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

The Financial Services Compensation Scheme (FSCS) covers bank, building societies and investment accounts, and will pay compensation if the holding institution goes bust.

A leaflet from the FSCS
(Image credit: © Matthew Horwood)

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).

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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.

Rupert Hargreaves

Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.