10.1 Client Relationships, Adviser Responsibilities and Types of Clients

The Adviser-Client Relationship

The relationship between a financial adviser and a client is the foundation of regulated financial advice in the United Kingdom. When an adviser provides a personal recommendation to a client, the adviser assumes duties that are imposed by the Financial Conduct Authority (FCA) Handbook, by the common law of contract and negligence, and by equity. The relationship is not transactional; it is built on trust, competence and integrity and continues for the duration of the engagement.

An adviser must act within the applicable best-interests, suitability and conduct rules. The Principles for Businesses (PRIN) include Principle 2 (skill, care and diligence), Principle 3 (management and control), Principle 8 (conflicts) and Principle 9 (relationships of trust). Principles 6 (customers' interests) and 7 (communications) apply outside Consumer Duty scope; Principle 12 and PRIN 2A apply to activities within it (PRIN 3.2.10R). COCON imposes individual Conduct Rules on people within its scope under the SMCR. These are firm and individual obligations with different application tests.

FCA Client Categories

The FCA's Conduct of Business Sourcebook (COBS) recognises three client categories, set out in COBS 3. Each category carries a different level of regulatory protection:

Retail Clients

A retail client is the default category under COBS 3 for a client who is neither professional nor an eligible counterparty. Retail clients generally receive the strongest conduct protections, but individual rules depend on the activity and product: suitability reports arise for relevant advised transactions, and cancellation rights apply to specified contracts. The retail label alone does not confer Financial Ombudsman Service (FOS) access, which has its own complainant and jurisdiction tests, or Financial Services Compensation Scheme (FSCS) protection, which depends on such matters as a failed authorised firm, protected activity, claimant eligibility and loss.

Professional Clients

A professional client is either a per se professional client — automatically professional because of its status, such as an authorised firm, a large undertaking meeting two of the prescribed size criteria, or a national government — or an elective professional client, who is a client that agrees in writing to be treated as professional after the firm has carried out a quantitative and qualitative assessment under COBS 3.5.

For an elective professional client, COBS 3.5 requires the firm to assess the volume and frequency of the client's transactions, the size of the client's financial instrument portfolio, and the client's knowledge and experience. A retail client cannot simply be relabelled professional to remove protections; the firm must follow the prescribed opting-up process and obtain written consent.

Eligible Counterparty

An eligible counterparty is the category offering the fewest conduct protections. It applies to dealings between firms and other authorised persons, governments, central banks and certain supranational bodies. A firm may treat a professional client as an eligible counterparty only with the client's express consent (COBS 3.6), and the relationship typically involves execution of transactions on a principal or matched-principal basis without a suitability requirement.

Permissive Client Categorisation

Firms may apply permissive client categorisation — that is, they may choose to treat a client that could be categorised as professional or eligible counterparty as a retail client, and thereby grant the higher protections. This may be useful where a high-net-worth individual prefers the stronger COBS treatment available to retail clients for the relevant service, even though they could be opted up. It does not itself create a cancellation right or FOS eligibility; those depend on separate rules.

COBS 3 Client Categorisation Process

COBS 3 requires firms to:

1. Categorise each new client as retail, professional, or eligible counterparty before providing services.
2. Provide a written description of the categorisation and the protections available.
3. Notify the client of the right to request a different categorisation.
4. Obtain express written consent before treating a client as an eligible counterparty or as an elective professional client.

The categorisation is recorded in the client agreement (COBS 2) and feeds into disclosure, suitability, cancellation and complaint handling for the duration of the relationship. The firm must also warn an elective professional client in writing that it will lose the protections that would otherwise apply as a retail client.

Adviser Responsibilities Across the Relationship

The adviser's responsibilities span the entire relationship, not just the moment of recommendation:

• Pre-engagement: initial disclosure of services, regulator, complaints procedure and status (independent or restricted).
• Information gathering: a fact-find sufficient to assess suitability, including objectives, risk tolerance, capacity for loss, and existing financial position.
• Analysis and recommendation: a suitable personal recommendation supported by a suitability report under COBS 9.
• Implementation: accurate execution of the recommended product and correct documentation.
• Ongoing servicing: periodic reviews and updates to the fact-find where an ongoing service is agreed.

Why Categorisation Matters for CeMAP

Client category is one factor in determining the applicable rules. For a retail client, a suitability report may be required for relevant advice, and a 14-day or 30-day cancellation right may arise for specified contracts; neither follows from categorisation alone. The CeMAP candidate should identify the category, explain its effect on the relevant service and recognise when an opt-up is appropriate. Mis-categorising a retail client to avoid applicable duties can breach FCA rules.