Financial Services Compensation Scheme (FSCS): a guide for UK investors (8 Feb 2024)

How does the Financial Services Compensation Scheme (FSCS) protect your savings, your mortgage, investments and insurance…?

The FSCS protects customers from losing some or all of their cash if authorised financial services firms go bust. It protects up to £85,000 of savings per individual, per financial institution (which might encompass more than one bank), and also covers mortgages, insurance and investments. In some circumstances, you could be covered for more than £85,000.

There’s a measure to protect temporary high balances (THBs) – where you have money resulting from things like house sales, redundancy pay or inheritances – when you’ll be covered for some types of funds up to £1m for six months.

You can only claim the FSCS compensation in certain circumstances, and certain criteria must be met.

The rules have been set by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The criteria are as follows:

• the financial services firm must have failed and be unable to return your money itself – i.e. be ‘in default’
• the FCA or PRA must have authorised the firm when you used it
• you must have actually lost money
• you must be claiming for personal money you’ve lost – although some businesses and charities may be able to claim in some circumstances.

The FSCS covers set amounts for certain financial products and the maximum amount you can claim for is detailed below; you’ll only receive compensation for the money you’ve lost, rather than the maximum amount.

• banks and building societies: £85,000 per person and per the financial institution’s licence
• credit unions: £85,000 per person, per firm
• debt management: £85,000 per person, per firm
• home finance intermediation: £85,000 per person, per financial institution
• general insurance: 90-100% depending on the circumstances
• life and pensions intermediation: £85,000 per person, per firm
• long-term care insurance: 100% with no upper limit (if the firm failed after 3 July 2015)
• investment provision: £85,000 per person, per firm
• investment intermediation: £85,000 per person, per firm
• payment protection insurance: 90% of total claim (if the firm failed after 1 Jan 2010).

How does the FSCS work for savings and bank accounts?

An important caveat about the FSCS is that it only applies to funds saved within each financial institution with a banking ‘authorisation’ (or licence) – not just each bank account, or even each bank. So, if you’ve saved more than £85,000 with two banks that are owned by the same institution with just one authorisation or licence, you’re only covered for £85,000 in total. So, to make sure your cash is covered, there are four key steps to address:

1. Find out who owns your bank

2. Stay within the £85,000 FSCS limit – If you have more than £85,000 to save, be sure to split it up between more than one banking institution to ensure it’s all covered.

3. Consider a joint account – If you and your partner have saved a significant amount of money and you don’t like the idea of spreading it around multiple banks, consider opening up a joint savings account. The FSCS covers £85,000 of savings per individual, per financial institution – so by placing your savings in a joint bank account along with your partner, you’re effectively doubling your coverage. This means coverage of £170,000 in total.

4. Be careful before you go offshore – Putting your money in an offshore savings account might be appealing as they often pay higher rates of interest, but many people had their fingers burned by the collapse of Icelandic bank Icesave in 2007 and the level of cover available varies depending where you invest.

Banks in the European Economic Area (EEC) are covered by their own domestic compensation schemes. The level of compensation that they pay is 100,000 euros. Those that are based outside the EEC, such as Indian bank ICICI, have to be authorised by the FCA in order to operate in the UK. This means they are covered by the UK’s FSCS.

Does the FSCS cover mortgages, insurance and investments?

They also cover investments, mortgages and insurance. The compensation limits are different to savings, and vary depending on the type of product you own. Current limits for each product area are:

• investments: 100% of the first £85,000 if the firm failed after 1^st April 2019; £50,000 if before
• mortgage advice and arranging: 100% of the first £85,000 if the firm failed after 1^st April 2019; £50,000 if before
• long-term insurance (eg life assurance): 100% of the claim
• compulsory general insurance (eg third-party motor insurance): 100% of the claim
• non-compulsory general insurance (eg home insurance): 90% of the claim
• general insurance advice and arranging: 90% of the claim
• advice for compulsory insurance: 90% of the claim
• Each product type is treated independently under the FSCS rules, so if you choose to bank and invest with the same provider you would be entitled to compensation for each of the products you hold, up to the relevant FSCS limits.

On 1^st April 2019, investment intermediation, life and pensions intermediation, and home finance intermediation all increased from £50,000 to £85,000.

More information on the level of protection available can be found on the FSCS website : https://www.fscs.org.uk/what-we-cover/

How does the FSCS work for investments?

The compensation rules for investments are more complicated than for savings deposits. The FSCS covers losses if an authorised financial services company is unable to pay claims against it. The first thing to remember is that investing is inherently risky, so there is no safeguard against funds falling in value, or the company in which you hold shares goes bust.

However, there are a few ways that you are protected when you invest.

• Negligent advice or fraud
• If your investment company goes bust
• Investing in unregulated financial products based in the UK
• FCA Register – you can use the FCA Register to check if a product, company or individual adviser is regulated and authorised. Before investing any sum of money, it’s always worth using this register to ensure you have the maximum protection.

 What happened to the FSCS protection after Brexit?

The FSCS has answered some FAQs on the topic:

• If you’re based in the UK with a UK bank account, the FSCS still protects your money: that is, if you’re a UK or EEA-based customer with a UK-authorised bank, building society or credit union.
• If you’re a UK citizen based in the EEA banking with an EEA branch of a UK firm: the FSCS will no longer protect your savings – but an EEA scheme in the country you’re banking in will have taken over. Visit the European Forum of Deposit Insurers for a full list of EEA deposit protection schemes.
• The Bank of England is considering reforms to its deposit guarantee scheme to better protect savers if a provider goes bust. The planned overhaul includes boosting the amount protected under the financial services compensation scheme (FSCS) from the current £85,000 limit.
• More details of when this might happen have yet to be announced.

For further information please visit www.fscs.org.uk.

This article is based on our understanding of current legislation and taxation which can change at any time in the future. Blackadders Wealth Management LLP are Independent Financial Advisers and a Discretionary Investment Management Firm, authorised and regulated by the Financial Conduct Authority under FCA number 738512. The FCA does not regulate tax advice.