If you are ever asked what type of investor you are, your first thought might be to reflect on your attitude to investment risk.
Perhaps you consider yourself to be a cautious investor or you might be balanced or adventurous in your approach to investing. In other words, you think about your investment choices and behaviour when asked your investor type.
However, the financial services industry looks at you in a very different way when they enquire about investment type.
The Financial Conduct Authority (FCA), the organisation responsible for regulating the financial services industry and protecting consumers, require financial advisers to classify investors between two investor types: High Net Worth Investor (usually referred to as HNWI) or Sophisticated Investor.
The FCA has set out clear definitions of each classification in their Conduct of Business Sourcebook (COBS).
High Net Worth Investors (HNWI)
In summary, to qualify as a HNWI you must certify that at least one of the following criteria applies to you:
- You must earn at least £100,000 per annum or
- Have net assets of at least £250k excluding your primary residence.
If you fail to qualify as a HNWI because you do not meet the qualifying criteria then you can still purchase an unregulated investment product as a Sophisticated Investor.
Please refer to COBS 4.12.6 for the full definition of net assets.
Sophisticated Investors
The definition for Sophisticated Investors is slightly more elaborate than HNWI and there are two ways in which you can be considered a Sophisticated Investor. You can be certified as one by a firm of financial advisers or you can self-certify.
Certified:
To be certified as a Sophisticated Investor you must have received a written statement from a firm of financial advisers within the previous 36 months – following an appropriate due diligence exercise.
This statement must confirm that you are “sufficiently knowledgeable to understand the risks associated with engaging in investment activity in non-mainstream pooled investments” (such as Unregulated Collective Investment Schemes or UCIS).
Please refer to COBS 4.12.7 for the full list of requirements.
Self-certified:
To self-certify as a Sophisticated Investor, you must confirm that at least one of the following criteria applies to you:
- Have been a member of a network of business angels
- Made at least one investment in an unlisted company.
- Worked in the private equity sector or in the provision of finance for SMEs
- Been a director of a company with an annual turnover of at least £1 million
Please refer to COBS 4.12.8 for the full list of requirements.
Why are Sophisticated Investor classifications important?
As a Sophisticated Investor you must confirm in writing that you understand and accept that the investments to which the financial promotions relate may expose you to a significant risk of losing all of the money or other property invested.
What happens if you are neither a HNWI or a Sophisticated Investor?
If you are neither a HNWI or a Sophisticated Investor, then there is nothing to stop you spending your money as you wish but it is unlikely you will be able to buy a UCIS through an FCA-regulated financial adviser.
However, if you are determined to go ahead and buy the investment product, the financial adviser can follow what are known as ‘insistent client’ rules. This means that you must confirm in writing that the product was not recommended by the adviser and the transaction is being carried out at your own request.
If you do self-certify as a HNWI or as a Sophisticated Investor and it transpires that you are neither, then should the investment fail, you will not have any recourse to the Financial Services Compensation Scheme (FSCS).
However, if it can be proven that the financial adviser failed to carry out proper due diligence on your application, for example by not establishing your attitude to risk or capacity for loss, then the financial adviser could be held liable for mis-selling.
Retail investors versus institutional investors
To learn more about the differences between retail investors and institutional investors, please click here.
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