Implications of having professional status v Retail

A few days ago I received an Email from my Broker idealing stating that they will categorise me as a "professional client" under the MIFID transitional grandfathering provisions (Article 71(6)). This may be because I have a spread betting account, although I have hardly ever used it, and not used it at all for a long time.

Unfortunately I hold quite a lot of ISA and PEP funds with them and I need to know if these monies would be safe in the event of the firms collapse or an illegal act of one of their employees considering this status. As far as I can see having professional status has no advantages at all. I have asked them the following questions, but am not expecting a direct answer.

Has anyone any idea what the implications are of professional status with regard to the following questions?

• Am I still protected by the Financial Services Compensation Scheme, (up to claims of £48 000?)
  
• Are my funds with idealing ring fenced in the event of Idealings insolvency?
  
• Idealing has professional Indemnity insurance cover of £1,000,000 per claim. However does this apply to me classed as a professional investor?

I have copied the entire letter below which may answer these indirectly, but is far from clear


The Markets in Financial Instruments Directive ("MiFID") comes into effect on
November 1, 2007. MiFID introduces a new client categorisation regime, which
will replace the current FSA categories (private client, intermediate client,
and market counterparty) with the MiFID categories: retail client, professional
client and eligible counterparty.

Effective 1 November 2007, we will categorise you as a "professional client"
under the MIFID transitional grandfathering provisions (Article 71(6)). You may
request a different categorisation than professional client, but we will not be
able to continue to provide a service to you in the event that you request to
be treated as a retail client, and we have the right under MiFID to refuse a
request to change your categorisation.

The protections available to you under MiFID differ depending on your
categorisation, and we will provide those protections available to you as a
"professional client".

The main differences in regulatory protections afforded retails clients vs.
professional clients are:

Communications, including financial promotions made by us with
professional clients are not subject to all of the requirements
imposed by MiFID on communications with Retail clients

Information provisions about iDealing (hereafter, "the Firm"), its
services, and remuneration that are required with respect to retail
clients are not all required with respect to professional clients

Professional clients are not eligible complainants with respect to
the Financial Ombudsman Services ("FOS")

Pre-requirements for the entry into written basic agreements for
designated investment business may not apply to professional clients

If the Firm makes a personal recommendation or manages investments
professional client in the course of MiFID or equivalent third party
business, it is entitled to assume that, in relation to the products,
transactions and services for which the professional client is so
classified, the client has the necessary level of experience and
knowledge for the purposes of suitability assessment, and where the
Firm is required to provide suitability reports to a retail client,
in many cases they are not be required to provide them to a
professional client

With respect to non-advised services, the Firm is not required to
request information or adhere to the same procedures when assessing
the appropriateness of a given service or product for a professional
client, and The Firm may not be required to give warnings to the
professional client if the Firm can not determined appropriateness
with respect to a given services or product

The Firm must provide certain product information to retail clients,
but not professional clients, when selling packaged products, cash
isas, or cash Child Trust Funds

There is no right to cancel a non-distance contract to buy a unit in
a regulated collective investment scheme if the consumer is not a
retail client

When managing investments for a client, a firm must provide the
client with a periodic statement. For retail clients, the content of
the statement is prescribed, but for professional clients, it is not

The firm may take into consideration the classification of the client
in following its Order Execution Policy, as well as in providing
information, including product information, to clients

Cassiopeia,

Unless my knowledge needs updating (pre-MIFID), as a "Professional" your assets are intergrated with the firm's. If the firm takes a dive you get jack. You need to be designated a "Private client" but I doubt this would be an option, here.

Personally, I'd look elsewhere.

Grant.

Cassiopeia,

Unless my knowledge needs updating (pre-MIFID), as a "Professional" your assets are intergrated with the firm's. If the firm takes a dive you get jack. You need to be designated a "Private client" but I doubt this would be an option, here.

You say you have ISA/Pep's with the firm. Are these held under a nominee name? Can't you ask for them to be registered in your name (and sent to you)? If so, do it.

Personally, I'd look elsewhere.

Grant.

Grantx

I expect you are right, this might explain why they aren't answering my questions. As you say this means I need to change broker. The lesson from this is never open a margin account with the broker who holds your main equity savings.

The main shares I buy are smallcap, and about 50% of the time these cannot be traded electronically since the volume I require are above the NMS and the broker needs to get on to a marketmaker. Hence I need a broker that can answer the telephone quickly and execute these orders efficiently even when the market is busy, and not cost the earth. Anyone any ideas?

Actually I am not too sure now, Idealing have just sent a mail out referring ,to the terms and conditions http://www.idealing.com/pdf/terms_and_conditions.pdf these state:

Terms & Conditions Risk Warning Notices

4 This agreement governs all accounts of type Standard, ISA, Mini-Isa, or PEP, and you may open one or more of these accounts under these Terms and Conditions. A separate agreement governs the opening and operation of account of type Margin. .......

13 iDealing.com will hold your money in accordance with the Financial Services Authority “Client Money” rules, which require iDealing.com to hold your money in a segregated client bank account at an approved bank.

Cassiopeia,

Looks like your ISA, etc is held in a nominee account.

As your status is “Professional” and thus “not eligible complainants with respect to
the Financial Ombudsman Services ("FOS")”, a segregated bank account seems nothing more than compliance with FSA/accounting standards or procedures. At a crude level, this could be nothing more than ensuring simple identification and differentiation in the event of a liquidation, for example. This is a guess.

Professional status, as far as I’m aware, doesn’t carry any benefits above and beyond any other status. It was used where firms were offering generally lower commissions than a retail broker but clients’ capital was integrated with the firm’s, thus reducing their capital requirement (a good saving).

Private client status for you sectors of market should be available from many brokers.

Grant.

I received a telephone call from the Director of Idealing today and his general message to me is that my professional status is unlikely to make any difference to these three questions. In fact the new rules will give me greater protection. If so why are they so keen to keep me professional?

1) Am I still protected by the Financial Services Compensation Scheme, up to claims of £48 000?
2) Are my funds with idealing ring fenced in the event of Idealings insolvency?
3) Idealing has professional Indemnity insurance cover of £1,000,000 per claim. However does this apply to me classed as a professional client?

I may write to the FSA to confirm this, however the FSA seem to be more keen to say what they don't do rather than what they do.

http://www.moneymadeclear.fsa.gov.uk/contactus.aspx

Cassiopeia,

They may need to maintain your professional status because the regulatory requirements are less demanding and less expensive in terms of admin. “Private client” status may not be available – again, this could have regulatory advantages.

Unless you have received revised Terms and Conditions, under the existing you are not covered by the FSCS. Are they ring-fenced? I wouldn’t bet on it.

I thought professional indemnity cover wrong-doing on their part? So if the firm goes down the pan, taking your money with it, but their demise was not attributable to themselves, ie they were innocent of any wrong-doing then indemnity cover would not kick-in or be applicable. It may apply if their was a massive fraud on their part.

Even as a private client, I wouldn’t have more than £48,000 with one broker – better to spread it around and ensure safety.

I suspect the FSA may direct you to some aspect of their web-site. The primary objective is to protect the private investor, not the “professional”. Further, they would probably suggest any queries you have regarding your status with your broker, be addressed to the broker in the first instance. I would send Idealing either an e-mail/fax or recorded letter seeking specific and unambiguous replies to your questions. Or just change brokers.

Look under “Client money rules" in the pdf found here:

http://www.fsa.gov.uk/pubs/cp/cp45_annexa.pdf

Grant.

Grantx

I had a word with the FSA today and they largely contradict what idealing told me and confirm what you say. The short story is that if I as a professional client have any problems with idealing they won't want to know, and as you also say I should get a written confirmation from idealing about the ring fencing of clients money.

This suggests to me that any traders should never ask for a margin account with the same broker as they hold long term ISAs and PEPs.

It looks like I will have to change brokers after all.

Cassiopeia,

It’s good to hear we have clarification from the FSA. The whole episode must have been an irritation and inconvenience (not to mention stressful), but nothing in life is easy nor straightforward, especially when you have a director telling you otherwise (there’s an indictment). Good riddance to bad rubbish.

Anytime I can help, don’t hesitate.

Grant.

Apologies for re-opening such an old thread. However I'm still trying to find out what implications are of having 'retail investor' status as opposed to 'professional investor' status.

From my web-research it appears that the 'retail client' offers greater regulatory protection from the FSA. For example, an article from the FT states

Retail customers’ funds are safeguarded if the betting provider goes bust, for example, whereas funds of professional investors could be at risk. Source FT.com / Reports - MIFID: Experience becomes a priority under revised rules

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However, I can see no benefit of being a 'professional client' or a 'eligible counterparty'. Can someone please clarify or point me in the direction of a document that will assist?

Are locals professional or retail clients?

arabianights said:

Are locals professional or retail clients?

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The following was sent to me by a friend on the subject. I haven't validated any of it so you may want to verify this before taking any action on what is written;

RichieE,

One time, “Professional” usually attracted lower comm’s (presumably to compensate for lack of protection).

The MIFID and non-MIFID criteria have got to be purely theoretical (I remember the very same from my Reg Rep exam years ago) in that they could be used as a justification for categorising parties as such. And to include Arabian’s query, I’m 95% certain “Locals” and Rep’s would be considered professional, regardless of their balance sheet/turnover.

I question whether these would be applicable to SB’s as the status of “professional” gambler may not be recognised by the inland revenue.

These days with relative low comm’s anyway, it wouldn’t be status but traded size which largely determines comm’s.

Grant.

grantx said:

One time, “Professional” usually attracted lower comm’s (presumably to compensate for lack of protection).

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That would be a logical outcome. However I don't see any offer of a better spread from CityIndex.

grantx said:

The MIFID and non-MIFID criteria have got to be purely theoretical (I remember the very same from my Reg Rep exam years ago) in that they could be used as a justification for categorising parties as such. And to include Arabian’s query, I’m 95% certain “Locals” and Rep’s would be considered professional, regardless of their balance sheet/turnover.

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I asked CityIndex outright which category I should be under and the girl I spoke to couldn't really tell me the difference between the categorisations. However, it's interesting to note that I've been classified as 'Retail Client' even after telling her that I was an Oil local on ICE.

grantx said:

I question whether these would be applicable to SB’s as the status of “professional” gambler may not be recognised by the inland revenue.

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I believe that pro-gamblers are considered as a profession. I know a few people who are poker pros and I reckon that they put 'Professional Poker Player' or words to that efffect whenever they are asked to disclose 'profession'. I had to fill out my 'self assessment' and I don't recall answering any question about my job title.

grantx said:

These days with relative low comm’s anyway, it wouldn’t be status but traded size which largely determines comm’s.

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I don't see why I would want to have 'professional status'. From what I understand I get less protection but no upside... unless anyone can inform me otherwise.