What is the FSCS and how can it protect your cash?

The Financial Services Compensation Scheme (FSCS) protects savers and investors if a financial institution fails.

Set up by the government, the institution is independent and free to use and is designed as a safety net to protect users of banks, building societies and investment accounts. 

How the Financial Services Compensation Scheme works

If a bank or building society goes bust, the FSCS will pay compensation of up to £85,000 per person per bank to cover any losses (or up to £1m if the money is there temporarily, from the proceeds from a house sale, say).

It’s important to know that these limits also apply to bank brands operating under the same bank licence. For example, First Direct and HSBC operate under the same bank licence, and are, therefore, protected by the same FSCS coverage. 

The Bank of England publishes a list of bank brands operating the same licence. 

While most people will be covered by this limit, if you have substantial cash savings, you may want to have accounts with more than one financial institution. Having more than one current account is good practice anyway. 

Bank collapses might be relatively rare, but technical issues are all too common among the big banks. Having two accounts with two providers will reduce the risks of you losing access to your money for whatever reason. 

Financial Services Compensation Scheme for investors 

As for brokers, if yours goes bust and there is a shortfall in client assets ie, money that should be in a segregated account turns out not to be, then the FSCS will pay out up to £50,000 per client (not per account) to top up whatever can be recovered from the broker.

So if a broker owes you £70,000, but you only get back £40,000, you should be entitled to another £30,000 from the FSCS. However, if you have two accounts with the same broker holding £70,000 and £80,000 and you get back £40,000 in each, the FSCS will pay you a maximum of £50,000 leaving you £20,000 short.

You can choose to make an FSCS claim after getting some money back from the insolvent broker, or before it pays out anything. When you make a claim, the FSCS takes over your claim against the company. So, if you are owed £70,000, the FSCS will pay £50,000 and make a claim for £70,000. If it gets £15,000, it passes all of that onto you. If it gets £30,000, it pays you £20,000 meaning you get all your money back and retains the remaining £10,000 to recover some of its losses.

The FSCS scheme also provides cover for financial services insurance products, pensions, debt management services and funeral plans. 

Other countries have their own rules. In the EU, the Deposit Guarantee Scheme (DGS)  guarantees bank deposits up to €100,000. While in the US, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000.