DISC 1A General

(1) This sourcebook sets out rules and guidance for authorised persons and unauthorised persons who are manufacturers or distributors of consumer composite investments.

(2) The rules and guidance relate, in particular, to the content of and manner in which information relating to consumer composite investments must be prepared and disclosed to retail investors.

The rules and guidance in DISC replace analogous requirements previously imposed by:

1. (1) the UK version of Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs); and

2. (2)

    the European Parliament and Council Directive of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (No 2009/65/EC) and the UK version of the Commission Regulation (EU) No 583/2010, specifying the form and contents of key investor information.

The core obligations in DISC are that, in respect of a consumer composite investment that is or may be distributed to retail investors in the UK:

1. (1)

    a manufacturer must prepare a product summary and provide it to the distributor(s), along with the underlying core information disclosures, in good time before the consumer composite investment is made available for distribution to retail investors (see DISC 2A.2.1R); and

2. (2)

    a firm must not distribute a consumer composite investment to a retail investor without providing a product summary (see DISC 2A.3.1R).

This sourcebook applies to an authorised person and to an unauthorised person in relation to activities carried on in relation to a consumer composite investment that is or may be distributed to a retail investor in the United Kingdom.

In this sourcebook, a retail investor is:

(1) a person to whom an investment is sold, or who is the recipient of an offer about or advice on an investment, and who is or would be categorised as a retail client under the rules in COBS 3; or

(2) a person who would meet the criteria in (1) if the selling, offer or advice on an investment involved the carrying on of a regulated activity or a controlled activity.

1. (1)

    In DISC, references to a firm also include a person who is not authorised to carry on regulated activities but carries on an activity specified as a designated activity by regulation 5 of the Consumer Composite Investments Regulations.

2. (2)

    The rules in DISC do not apply in relation to a consumer composite investment where it is distributed to investors who are not retail investors, or who are not in the United Kingdom.

This sourcebook applies to Gibraltar-based firms and TP firms in relation to activities carried on in relation to a consumer composite investment that is distributed or offered to a retail investor in the United Kingdom.

In relation to an unauthorised person, this sourcebook only imposes obligations to the extent that:

1. (1)

    the relevant consumer composite investment falls within the definition set out in regulation 4; and

2. (2)

    the obligation relates to an activity specified as a designated activity by regulation 5,

3. of the Consumer Composite Investments Regulations.

1. (1)

    Regulation 5 of the Consumer Composite Investments Regulations specifies the following activities as designated activities under section 71K of the Act:

   1. (a)

       manufacturing a consumer composite investment which is, or is proposed to be, made available to a retail investor located in the United Kingdom;

   2. (b)

       advising on a consumer composite investment if the advice is given to a retail investor located in the United Kingdom, or an agent for that investor

   3. (c)

       offering a consumer composite investment to a retail investor located in the United Kingdom; and

   4. (d) selling a consumer composite investment to a retail investor located in the United Kingdom.

2. (2)

    Regulation 6 of the Consumer Composite Investments Regulations confers the power on the FCA to make rules in respect of those specified activities, including in relation to unauthorised persons.

3. (3)

    This supplements the FCA's other powers under the Act and enables it to make rules in relation to consumer composite investments that apply to both authorised persons and unauthorised persons.

In this sourcebook, reference to an unauthorised person includes an EEA UCITS scheme recognised by virtue of regulation 62 of the Collective Investment Schemes (amendment etc.) (EU Exit) Regulations 2019.

The rules and guidance in GEN 1.3, GEN 2.1, GEN 2.2.1R to GEN 2.2.16G, and GEN 2.2.18R to GEN 2.2.25G apply to manufacturers and distributors who are not authorised persons as they apply to authorised persons.

The obligations in DISC do not apply in respect of a manufacturer of a consumer composite investment where the manufacturer has taken reasonable steps to ensure that:

1. (1)

    the offer and any associated communications about the consumer composite investment (including the prospectus, if there is one):

   1. (a)

       feature prominent and clear disclosures to the effect that the consumer composite investment is being offered only to investors who are or would be categorised as professional clients or eligible counterparties under the FCA's rules in COBS 3, and is not intended for retail investors; and

   2. (b)

       are directed only to investors eligible for categorisation as professional clients or eligible counterparties under the FCA's rules in  COBS 3; and

2. (2)

    the distribution strategy and arrangements with distributors for the consumer composite investment are appropriate in light of the non-retail target market.

Where a manufacturer complies with DISC 1A.1.12R, the manufacturer is not required to prepare a product summary and is not otherwise subject to obligations in DISC.

1. (1) The following are consumer composite investments:

   1. (a)

       a structured deposit;

   2. (b)

       a structured product;

   3. (c) a structured finance product;

   4. (d)

       a security or financial instrument which is or embeds a derivative, or which includes features equivalent to a derivative contract;

   5. (e) a debt security which meets the criteria in DISC 1A.2.2R;

   6. (f)

       a security issued by a fund, or rights to or interests in such a security;

   7. (g) a contingent convertible security;
   8. (h) a contract for differences;
   9. (i) an insurance-based investment product; and
   10. (j) any other investment where the returns are dependent on the performance or changes in the value of indirect investments.
2. (2) For the purposes of (1)(j):
   1. (a) investment returns include, in particular, payment or repayment obligations to the investor, the maturity value or surrender value of a policy, changes in the value of a unit, and the resale value of a security on a secondary market;
   2. (b) the investment return is dependent on performance or changes in the value of indirect investments if it is wholly or predominantly linked to, contingent on, sensitive to or otherwise determined at least in part by the actual or anticipated performance or changes in value;
   3. (c) indirect investments are one or more investments or assets, including in particular assets held or operated for investment rather than commercial purposes, which are not purchased or held by the investor directly or at all; and
   4. (d) it is immaterial whether the performance or changes in value are measured directly or via one or more market index or indices.

1. (1) A debt security is a consumer composite investment if the level of interest payable, any conditionality of principal repayment, or the issuer's default risk, is linked to or materially dependent on one or more of the following, whether or not modified by a pre-determined formula:
   1. (a) fluctuations in reference indices or benchmarks relating to investments or a class of investments– for example, a stock market index;
   2. (b) the value or performance of a financial instrument or a basket of financial instruments, or one or more specified commodities or foreign exchange rates; or
   3. (c) the value or performance of investments held by the issuer or by a person connected to the issuer.
2. (2) For the avoidance of doubt, the following are excluded from (1)(a):
   1. (a) the Bank of England official Bank Rate or any equivalent rate from another central bank;
   2. (b) any benchmarks or indices tracking the rate of inflation;
   3. (c) the Sterling Overnight Index Average (SONIA), or any other equivalent risk-free reference rate in any currency; and
   4. (d) the Euro Interbank Offered Rate (EURIBOR) or any similar Interbank Offered Rate.
3. (3) In (1)(c):
   1. (a) examples of investments include one or more derivatives, real estate holdings, a pool of receivables, one or more financial instruments or a portfolio of financial instruments; and
   2. (b) a person is connected to the issuer if it is a member of the same group as the issuer, has a relevant business relationship with the issuer or otherwise does not have an arm’s-length relationship with the issuer.

1. (1) Insofar as it might meet the description of a consumer composite investment as set out in DISC 1A.2.1R(1)(j), a debt security meeting all the following conditions is excluded from being a consumer composite investment:
   1. (a) it does not fall within DISC 1A.2.2R(1);
   2. (b) the issuer's default risk is wholly or predominantly determined by the economic performance of the commercial or industrial activities of the issuer (or, where the debt security is guaranteed by a group person, that person); and
   3. (c) the terms of the debt security do not impose any modification, structuring or conditionality on the issuer's obligation to pay interest or repay the principal, save for the effect of any feature listed under DISC 1A.2.4R.
2. (2) For avoidance of doubt, the activities of an issuer that pools loan agreements or debt securities, or which is engaged in any form of securitisation, are not commercial or industrial activities for the purposes of (1)(b).

1. Inclusion of a feature listed below does not cause a debt security to become a consumer composite investment in DISC 1A.2.1R(1)(j) or DISC 1A.2.2R(1), nor to be excluded from being a consumer composite investment under DISC 1A.2.3R:
2. (1)  a fixed coupon rate, including where:
   1. (a) a set coupon rate applies until maturity, including a nil or zero rate; and
   2. (b) the coupon rate is subject to pre-defined changes at fixed times prior to maturity (that is, a stepped coupon);
3. (2) a floating or variable coupon, provided that:
   1. (a) the interest payable is determined by an index or benchmark of the kind described by DISC 1A.2.2R(2), with or without a spread reflecting the credit risk of the issuer; and
   2. (b) the interest payable is not subject to any additional modification or structuring such as, for example, a cap, or a floor other than zero;
4. (3) a put option giving the investor a discretion to demand early repayment of the debt security on pre-agreed terms, or giving the investor the choice to convert or exchange their debt security into one or more shares of the same issuer at a pre-determined price;
5. (4) a call option allowing the issuer to redeem a debt security early at a price higher than or equal to par, where:
   1. (a) the option is exercisable otherwise than in response to fluctuations, price movements or performance of an index, benchmark, specified asset or underlying asset falling within DISC 1A.2.2R(1); and
   2. (b) the mechanism to calculate the cash repayment amount is made clear to the investor in the terms of the debt security;
6. (5) a perpetual or indefinite term; or
7. (6) the debt security's subordination in the creditor hierarchy in the event of the issuer's insolvency.

1. (1) DISC 1A.2.2R sets out the kind of debt security that is a consumer composite investment.
2. (2) DISC 1A.2.3R sets out the kind of debt security that is excluded from being a consumer composite investment.
3. (3) DISC 1A.2.4R sets out the sorts of features of a debt security that are neutral for the purposes of determining whether it meets the criteria for a consumer composite investment.

1. Insofar as they would or might meet the description of a consumer composite investment as set out in DISC 1A.2.1R(1)(j), the following are excluded from being a consumer composite investment:
2. (1) a plain vanilla listed bond;
3. (2) a long-term insurance contract where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity;
4. (3) a pure protection contract;
5. (4) a deposit, other than a structured deposit;
6. (5) non-equity transferable securities meeting the criteria set out in regulation 4(2)(c), (d) and (e) of the Consumer Composite Investments Regulations;
7. (6) non-fungible shares of capital whose main purpose is to provide the holder with a right to occupy any immovable property or a part thereof and where the shares cannot be sold without this right being given up;
8. (7) a pension scheme, including a stakeholder pension scheme;
9. (8) a pension annuity;
10. (9) a funeral plan product;
11. (10) shares in the capital of any central bank;
12. (11) transferable securities meeting the criteria set out at paragraphs (l) and (m) of regulation 4 of the Consumer Composite Investments Regulations;
13. (12) a unit in an ACS or in a qualified investor scheme; and
14. (13) an equity share (commercial company), or an equivalent share listed on an overseas investment exchange.