Dear Clients and Friends,
In recent months, the FCA has continued to remind firms to get their house in order on client categorisation. Since the advent of the Consumer Duty, the regulator now has a framework that places the onus on firms to consider outcomes, rather than disclosures. They have also provided an update on upcoming changes in short selling rules and a targeted letter to Compliance Officers advising them to prepare for the UK’s transition to T+1 securities settlement.
The FCA’s Red Flags in Client Categorisation Processes
While the FCA is often seen as a quieter regulator, focusing primarily on the most serious issues compared to its US counterpart, the past few years have shown a clearer and more consistent voice. The latest review, while targeted at corporate finance firms, has implications for a broad range of firms. As we await the FCA’s plans to modernise the client categorisation rules in COBS 3 through an upcoming consultation, the observations in this review are just as relevant now as they will be post-consultation.
What’s the FCA saying:
The FCA has identified recurring issues in how firms categorise clients, noting that many rely on quick or informal assessments, maintain insufficient records, and apply inconsistent governance. As noted in a previous alert, “Opting up is not optional”, client categorisation assessments and the corresponding records are mandatory. Initial desk top assessments alone are insufficient – in several cases, firms failed to document the rationale or supporting evidence, and categorisation was not revisited when circumstances changed.
These shortcomings can create regulatory and reputational risks, particularly when professional categorisation status changes are implemented without proper verification. The FCA found that:
- Many firms rely on quick, unstructured “opt-up” assessments without proper documentation or periodic reviews.
- Elective professional categorisation often lacks evidence; job titles or self-certification alone are insufficient.
- Promotions are sometimes issued before confirming client status, leading to regulatory and reputational risk.
- Policies and procedures are often generic, with inconsistent record-keeping and governance gaps.
What’s Judd saying:
Document why a client meets professional/wholesale criteria, and revisit it if their portfolio, role, or investment vehicle changes as part of your compliance monitoring. You should treat elective professional categorisation like a structured assessment: record how each individual satisfies the criteria rather than relying on informal judgments. Recent FCA questionnaires received by firms have shown a strong focus on this area. When it comes to financial promotion distribution, ensure you have the documentation to support that each recipient is properly categorised.
The FCA’s Short Selling Proposals
As the UK Short Selling Regime evolves, following feedback from HM Treasury’s Call for Evidence, the FCA has published proposals with targeted changes to reduce disproportionate burdens on firms while preserving market integrity.
What’s the FCA saying?
The proposals include a new Short Selling Sourcebook, aligned with previous EU guidance but tailored for the UK market.
Key changes focus on position reporting, cover requirements, reportable shares, market maker exemptions, and public disclosure.
- Position reporting: Deadlines for reporting net short positions (NSPs) would extend to T+1, allowing firms more time to calculate and submit reports.
- Cover requirements: Evidence of covering a short sale must be retained for at least five years. The FCA proposes clarifications on what constitutes an ‘easy-to-borrow or purchase confirmation’ and on ensuring shares can be delivered on settlement.
- Reportable Shares List (‘RSL’): The FCA intends to reduce the number of shares subject to reporting and cover rules and update the RSL monthly, with a full review every two years.
- Market maker exemptions: The notification process will be simplified, the pre-exemption notification period reduced, and new instruments can be added immediately upon notification. The exemption applies strictly to market making, not proprietary trading.
- Public disclosure: Net short positions reported will be anonymised, and the FCA will publish aggregated net short positions (‘ANSPs’) two working days after the relevant trading day.
What’s Judd saying?
The consultation closes on 16 December 2025, with the FCA proposing a Policy Statement publication timeline of two months before Phase 1 of implementation (a date yet to be determined). Start mapping how your firm currently discloses short positions and ensure internal workflows and reporting systems are aligned. Getting to grips with the consultation will support this work ahead of publication of the final rules.
Preparing for T+1: What the FCA Expects from Compliance Officers
As the UK prepares to transition from T+2 to T+1 securities settlement, effective 11 October 2027, the FCA has issued a letter to Compliance Officers. While the transition is industry-led, the FCA emphasises that firms must take proactive steps now.
What’s the FCA saying?
By the end of 2025, all firms should have a solid grasp of the Accelerated Settlement Taskforce Final Report and its Implementation Plan. This means you should already be developing a dedicated T+1 transition project, including thorough reviews of trading, clearing, and settlement processes. This is an opportunity to identify manual steps or bottlenecks that could slow down settlement.
Throughout 2026, your focus should shift to collaboration; engaging with settlement agents, custodians, and outsourced providers to understand and align on operational changes such as earlier confirmations and allocation deadlines. Firms will also need to review securities lending and recall processes to ensure they can support these shorter timeframes. Key operational updates should be implemented by year-end 2026.
In 2027, attention will turn to testing and validation. Firms are expected to conduct internal and external testing of new processes early in the year and address any issues well ahead of the October deadline.
The FCA has made it clear that Compliance Officers have a central role in driving this change. Compliance Officers should keep boards and senior management informed, oversee readiness plans, drive automation efforts, and maintain open communication with the regulator.
What’s Judd saying?
With the deadline approaching, the regulator is placing greater emphasis on firms’ approaches to managing operations, risk, and efficiency. The FCA has stated that it may engage directly with firms to obtain evidence of their preparedness in advance of the deadline.
Conclusion
Overall, the recent publications continue to champion a common theme we have seen coming out of the FCA: effective compliance requires organised, proactive, evidence-based action rather than passive adherence through generic policies and procedures. In the case of these recent areas of interest, this means documenting client eligibility, tailoring policies and reviewing processes, in order to prepare for regulatory changes in the Short Selling Regime and T+1 settlement.
