CONDUCT OF BUSINESS: BUSINESS CUSTOMERS, CLIENT CLASSIFICATION AND THE CDRS
Invitation to comment
The QFC Regulatory Authority (“Regulatory Authority”) seeks public comments on its proposals to amend:
These proposals support the Regulatory Authority’s ongoing commitment to meet high international regulatory standards for financial services and the continued development of the QFC as a leading financial and business centre in the Middle East.
Proposals on client classification
3.1 Jurisdictions that distinguish between different categories of customer also often provide a mechanism to allow a customer (whether an individual or legal entity) to be re-classified if certain criteria are met, usually based on a measure of the customer’s financial strength, knowledge and experience.
3.2 Under the current COND rules, a retail customer can be re-classified subject to:
3.3 These current requirements were established in 2005 and have not been materially amended since that date. During this time a number of practical issues have arisen in the interpretation and application of the requirements. Amongst the more important of these issues are:
3.4 In order to resolve these issues under the current COND rules, the Regulatory Authority is proposing the following amendments.
How legal entities can be re-classified
3.5 Under current rules there is uncertainty as to how the test should be applied to re-classify a legal entity as a business customer where the financial, knowledge and experience criteria are met. Specifically, the issue relates to whom the test should apply, for example the legal entity itself or the individual or individuals authorised to execute the transactions on behalf of the legal entity.
3.6 To address this issue, the Regulatory Authority is proposing to:
Financial criteria
3.1 The current financial criteria for re-classifying customers, whether an individual or legal entity, is set at USD 1 million in liquid assets. This is a different approach to that commonly found in regimes that allow for customer re-classification. The liquid asset test has also proven difficult to define, excludes certain prominent asset classes, such as investment properties, and takes no account of the customer’s liabilities. The Regulatory Authority is therefore proposing to amend the criteria to a net asset test that is in closer alignment to the one found in other jurisdictions that have customer re-classification regimes. It is proposed to set the net asset test at QAR 4 million (subject to the exclusion of the primary family residence as an asset, although liabilities on this residence must be included).[1]
3.2 The new test would only apply to classifications that take place from the commencement date of the amendments. All previous classifications made on the basis of the liquid assets test would remain valid.
Evidencing the financial criteria
3.3 Evidencing the financial criteria in relation to individuals has proven problematic under the current rules. Publicly available information is generally limited and customers in the region tend to be reluctant to provide copies of detailed financial information. Accordingly, the evidence required for firms to comply with the rule is uncertain, open to interpretation and ambiguous.
3.4 To address this issue, the Regulatory Authority is proposing that:
3.5 Where an authorised firm relies on the customer's statement, this must be in writing and on a form prepared by the firm, which includes a mandatory warning that mis-representing their financial position could be detrimental to the individual.
3.6 An authorised firm, however, would not be permitted to classify an individual as a business customer where there are any reasonable doubts regarding the accuracy of an individual's statement.
3.7 To address concerns that these individuals may be exposed to greater risks, the Regulatory Authority is proposing that the retail protections in Part 4.3 of COND relating to understanding the customer’s needs (‘know your customer’), suitability and risk assessments, would apply to all individuals who have been re-classified as business customers.[2]
Miscellaneous
3.8 Finally, the Regulatory Authority has included a number of minor amendments that will not materially affect authorised firms, but will improve the policy outcome of the COND rules. These amendments either:
[1] The figure of 4 million reflects rounding up when converting figures from USD to QAR.
[2] These rules are located specifically in Division 4.3.A of COND. This requirement would also begin to apply to individuals re-classified prior to the commencement of these proposals, that is, before 1 January 2016.
The Consultation Paper invites comments on the proposed Conduct of Business Amendments Rules 2015 (“draft Rules”) as set out in Attachment 1. To assist readers, Attachment 2 shows the relevant parts of COND with the amendments tracked into the rules.
Click here to view PDF Version of Consultation Paper 2015/3.
Click here to view Word Version of Consultation Paper 2015/3.
Click here to view PDF Version of Attachment 1 to Consultation Paper 2015/3.
Click here to view Word Version of the Attachment 1 to Consultation Paper 2015/3.
Click here to view PDF Version of Attachment 2 to Consultation Paper 2015/3.
Click here to view Word Version of the Attachment 2 to Consultation Paper 2015/3
Please submit your comments, including contact details for the organisation represented, to:
Dr Matthew Hampton
Associate Director, Policy
Policy and Legislative Counsel Division
QFC Regulatory Authority
PO Box 22989
Doha, Qatar
Or emailed to: ConsultationPapers@qfcra.com
All comments must be received by 1 November 2015.
In accordance with its statutory objectives, it is the Regulatory Authority’s policy to make all responses to formal consultation available to the public. Respondents who would like their submission, or parts of it, to remain confidential should provide this information marked as confidential. A standard confidentiality statement in an e-mail message will not be regarded as a formal request for non-disclosure.