IFAC often field questions about the categorization of high net worth clients. These come from firms who do NOT have an IFA in house â€“ or do not have the permission to advise retail clients. Some IFAs also ask from time to time, seeking to reduce process and protect themselves in the event of a transaction with a high net worth individual going wrong.
If it were simple, weâ€™d all be doing it. And IFAC say the categorization of professional client can only really be used when advising boards of directors or Charities of businesses the size of county councils. The FCA rules actually define HNW (much the same as professional client in relation to protections afforded by regulation) as having an annual income of Â£100,000 or more, or more than Â£250,000 of net assets â€” levels unchanged for the past two decades despite the value of money declining significantly. In fact the FCA rules helpfully provide a template statement:
If only it were so simple.
Property investor Robert Tchenguiz faces a High Court trial next year â€“ he is suing CMC, arguing that he should never have been treated as a sophisticated professional client and that spread-better CMC should not have been allowed to close his account. CMC claimed in a pre-trial hearing on Friday that Mr Tchenguiz had signed forms in 2019 opening his account that designated him as an â€œelective professional clientâ€ â€” a category that allowed him to run a deficit on his account, but that gave him fewer regulatory protections than retail clients. One of the positions may be for Â£30m it is reported.
Jonathan Davies-Jones QC, representing Mr Tchenguiz, told the High Court that he should never have been treated as a professional client. Quelle surprise! Win that argument, and the entire case will be won by Tchenguiz, and presumably the Â£30m position refunded.
If this story was a one off, youâ€™d be interested. But it repeats on a daily basis in our industry.
Sir Keith Mills invested over a decade ago some Â£200m of his own cash, and sued: his case also rested on exactly this point â€“ HNW (ie professional) or retail client?
This is where the professional client categorisation often ends up, with eye-wateringly rich going to the high court to re-categorise themselves as â€œordinaryâ€.
I guess we all feel â€œordinaryâ€ at some stage â€“ no matter how wealthy we are, and this is the heart of the compliance issue in financial services markets today.
DE-RISKING THE CUSTOMER
All the risk lies with the IFA who is client facing, and the investment management world have been de risked by this, excepting this hole in the wall called â€œprofessional clientsâ€
We make no apology for repeating an earlier comment:
The categorization of professional client can only really be used when advising boards of directors or Charities of businesses the size of county councils.