Financial Conduct Authority flags weaknesses in client categorisation and investor certification and will consult on updating COBS3 rules

The Financial Conduct Authority published findings from a review of corporate finance firms’ compliance with COBS 3 client categorisation rules and COBS 4 certification requirements, identifying gaps in firms’ assessments, supporting records and overall process rigor. The FCA has given feedback to reviewed firms, asked for improvements where weaknesses were found, and signalled that it will update the COBS 3 client categorisation rules for all in-scope regulated firms, not only corporate finance firms. The review covered 10 firms selected using the FCA’s 2024 corporate finance portfolio survey and focused on practices involving elective professional categorisation, use of corporate finance contacts for financial promotions, and marketing of high-risk investments to individual investors. Key issues included superficial or undocumented onboarding categorisation, unclear processes for validating initial categorisations against COBS criteria and refreshing assessments for subsequent transactions, and unstructured elective professional qualitative assessments with limited documented rationale. For corporate finance contacts, the FCA saw weaknesses in evidencing categorisation before communicating promotions, inconsistent identification of the correct legal recipient, and communications that may not “clearly indicate” the absence of a client relationship beyond buried disclaimers. For certified high net worth and self-certified sophisticated investors, the FCA noted poor identification of the applicable regime (COBS 4 versus Financial Promotion Order exemptions), use of non-compliant or mixed statement templates, ad hoc controls over obtaining valid in-date statements, and apparent misapplication of Financial Promotion Order Articles 48 and 50A to investments that did not appear to meet the relevant criteria. The FCA will shortly consult on proposals responding to feedback in CP24/24 on modernising the COBS 3 client categorisation rules and will take the review’s findings into account as it updates the framework. Firms are encouraged to consider the forthcoming consultation before making process changes, and the FCA will continue to monitor conduct in these areas through ongoing supervision.