Summary
The Financial Conduct Authority’s (FCA”) CP25/36 on client categorisation and conflicts of interest (the “consultation”) should not be read as a narrow technical consultation. It is better understood as part of a broader supervisory agenda: away from prescriptive eligibility mechanics and towards an outcomes-led assessment of whether firms’ judgments genuinely serve client interests and market integrity.
Last week we published an insights piece around “Reasonable Steps vs Outcomes” [read full piece], in that sense, CP25/36 sits squarely alongside the themes explored therein, namely, that the regulator is less persuaded by the existence of frameworks and more focused on how those frameworks shape decisions, constrain behaviour, and prevent harm in practice.
What the FCA is proposing in CP25/36 is not just a change in who can be categorised as a professional client, but the evidentiary burden on firms to demonstrate that opting a client out of retail protections is justified, informed, and compatible with good outcomes. It can be argued that has always been the purpose behind the MiFID II client categorisation criteria, however with the move away from on shored EU law post-Brexit, the changes could offer both challenges and opportunities.
The FCA has signalled that it intends to monitor the effectiveness of the policy once published as a new regime through supervisory work, complaints, and potentially regulatory returns. Firms should expect questions not just about how many clients were opted up, but about patterns of loss, complaints or remediation among elective professionals, changes in client behaviour post-categorisation, reassessment of categorisation when circumstances changed and how categorisation decisions interacted with product governance outcomes.
From eligibility tests to judgement under scrutiny
The consultation explicitly rejects a “tick-box” interpretation of elective professional client status. The removal of the mandatory quantitative test in COBS 3.5.3R(2) and the introduction of a more holistic, outcome-based qualitative assessment is not deregulatory in spirit. Instead, it reallocates responsibility.
Firms are being given greater discretion, but with that discretion comes greater accountability for the consequences of categorisation decisions. The FCA is clear that reliance on self-certification, mechanical thresholds, or status-based documentation will not meet expectations. What matters is whether the firm can evidence that:
- The client genuinely understands the implications of losing retail protections, including the Consumer Duty.
- The client can bear losses associated with the products and services they will access.
- The categorisation decision aligns with the client’s objectives and best interests.
- The firm’s own incentives, product strategy and distribution model do not bias the assessment.
This is a shift from permission-based compliance (did the client meet the rule?) to proof-based supervision (did the firm’s judgement produce the right outcome and will it continue to do so?).
Consumer Duty as both safeguard and test
One of the most consequential aspects of CP25/36 is the FCA’s explicit reliance on the Consumer Duty as a core safeguard, rather than layering additional prescriptive rules. Elective professional clients will, by definition, be opted out of the Duty, but the Duty remains central to how firms must design the categorisation process itself. The ‘client’s best interests’ rule should remain core to the design of these processes.
This creates a subtle but important dynamic. Firms must use Consumer Duty principles: good outcomes, customer understanding, avoidance of foreseeable harm, to justify a decision that removes the client from the scope of those protections.
In practical terms, this means firms will need to demonstrate, ex post, that:
- Communications about opting out were balanced, comprehensible and not outcome-biased.
- Consent was informed in substance, not just in form.
- No commercial pressure, product gating or status signalling distorted the client’s decision.
- The firm considered whether retaining retail protections would better support the client’s long-term outcomes.
This mirrors the “reasonable steps vs outcomes” tension. Reasonable steps remain the legal lens, but outcomes are the evidential test of whether those steps were meaningful.
Conflicts rationalisation
The conflicts proposals in CP25/36 are framed as a rationalisation exercise, not a substantive change in obligations. However, the broader supervisory context suggests that simplification does not mean leniency.
By streamlining SYSC conflicts rules, the FCA is removing a common defence: complexity as an excuse for inconsistency. Firms will be expected to demonstrate clearer line-of-sight between identified conflicts, mitigation strategies, and observable outcomes for clients.
In an outcomes-focused regime, conflicts frameworks that exist only as registers and disclosures are unlikely to satisfy supervisory scrutiny. The question will increasingly be whether conflicts:
- Influenced product design, pricing or distribution decisions.
- Were actively managed when commercial pressure increased.
- Resulted in altered behaviour when client outcomes were at risk.
Again, the existence of frameworks is not the end goal, rather you must address and evidence operational effect.
Multi-jurisdictional firms: fragmentation as an operational risk
For firms operating across multiple jurisdictions, CP25/36 introduces a non-trivial operational challenge. Client categorisation regimes are already fragmented even across common multi-jurisdictional markets including MiFID, AIFMD, US accredited investor rules, Singapore and Swiss frameworks. As ever, there is a growing tension between regimes that are principles versus rules based. The UK’s move towards a more judgement-based, qualitative model risks increasing internal inconsistency unless firms act deliberately.
Key challenges include:
- Divergent thresholds and concepts of “professional” or “sophisticated” clients across regimes.
- Systems and controls designed around rigid eligibility tests rather than judgement.
- Global products distributed under multiple categorisation standards.
- Front-line teams navigating different disclosure and consent expectations.
Without careful thought, firms risk drifting into inconsistent standards across jurisdictions: over-protecting clients in some markets, which can unnecessarily restrict access to products and weaken competitiveness, while under-protecting clients in others, increasing conduct risk and the likelihood of supervisory challenge.
At the same time, this tension creates a strategic opportunity. Firms that invest in a coherent, principles-based client categorisation framework, one that is aligned to outcomes rather than jurisdiction-specific mechanics, are more likely to deliver consistent client experiences. In addition, it enables firms to review their frameworks to establish clearer internal decision-making and accountability, reduce the need for remediation and repeated re-papering, and demonstrate stronger “grip” in supervisory interactions.
Opportunities for UK consumers and UK firms
CP25/36 is explicitly framed as supporting growth and competitiveness, not just consumer protection. If implemented well, the proposals could unlock meaningful benefits:
For UK consumers:
- Greater access to products and services that genuinely meet their needs.
- Fewer artificial barriers based on outdated proxies for sophistication.
- Clearer understanding of what protections they are giving up, and why.
For UK firms:
- Increased flexibility in product design for truly professional clients.
- Reduced reliance on blunt eligibility criteria that distort distribution strategies.
- Improved ability to compete with international peers in wholesale markets.
Crucially, these benefits depend on firms treating categorisation as a governance decision rather that an onboarding step.
The interaction between PS25/20 (Consumer Composite Investments) and CP25/36
It is noteworthy that CP25/36 can have an impact on other parallel policy implementation and integration for firms not least of which is the upcoming PS25/20 (Supporting informed decision making: Final rules for Consumer Composite Investments (“CCI” s) (“PS25/20”) which uses client categorisation primarily as a scope gate for disclosure. Put simply: if the product is being made available to a UK retail investor, then that product is in scope of PS25/20; if it is genuinely non-retail, there is an exemption route. The exemption is framed by reference to whether investors are or would be categorised as professional clients or eligible counterparties under COBS 3, plus “reasonable steps” around communications and distribution strategy.
CP25/36, is proposing to change the underlying mechanics of how a natural person can become an elective professional client (and therefore cease to be retail) under COBS 3, including safeguards around informed consent and stronger qualitative assessment, and a new wealth route.
As a result, the interaction between CP25/36 and PS25/20 is causal. Changes impacting COBS 3 under CP25/36 changes who can legitimately be categorised as elective professional (and how firms must evidence that decision). In practice it changes how confidently a manufacturer/distributor can rely on the “non-retail CCI” perimeter in PS25/20 without mis categorisation risk.
That creates potential mismatch if the proposal in CP25/26 is taken forward into policy:
- “Elective professional” becomes a higher-evidence statement. CP25/36 is explicitly aimed at poor practice in opt-ups (over-reliance on self-certification, incentives, weak qualitative assessment) and proposes clearer standards and informed consent expectations.
- PS25/20 is about product perimeter; CP25/36 is about client protection perimeter. Even if a product is structured and labelled “not for retail”, a firm still needs to know the client is non-retail (professional/elective professional) before relying on that perimeter. CP25/36 reinforces that until all conditions to opt-up are met, the client must be treated as retail.
In practice, if you’re manufacturing or distributing CCIs and using the “non-retail” carve-out, CP25/36 should be treated as an even more critical ‘to watch’. In practical governance terms, you should assume supervisors will expect evidence that your non-retail distribution strategy maps to genuine categorisation decisions.
What might engagement and responding look like for different firms?
Firms with a material wholesale or semi-wholesale client base
Asset managers, hedge funds, private markets managers and wealth firms that regularly deal with high-net-worth individuals, family offices or sophisticated private investors should pay particular attention. The removal of rigid quantitative tests and the introduction of a £10m wealth-based route materially changes who can be accessed, how products can be distributed, and where retail protections apply. These firms are well placed to influence whether the qualitative assessment framework is workable in practice and whether it genuinely supports innovation without introducing supervisory ambiguity.
Firms operating mixed retail and professional models
Firms that straddle retail and professional business lines, particularly those with optional exemption permissions, dual-use products, or distribution chains that cross client categories, face heightened conduct and conflicts risk under the proposed regime. Responding to the consultation gives these firms an opportunity to highlight practical challenges around boundary management, communications, systems design and Consumer Duty alignment before rules are finalised.
Multi-jurisdictional firms and third-country firms
Firms operating across the UK, EU, US or Asia-Pacific markets should consider responding where the proposals risk increasing fragmentation between client categorisation regimes. Differences between MiFID-derived concepts, US accredited investor standards and the FCA’s more judgement-led approach may create operational friction, client confusion and governance complexity. The FCA has explicitly invited views on interactions with other regimes, and this is an area where industry input can meaningfully shape outcomes.
Wealth managers and advisers serving high-net-worth individuals
Advisory firms working with wealthy, but non-institutional clients sit at the sharp end of the informed consent and Consumer Duty interplay. The proposed ability to discuss opt-up options, coupled with prohibitions on inducement and pressure, raises real questions about adviser conduct, documentation and evidencing client understanding. These firms are well positioned to provide feedback on what “informed” consent looks like in real client conversations.
Firms with complex conflicts profiles
Firms with multiple business lines, co-investment structures, proprietary products or vertical integration should not overlook the conflicts rationalisation proposals. While framed as simplification, clearer rules will likely sharpen supervisory expectations around evidencing how conflicts are managed. Firms with more complex incentive structures may wish to engage to ensure the rationalised framework reflects operational reality.
Smaller firms and newer market entrants
For smaller firms, CP25/36 may reduce long-term compliance friction by simplifying per se categories and conflicts rules. However, smaller firms are also more exposed to supervisory challenge where qualitative judgement is poorly evidenced. Responding to the consultation allows these firms to flag proportionality concerns and influence how outcomes-based expectations are applied across different firm sizes.
Conclusion
CP25/36 reinforces a broader regulatory message that discretion is not deregulation. The FCA is granting firms more flexibility, but also demanding clearer evidence that judgement is exercised responsibly and in clients’ best interests.
The FCA wants to see a continued move beyond “reasonable steps” towards demonstrating that process demonstrably shaped behaviour and prevented poor outcomes over time. Client categorisation is becoming a live test of governance quality, incentive management and cultural maturity.
For firms that treat it as such, CP25/36 represents a very real strategic opportunity.
