FSRA Thematic Review on Client Classification

The Riffle

The FSRA’s thematic review assessed APs' compliance with client classification rules under COBS Chapter 2. Key gaps include mixing classification with AML/KYC, weak knowledge assessments, poor governance, and lack of ongoing monitoring. APs must conduct a gap analysis and address deficiencies.

Client Classification

• Conflation with AML/KYC
  APs often mix client classification with AML/KYC due diligence, leading to improper classification. FSRA expects a distinct, well-documented classification process.

• Inadequate Assessment of Net Assets
  APs must ensure accurate assessment and verification of net assets based on financial documents, asset valuations, and exclusions outlined in COBS 2.4.4 (b)(i).

• Insufficient Knowledge and Experience Assessment
  Many APs rely on client self-assessment instead of conducting independent evaluations through direct interactions, financial history reviews, and open-ended questionnaires.

• Reliance on External Classifications Without Gap Analysis
  Some branches rely on parent company classifications without verifying compliance with FSRA rules. A full gap analysis is required.

• Weak Governance, Training, and Record Keeping
  Many APs lack proper governance structures, staff training, and record-keeping mechanisms, affecting compliance quality. FSRA mandates a second-line review process.

• Lack of Ongoing Monitoring
  APs fail to periodically review client classifications. FSRA expects continuous monitoring and reclassification when client circumstances change.

• Fund Managers and Unitholders Classification
  Fund managers must classify unitholders before admitting them to Exempt or Qualified Investor Funds, applying the same client classification standards as other APs.

Disclosure Requirements

• APs must clearly disclose classification criteria and maintain transparency regarding classification decisions.

• Notifications sent to clients about their classification status should be well-documented.

Regulatory Compliance

• Gap Analysis – APs must assess their classification framework against FSRA findings and COBS rules.

• Remediation – Implement improvements in processes, policies, training, and documentation.

• Training – Staff must be trained to ensure proper client classification and adherence to regulatory requirements.

• Monitoring – Establish a system for periodic reassessment of client classifications.

• Segregation – Ensure clear separation between AML/KYC processes and client classification.

Next Steps

APs should immediately implement these recommendations to maintain compliance. FSRA will continue monitoring and may conduct further reviews to ensure effective remediation.

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