategorise, of their category, and inform them on a durable medium of any right to request a different category and of any limits on protection that would result. A firm may also decide on its own to give a client more protection, treating an eligible counterparty as a professional or retail client, or a per se professional client as retail.

Eligible counterparties, the most sophisticated category, are covered in What are the rules for tied agents, eligible counterparties and crowdfunding? Separately, a firm providing any investment service, or safekeeping, to a retail or professional client enters into a written basic agreement, on paper or another durable medium, covering the essential rights and duties of both sides; for investment advice this applies only where the firm provides a periodic suitability assessment.