DISC 5.6 Adjusting the initial risk and return score

1. (1) The manufacturer must assess whether a consumer composite investment's initial score produced in accordance with DISC 5.4 or DISC 5.5 (as applicable) would provide retail investors with a fair and accurate reflection of the overall risks of the investment.
2. (2) Following the assessment in (1), the manufacturer must:
   1. (a) upgrade the score, where its assessment is that the initial score may lead retail investors to under-estimate the risks of the consumer composite investment, having regard in particular to any material risks identified under DISC 5.1.4R;
   2. (b) downgrade the score, where DISC 5.6.3R applies and in accordance with that rule; or
   3. (c) treat the initial score as the finalised risk and return score, where in its view the initial score provides an appropriate and fair indication of the overall risks of the consumer composite investment.

A manufacturer should consider its obligations under DISC 3.1.2R in assessing:

1. (1) whether and how to adjust the initial risk and return score of a consumer composite investment in DISC 5.6.1R; and
2. (2) whether to include additional information in the product summary to assist retail investors in understanding the risks of the consumer composite investment.

1. (1) A manufacturer may cautiously downgrade the risk and return score of a consumer composite investment where the initial risk and return score is, in the manufacturer's considered judgement, likely to overstate the overall risks of the investment – for example, because the relevant period used for the volatility calculation included a period of extreme market anomalies.
2. (2) A manufacturer may downgrade the risk and return score of a consumer composite investment to a more significant extent where there is at least 90% capital protection under all market conditions, so as long as the ultimate risk and return score is an appropriate and fair reflection of all relevant risks, including in particular the counterparty risks applying to the investment.
3. (3) The manufacturer must take particular care to clearly document the rationale for any downward adjustment in the initial risk and return score of a consumer composite investment.

In the FCA's view, it will not normally be appropriate for a consumer composite investment to which DISC 5.5.1R applies to have its risk and return score downgraded following the manufacturer's consideration in DISC 5.6.1R.

1. (1) Where a consumer composite investment features low liquidity, a manufacturer must add +1 to the risk and return score in addition to any other change to the score following the assessment in DISC 5.6.1R.
2. (2 For the purposes of (1), a consumer composite investment has low liquidity if one or both of the following apply:
   1. (a) a retail investor is likely to face delay or added cost for encashing, selling, or otherwise exiting the investment; or
   2. (b) the consumer composite investment has a high degree of exposure to inherently illiquid assets, meaning it is a FIIA or another investment where 50% or more of the underlying assets or reference assets are inherently illiquid assets for at least three consecutive months in the last 12-month period, or are permitted to be under its investment objectives.
3. (3) Insofar as it might fall within (2)(b), a share in a fund is not to be regarded as having low liquidity if it is admitted to trading and regularly traded on a UK RIE, a UK MTF, or a recognised overseas investment exchange.
4. (4) The adjustment in (1) need not be made where the consumer composite investment's risk and return score is otherwise 9 or above.

If the consumer composite investment carries a risk that the investor could lose more money than they invested, it must be assigned a risk and return score of 10.

The finalised risk and return score for a consumer composite investment should be an integer number reflecting the initial score produced under DISC 5.4 or DISC 5.5 (as applicable) after any adjustments under this section.

The manufacturer must keep an adequate record of the calculation of the risk and return score as well as any subsequent adjustment or revision for a period of at least 5 years.