Interactive Brokers (U.K.) Limited – MiFID Categorisation

Introduction

The European Union legislative act known as the Markets in Financial Instruments Directive, or MiFID, as amended by MiFID II, requires Interactive Brokers (U.K.) Limited (IBUK) to classify each Client according to their knowledge, experience and expertise: "Retail", "Professional" or "Eligible Counterparty". 

In accordance with the Financial Conduct Authority rules, IBUK categorises most clients as Retail clients, providing them with a higher degree of protection.
 
Only those clients that are either regulated entities or funds managed by regulated fund managers, are categorised as Per Se Professional Clients.

The main differences in regulatory protections afforded to Professional Clients as compared with Retails Clients are:

1. Description of the nature and risks of packaged investments: A firm that offers an investment service with another service or product or as a condition of the same agreement with a retail client must: (i) inform retail clients if the risks resulting from the agreement are likely to be different from the risks associated with the components when taken separately; and (ii) provide retail clients with an adequate description of the different components of the agreement and the way in which its interaction modifies the risks. The above requirements do not apply in respect of professional clients. However, IBUK will not make such differentiation apart from the case specified under point 3 below.

2. Investor protection measures on the provision of Contracts for Differences (“CFDs”): The European Securities and Markets Authority (“ESMA”) introduced product intervention measures on the provision of CFDs to retail investors. The measures include: (i) New leverage limits on the opening of a position, which vary according to the volatility of the underlying; (ii) A margin close out rule on a per account basis that standardises the percentage of margin at which providers are required to close out one or more open CFDs; (iii) Negative balance protection on a per account basis;
(iv) A restriction on the incentives offered to trade CFDs; and (v) A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.The above requirements do not apply in respect of professional clients.

3. Communication with clients: A firm must ensure that its communications with all clients are fair, clear and not misleading. However, the way in which a firm may communicate with professional clients (about itself, its services and products, and its remuneration) may be different from the way in which the firm communicates with retail clients. A firm’s obligations in respect of the level of details, medium and timing of the provision of information are different depending on whether the client is a retail or professional client. The requirements to deliver certain product-specific documents, such as Key Information Documents (“KID”) for Packaged Retail and Insurance-based Investment Products (“PRIIPs”), are not applied to professional clients.

4. Depreciation in value reporting: A firm that holds a retail client account that includes positions in leveraged financial instruments or contingent liability transactions must inform the retail client, where the initial value of each instrument depreciates by 10 per cent and thereafter at multiples of 10 per cent. The above requirements do not apply in respect of professional clients.

5. Appropriateness: When assessing appropriateness for non-advised services, a firm may be required to determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service offered or demanded. Where such an appropriateness assessment requirement applies in respect of a client, the firm may assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client. A firm may not make such an assumption for a retail client and must determine that a retail client does have the necessary level of experience and knowledge.
 

IBUK provides non-advised services and is not required to request information or adhere to the assessment procedures for a professional client when assessing the appropriateness of a given service or product as with a retail client, and IBUK may not be required to give warnings to the professional client if it cannot determine appropriateness with respect to a given service or product. 

6. Exclusion of liability: Firms’ ability to exclude or restrict any duty or liability owed to clients is narrower under the FCA rules in the case of retail clients than in respect of professional clients.

7. The Financial Services Ombudsman: The services of the Financial Ombudsman Service in the UK may not be available to professional clients, unless they are, for example, consumers, small businesses or individuals acting outside of their trade, business, craft or profession.

8. Compensation: IBUK is a member of the UK Financial Services Compensation Scheme. You may be entitled to claim compensation from that scheme if IBUK cannot meet its obligations to you. This will depend on the type of business and the circumstances of the claim; compensation is only available for certain types of claimants and claims in respect of certain types of business. Eligibility for compensation from the scheme is determined under the rules applicable to the scheme.
 

Re-categorisation as Professional Client

IBUK allows its Retail Clients to request to be re-categorised as Professional Clients. Clients are notified of their Client Category and can check it at any time from Account Management, under Settings> Account Settings> MiFID Client Category. From this same screen, Clients can also request to change their MiFID Category.

IBUK will consider re-categorising Retail Clients to Professional Clients in two instances:

1. Per Se Professional Clients can notify IBUK that they consider that they should have been categorised as Per Se Professionals under the FCA rules, because at least one of the following conditions applies:

(i) authorised or regulated to operate in the financial markets; or

(ii) a large undertaking meeting two of the following size requirements on a company basis:

(a) balance sheet total of EUR 20,000,000;
(b) net turnover of EUR 40,000,000;
(c) own funds of EUR 2,000,000;

(iii) an institutional investor whose main activity is to invest in financial instruments. This includes entities dedicated to the securitisation of assets or other financing transactions.

2. IBUK may treat Clients as Elective Professional Clients if, based on an assessment of the Client’s expertise, experience, and knowledge, IBUK is reasonably assured that, in light of the nature of the transactions or services envisaged, the Client is capable of making its own investment decisions and understand the risks involved. Clients who do not meet the requirements to be categorised as Per Se Professional Clients can still request to be categorised as Elective Professional Clients.

To obtain such re-categorisation, Retail Clients must provide evidence that they satisfy at least two (2) of the following criteria:

1. Over the last four (4) quarters, the Client conducted trades in financial instruments in significant size at an average frequency of ten (10) per quarter.

To determine the significant size IBUK considers the following:

a. During the last four quarters, there were at least forty (40) trades; and
b. During each of the last four (4) quarters, there was at least one (1) trade; and
c. The total notional value of the top forty (40) trades of the last four (4) quarters is greater than EUR 200,000; and
d. The account has a net asset value greater than EUR 50,000.

Trades in Spot FX and Unallocated OTC Metals are not considered for the purpose of this calculation.

2. The Client holds a portfolio of financial instruments (including cash) that exceeds EUR 500,000 (or equivalent);

3. The Client is an individual accountholder or a trader of an organisation account who works or has worked in the financial sector for at least one year in a professional position which requires knowledge of products it trades in.

Upon review and verification of the information and supporting evidence provided, IBUK will re-categorise clients if all relevant conditions are met to satisfaction.

Retail Clients requesting to be re-categorised as Professional Accounts must read and understand the warning provided by IBUK before the relevant request is submitted.

Re-categorisation as Retail Client Professional Clients can request IBUK to be re-categorised as Retail Clients, from the same Account Management page described above (under Settings> Account Settings> MiFID Client Category).

With the sole exception of regulated entities or funds managed by regulated fund managers, which are categorised as Per Se Professional Clients, IBUK accepts all such requests.

THIS INFORMATION IS GUIDANCE FOR INTERACTIVE BROKERS FULLY DISCLOSED CLEARED CUSTOMERS ONLY.
NOTE: THE INFORMATION ABOVE IS NOT INTENDED TO BE A COMPREHENSIVE, EXHAUSTIVE NOR A DEFINITIVE INTERPRETATION OF THE REGULATION, BUT A SUMMARY OF IBUK’S APPROACH TO CLIENT CATEGORISATION AND RE-CATEGORISATION POLICY.