What is the FSCS and how does it protect your savings and investments?

The Financial Services Compensation Scheme (FSCS) protects your savings and investments if a financial institution fails. 

What is the FSCS?

Set up by the UK government and funded by the financial services industry, the institution is independent and free to use. It is designed as a safety net to protect customers of banks, building societies, credit unions, pension providers, investment firms and insurance companies. 

How does the FSCS work for savers?

If you hold money with an authorised UK-based bank, building society, or credit union, you are automatically covered by the FSCS compensation scheme. 

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You will usually be compensated for up to £85,000 if the institution you’re using goes bust. If you hold a joint account, the protection doubles to £170,000. Some types of financial products may be covered for higher amounts, including pensions and in certain circumstances, where your bank balance is temporarily high (for example, due to the proceeds from a house sale or receiving an inheritance), you may be compensated for losses of up to £1 million, for six months from when you first deposited the amount. Eligibility will be assessed at the time a bank or building society fails and you don’t need to apply separately for this type of coverage. 

It’s important to note that these limits apply ‘per financial institution’, which applies to different bank and building society brands that operate under the same licence. For example, First Direct and HSBC operate under the same bank licence, and are, therefore, protected by the same FSCS coverage limit. So your total compensation for funds held across both banks will be capped at £85,000. 

While most people will be covered by this limit, if you have substantial cash savings, you may want to spread your money between accounts at more than one financial institution.

Bank and pension provider collapses might be relatively rare, but they do happen. Having two accounts with two providers will reduce the risks of losing access to your money for whatever reason. You can check the Bank of England’s list of banks operating under the same licence to ensure that you’re managing your savings effectively.

How does the FSCS work for investors?

As for brokers, if yours goes out of business and there is a shortfall in client assets i.e., money that should be in a segregated account turns out not to be, then the FSCS will pay out up to £85,000 per client (not per account) to top up whatever can be recovered from the broker. Note that the FSCS protection varies depending on the type of product, and not all investment products are protected. You can use the FSCS investment protection checker to see if your product is covered.

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 £120,000 respectively, and you get back £40,000 for each, the FSCS will pay you a maximum of £85,000 leaving you £25,000 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.

Other countries have their own rules. In the EU, the Deposit Guarantee Scheme (DGS) guarantees bank deposits up to €100,000 and in the US, the Federal Deposit Insurance Corporation (FDIC) insures savings up to $250,000 but does not cover other financial products such as insurance or annuities. Investments in the US are protected by the Securities Investor Protection Corporation (SIPC).

Other financial products the FSCS covers

Although most commonly known for stepping in when banks and investment firms fail, the FSCS provides compensation for customers of a wide range of financial services, from funeral plans and life insurance to mortgages and self-invested personal pensions (SIPPs+).

Are you eligible for FSCS compensation?

In order to claim compensation under the FSCS, you need to meet certain criteria set by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Here’s a brief rundown of the eligibility criteria:

• The firm needs to be a failed firm for you to receive payment for a claim against it. 
• The firm needs to be authorised by either the FCA or the PRA, or any predecessor of these regulators at the time you were involved in business with it. 
• You must have suffered a financial loss, and the firm must owe you a ‘civil liability’ such as a breach of certain rules or negligence so that if you take the firm to court, the ruling would be in your favour.
• Each product has slightly different criteria. 

Check if your financial product or service is protected, and what the compensation limits are.

How to claim for FSCS compensation

If you think you have a compensation claim against a failed financial services company under the FSCS, the first step is to check your eligibility using the FSCS’s online tool. It’s free and relatively simple.

After this, you need to gather all the necessary documents. You can find out which documents are required for each kind of claim, such as investment, mortgage advice or endowment, pensions, PPI, structured deposit or whole-of-life insurance claims, on the FSCS website. For most claims, you require two forms of identification, documents related to the product or service you’re claiming for, and your bank details, so that the compensation can be paid into your account if approved. 

If you’re claiming under the temporary high balances rule, you will need to provide evidence of any of the following that apply to your case: 

• A property sale receipt or agreement.
• A court judgment.
• A will.
• A letter from an insurer regarding an insurance payout.
• A letter from a lawyer, conveyancer, mortgage provider, former employer, or pension trustees.
• Court orders.
• Social security statements.
• Probate/letters of administration.
• Death/marriage certificate.
• Land register and HMRC records.