Client Categorisation Reform: New Routes to Professional Client Status

Introduction: A Watershed Moment for UK Wholesale Markets

The Financial Conduct Authority's publication of Consultation Paper CP25/36 in December 2025 marks a significant development in the UK's post-Brexit regulatory framework for wholesale markets. The proposals, which form part of the Government's broader Wholesale Markets Review, aim to reform the client categorisation regime inherited from MiFID II, creating new pathways for sophisticated investors to access professional client status.

For firms operating in the wholesale and private markets space, these proposals represent both an opportunity and a compliance challenge. This article examines the key elements of CP25/36, the practical implications for different types of firms, and the steps compliance teams should be taking ahead of the 2 February 2026 consultation deadline.

Background: Why Reform is Needed

The current client categorisation framework, derived from MiFID II, has faced sustained criticism from market participants and policymakers alike. The regime establishes three client categories - retail, professional, and eligible counterparty - with progressively fewer regulatory protections as sophistication increases.

The fundamental criticism centres on the quantitative tests for elective professional client status, which require individuals to meet at least two of the following three criteria:

Carried out transactions of significant size at an average frequency of 10 per quarter over the previous four quarters
Portfolio of financial instruments exceeding EUR 500,000
Worked in the financial sector for at least one year in a professional position

These tests, critics argue, fail to capture genuine financial sophistication. A retired investment banker with decades of market experience but a modest pension may fail the transaction frequency test, whilst a lottery winner with no financial expertise could readily meet the portfolio threshold.

More significantly for UK competitiveness, the current framework has been identified as a barrier to participation in private markets, venture capital, and other long-term investment opportunities that institutional investors access routinely but which remain largely closed to wealthy individuals.

CP25/36: Key Proposals

The New Wealth-Based Route

The centrepiece of CP25/36 is the proposed introduction of a new wealth-based pathway to professional client status. Under the proposals, an individual would qualify for elective professional client categorisation if they can demonstrate net investable assets of at least GBP 10 million.

This represents a significant departure from the existing framework, which focuses on activity levels rather than absolute wealth. The FCA's rationale is that individuals with substantial investable assets are likely to have the financial capacity to bear investment losses and the means to access professional advice.

The GBP 10 million threshold has been set deliberately high to ensure the route is available only to genuinely wealthy individuals. The FCA has made clear this is not intended to be a mass-market pathway but rather a targeted reform for high-net-worth individuals seeking access to sophisticated investment opportunities.

Key implementation points:

The threshold applies to net investable assets, excluding primary residence and pension entitlements
Firms must obtain appropriate evidence of assets, which may include bank statements, investment platform valuations, or certified net worth statements
Annual confirmation of continued eligibility will be required

Removal of the Quantitative Test

CP25/36 also proposes removing the quantitative test requiring 10 transactions per quarter. The FCA acknowledges that transaction frequency is a poor proxy for sophistication, particularly in an era of long-term investing where low turnover may indicate disciplined strategy rather than inexperience.

This change would address one of the most criticised aspects of the current regime, which arguably penalises buy-and-hold investors whilst rewarding excessive trading activity.

If implemented, the remaining criteria for elective professional client status would focus on:

The wealth-based route (GBP 10 million threshold)
Portfolio size exceeding the existing threshold
Professional experience in the financial sector

Enhanced Qualitative Assessment

To address concerns that wealth alone does not guarantee sophistication, CP25/36 proposes strengthening the qualitative assessment requirements for all routes to elective professional client status.

Firms would be required to take reasonable steps to ensure that clients understand:

The nature and implications of professional client status
The specific regulatory protections they would be giving up
The types of products and services they would access
The risks associated with those products and services

This enhanced assessment goes beyond the current requirement for written warnings and signed acknowledgements. The FCA expects firms to engage meaningfully with clients to evaluate whether they have the expertise, experience, and knowledge to make informed investment decisions.

Practical implications:

Document conversations with clients, not just written acknowledgements
Consider implementing structured suitability questionnaires
Maintain records demonstrating genuine engagement with the client's circumstances
Where concerns arise about a client's understanding, decline to categorise them as professional

Informed Consent Requirements

CP25/36 introduces more prescriptive requirements around informed consent. Clients opting into professional status must be provided with clear information about:

The Consumer Duty protections they will no longer benefit from
Best execution obligations and how they differ for professional clients
Disclosure requirements that do not apply to professional clients
The ability to request treatment as a retail client at any time

The informed consent document must be in writing, signed by the client, and retained for the duration of the relationship plus five years.

Importantly, the FCA clarifies that the consent requirement is product or service-specific. A client may elect professional status for private equity investments, for example, whilst remaining a retail client for other services. Firms must maintain clear records of the scope of any professional client election.

Addressing Consumer Duty Concerns

A significant aspect of CP25/36 is its interaction with the Consumer Duty regime. When the Duty was introduced, questions arose about its application to professional clients and whether firms facilitating client upgrades might breach Duty requirements by enabling clients to access products without retail protections.

The FCA addresses this directly in the consultation. The regulator's position is that:

Consumer Duty applies to all retail clients and remains disapplied for professional clients
A client's decision to opt into professional status, made with informed consent, represents an autonomous choice that firms should respect
Firms will not breach Consumer Duty solely by providing a route to professional status, provided the qualitative assessment and informed consent processes are robust
Where firms have concerns about a client's suitability for professional status, they should decline to categorise them as such regardless of whether they meet the formal criteria

This clarification is significant for wealth managers and private banks considering whether to offer the wealth-based route. The FCA has effectively given a green light, provided firms implement appropriate safeguards.

Impact on Private Markets and Long-Term Investors

The proposals have particular significance for the private markets sector, including venture capital, private equity, and infrastructure investment. These asset classes have traditionally been accessible primarily to institutional investors, with wealthy individuals often excluded despite having the financial capacity and time horizon to participate.

The current categorisation regime contributes to this exclusion in several ways:

Transaction frequency tests disadvantage illiquid investments with long holding periods
The EUR 500,000 portfolio test does not distinguish between liquid and illiquid holdings
Firms face compliance uncertainty about facilitating retail client access to professional-only products

CP25/36 directly addresses these concerns. The wealth-based route provides a clear pathway for high-net-worth individuals to access private market opportunities. The removal of the transaction frequency test recognises that patient capital investors should not be penalised for low turnover.

For firms in the private markets space, the reforms could significantly expand the available investor base, supporting capital formation and economic growth objectives that underpin the Wholesale Markets Review.

Client Review Obligations

CP25/36 introduces new requirements for ongoing review of professional client categorisations. Firms would be required to:

Conduct an initial review of all existing elective professional client categorisations within 12 months of the new rules taking effect
Implement processes for annual verification that clients continue to meet the relevant criteria
Re-perform the qualitative assessment where there are material changes in a client's circumstances
Maintain documented evidence of reviews conducted

These requirements represent a significant compliance burden, particularly for firms with large books of elective professional clients. However, the FCA's expectation is that robust categorisation processes should be an ongoing feature of client relationship management, not a one-time onboarding exercise.

Implementation Timeline

The FCA has proposed the following timeline:

December 2025: Publication of CP25/36
2 February 2026: Consultation closes
Q2 2026: Publication of Policy Statement and final rules
Q4 2026 or Q1 2027: Expected implementation date
12 months from implementation: Deadline for review of existing categorisations

Firms should note that the consultation period is relatively short at approximately seven weeks, reflecting the FCA's desire to progress the Wholesale Markets Review promptly. Those wishing to respond should begin preparing their submissions now.

Practical Steps for Firms

Immediate Actions (Before Consultation Closes)

Review the consultation paper in full and assess its impact on your business model
Identify clients who might benefit from or be affected by the proposals
Evaluate your current categorisation processes against the proposed enhanced requirements
Consider responding to the consultation if you have views on the proposals, particularly the GBP 10 million threshold or qualitative assessment requirements
Brief senior management and boards on the proposals and their implications

Medium-Term Preparation (Q1-Q2 2026)

Develop implementation plans for the new wealth-based route if relevant to your client base
Design enhanced qualitative assessment frameworks in anticipation of final rules
Review existing informed consent documentation and prepare updated versions
Plan technology and process changes needed to support annual verification requirements
Consider training needs for client-facing staff on the new regime

Implementation Phase (Post-Final Rules)

Update policies and procedures to reflect final rules
Implement system changes to capture wealth-based assessments and annual reviews
Communicate with clients about changes to categorisation processes
Conduct the initial review of existing professional client categorisations
Monitor for regulatory guidance on areas of uncertainty

How MEMA Can Help

The client categorisation reforms represent a significant opportunity for firms in the wealth management, private banking, and private markets sectors. However, implementing the new framework whilst maintaining robust compliance requires careful planning and expertise.

At MEMA Consultants, our regulatory specialists can support your firm with:

Gap analysis of your current categorisation processes against CP25/36 proposals
Consultation response drafting if you wish to engage with the FCA's policy development
Policy and procedure development for the new wealth-based route and enhanced qualitative assessments
Training programmes for client-facing and compliance staff
Implementation project management to ensure readiness for the new regime
Ongoing compliance support including annual review frameworks

Our team includes former FCA supervisors with direct experience of client categorisation supervision and enforcement, ensuring you receive practical guidance grounded in regulatory reality.

The consultation closes on 2 February 2026. Whether you are looking to respond to the consultation, prepare for implementation, or simply understand the implications for your business, our team is ready to assist.

Contact MEMA Consultants to discuss how we can support your firm through this significant regulatory change.

This article is intended for general information purposes only and does not constitute legal or regulatory advice. Firms should seek professional guidance tailored to their specific circumstances. The proposals discussed remain subject to change following the consultation process.