UK FCA Consults on Recalibrating Client Categorisation and Rationalising Conflicts of Interest Rules

The UK Financial Conduct Authority published a package of consumer investments reforms on 8 December 2025 to empower retail investment and reinforce wholesale markets. At the heart of the proposals is the FCA’s ambition to rebalance risk in a way that supports growth, innovation and competitiveness.

The reforms aim, in part, to (i) make it easier for consumers to understand investments, potential returns, costs and risks; (ii) draw a clearer distinction between retail and professional investors, thereby freeing firms to innovate and offer a broader range of products to genuinely experienced clients with the resources to bear greater risk; and (iii) as part of the FCA’s commitment to simplifying its rules, rationalise its “overly complex” conflicts of interest rules—making them more concise, reducing complexity, and enhancing accessibility and navigability—while maintaining the core obligations, to ensure the new rules are proportionate and clear for firms to interpret, apply and implement.

This LawFlash focuses on the FCA’s proposed recalibration of client categorisation rules and rationalisation of the conflicts of interest regime as set out in the FCA’s consultation paper, Client categorisation and conflicts of interest (CP25/36), issued in response to feedback on the FCA’s consultation paper CP24/24 (November 2024) and call for input (July 2024).

CLIENT CATEGORISATION: RECALIBRATION

FCA rules apply different protections to different types of clients, with retail clients afforded the highest protection while retaining the option to opt out of retail protections by qualifying for elective professional client status—a mechanism that ultimately enables access to a broader range of financial products and services.

The FCA received feedback that individuals with significant expertise or substantial resources are sometimes unable to meet the assessment criteria for elective professional status and that the trading frequency criterion (10 trades per quarter over the previous four quarters) is not realistic for clients invested in illiquid or long-term strategies.

By contrast, the FCA has found poor practices in how certain firms categorise retail clients as elective professionals, including reliance on self-certification, offering incentives to opt-up, and inadequate qualitative assessments of clients’ experience, expertise and knowledge. These practices can lead to significant losses and consumer harm. The proposals therefore include safeguards “to prevent firms inappropriately opting clients out of the retail protections they need”.

Proposed Updates to Elective Professional Criteria

The FCA proposes to recalibrate the elective professional regime as follows:

• Removal of the current quantitative test: The rigid MiFID-derived trading frequency and portfolio-size criteria would be deleted (except for local authorities). The FCA considers that this test can lead to some consumers being inappropriately opted out of retail protections and, at the same time, other individuals with significant expertise/resources are sometimes unable to meet the criteria.
• £10 million wealth assessment: A new path to elective professional status for individuals with at least £10 million in net investable assets (cash and/or designated investments) would be introduced. No structured qualitative assessment would be required, but the client must give informed consent, the firm must meet best interests and consumer duty standards as applicable, and verify the client has investable assets of at least £10 million.
• Qualitative assessment: The FCA proposes to retain the requirement that firms undertake a robust qualitative assessment of a client’s expertise, experience and knowledge. It proposes to identify a set of relevant factors that firms must consider in determining whether a client meets the threshold to be categorised as an elective professional client. For clients not using the new wealth assessment route, firms must conduct a holistic outcome based assessment taking into account relevant factors, including occupational experience (inside or outside financial services), personal trading investment history, knowledge and ability to assess risk, financial resilience and loss bearing capacity, objectives for opting out, and adverse indicators (e.g., vulnerability) that gives reasonable assurance that, in light of the nature of the transactions or services envisaged, the client is capable of making their own investment decisions and understanding the risks. Firms may not rely solely on client self certification or manifestly inaccurate/out of date information.
• Informed consent and communications: Firms must obtain “informed consent” by signed confirmation, with clear prominent warnings about protections foregone and sufficient time to consider. Firms may proactively provide balanced factual information on opting out where they reasonably believe a client is likely to meet the professional threshold to help the client decide whether requesting to opt out is right for them. A client may only be categorised as an elective professional if they have actively requested this and given informed consent to opt out of all retail protections.
• Ongoing safeguards: No periodic reassessment requirement is proposed, but firms must reassess if they become aware (or should reasonably suspect) that a client no longer meets the professional threshold, and clients must be able to withdraw consent at any time. Firms should maintain robust records evidencing the basis for categorisation and assessments.

In a move that will likely create significant new burden, the FCA proposes, as part of the transitional arrangements, that firms must conduct a one-off review of all existing elective professional clients within 12 months of the new rules entering into force, reassessing against the updated standards and obtaining fresh informed consent where prior processes do not meet the new requirements relating to the qualitative assessment and “informed consent.”

Proposed Updates to Per Se Professional Criteria

The FCA proposes to rationalise the per se professional client list by:

• Replacing the list of authorised entities with a clearer rule that any entity authorised or regulated in the UK or a third country to operate in financial markets qualifies;
• Expressly including special purpose vehicles as per se professionals;
• Harmonising “large undertaking” criteria by applying the existing MiFID thresholds to whatever type of business (MiFID, non-MiFID or mixed) is being conducted, but converting the relevant thresholds from Euros into GBP; and
• Removing the rule allowing firms conducting exclusively non-MiFID business with trustees to categorise as per se professionals if the trust has assets over £10 million, thereby necessitating re-categorisation under one of the alternative routes, including the new wealth assessment option; however, the existing position will continue to apply for pension trustees where the trust has assets exceeding £10 million and at least 50 members.

Certain per se professional (non MiFID) and elective eligible counterparty classifications must also be reviewed. Re notification is only required where categorisation changes.

CONFLICTS OF INTEREST: RATIONALISATION

Requirements to manage conflicts lie at the heart of the regulatory framework to help ensure that clients receive fair outcomes. FCA Principle 8 requires all firms to manage conflicts of interests fairly, both between themselves and their customers and between one customer and another. SYSC 10 of the FCA Handbook sets out specific obligations that firms must meet in relation to managing conflicts of interest. Generally, the FCA expects firms to ensure that conflicts do not result in adverse outcomes for customers and that a firm’s management is responsible for ensuring that conflict identification and management are embedded in the firm’s culture.

The FCA has previously received feedback that its conflicts of interest rules are complex to navigate, create uncertainty and add costs as they apply differently under MiFID, AIFMD, the Insurance Distribution Directive (IDD) and the UCITS Directive. This has required firms—particularly those conducting mixed business—to undertake duplicative processes.

The FCA proposes to rationalise the rules in SYSC 3 (Systems and Controls) and SYSC 10 (Conflicts of Interest) of the FCA Handbook, merging duplicative provisions across MiFID, AIFMD, the IDD and the UCITS Directive into a shorter, clearer set of rules with a new express proportionality provision. By reducing the length and complexity of the current rules, the FCA is seeking to ensure its rules are proportionate and clear for firms to interpret and implement.

Importantly, the FCA’s objectives are to maintain the current core substantive obligations, rather than increase or reduce them, while merging similar or duplicative provisions, though certain activity specific obligations will be presented more consistently and some requirements (e.g., inclusion of a gifts and benefits policy) will be rendered explicit for all firms.

Helpfully, firms will not be required to update their conflicts policies and processes before their next scheduled review. Transitional arrangements will defer application for full scope UK AIFMs until AIFMD Level 2 conflicts provisions are revoked.

NEXT STEPS

Affected firms should review the proposed changes set out in the consultation paper. The deadline for responses is 2 February 2026. Once the final client categorisation rules are published, firms should begin reviewing existing documentation and information obtained from clients to ensure it is sufficient to enable them to complete the qualitative assessment and determine whether any client reassessments, re-categorisations or refreshed consents are required within the one-year post–effective date deadline.

Firms may also need to consider whether professional client representations and acknowledgements obtained from investors and clients require updating, including whether EU and UK professional client representations should be bifurcated as the regimes continue to diverge.