MiFID II slightly modifies the client categorisation by clarifying the – in principle – non-professional status of local authorities. It confirms that the duty of loyalty is applicable to all clients. The possibilities of "opt-up" and "opt-down" remain unchanged.
Categorisation under MiFID I
Annex II of MiFID I defines a professional client as "a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs". In other words, it is a financial professional. MiFID I establishes a number of presumptions. In this respect, a "large undertaking" (an undertaking meeting two of the following criteria on an individual basis: (1) balance sheet total of EUR 20,000,000; (2) net turnover of EUR 40,000,000; and (3) own funds of EUR 2,000,000) will be presumed to be a professional client. A retail client is negatively defined as "a client who is not a professional client". This definition includes not only most natural persons, but also most SMEs. For the sake of completeness, it should be mentioned that MiFID I identifies a third client category, "eligible counterparties", which are market players with a level of sophistication equivalent to that of the financial intermediaries they are dealing with.
The SME – generally a retail client
The FSMA and supervisory authorities from other European countries, such as the Netherlands and Great Britain, have called financial intermediaries to order for having sold complex derivative financial instruments (Bermudan swap-type) to SMEs after 1 November 2007 (the date of entry into force of MiFID I), without complying with the diligence duty imposed on them by MiFID I.
The concept of "regional government"
When MiFID I entered into force in 2007, the European Commission responded to a question regarding the concept of "regional government", presumed to be a professional client by MiFID I. It specified that a local government, a municipality or their administration do not constitute "regional governments". The MiFID II definition of "professional client" has been modified slightly in order to exclude the presumption of professionality for public authorities, other than national or regional authorities.
Reminder of the general duty of loyalty
In its 2010 review, the Commission reiterated that the duty to act "honestly, fairly and professionally" and the duty to inform in a "correct, clear and not misleading" way are applicable to all client categories. Within this framework, Article 30 MiFID II specifies that "Member States shall ensure that, in their relationship with eligible counterparties, investment firms act honestly, fairly and professionally and communicate in a way which is fair, clear and not misleading, taking into account the nature of the eligible counterparty and of its business".
"Opt-up" and "opt-down"
Belonging to one of the categories is a mere legal presumption that can be modified at the client's request. In principle, a company that is presumed to be a professional client should request to be treated as a retail client ("opt-up") when it does not have the required knowledge or experience or when it wishes to have greater protection. Likewise, a professional intermediary observing such an inadequacy must suggest such reclassification to its client. This will be the case, for example, for a "large undertaking" without knowledge of the financial sector or for a small pension fund. If it does not request such reclassification, the company's management risks being considered negligent.
A client can also request to be qualified as a client of a less protected category ("opt-down") if it does, in fact, possess the required professional qualities. The opt-down may only be applied by the financial intermediary with caution and on the basis of documents justifying the change, in particular when the intermediary itself has proposed the change in order to place a complex instrument with this investor.