Find out how the Financial Services Compensation Scheme (FSCS) could protect your savings if a financial firm collapses, and when you might not be covered.
It was created in 2001 to replace eight previous compensation schemes.
FSCS describes itself as “the compensation fund of last resort for customers of authorised financial services firms”.
If a financial institution becomes insolvent or ceases trading and you have money in an account there, FSCS should be able to refund you some, or all, of your money.
FSCS is funded by the financial services industry.
FSCS is independent from the government and is not funded by taxation.
If you have money held in a UK-based bank or building society that becomes insolvent, you should be covered by the FSCS and should be able to claim compensation.
It doesn’t matter if the money’s held in a savings account, an Isa or a current account - it’s all covered as long as the organisation it’s held with is authorised by the regulators.
The limit you can claim is £75,000 per person, per authorised bank.
You need to be aware that some banks may have several different brands and names all held under a single authorisation with the regulators,.
This could mean that if, for example, you had £70,000 of savings with one bank and £30,000 with another brand of the same organisation, you might only be able to claim £75,000 compensation in total.
If you split your savings so that you had your £70,000 and £30,000 at completely separate banks and both went under, you’d be compensated for the full £100,000.
Whether the banks each offer separate compensation limits depends on how they’re licensed.
As an example, RBS and Natwest are related, but you would get a separate £75,000 limit with each if you had accounts with both banks.
Yet Halifax and Bank of Scotland are also linked, but you’d only have a single £75,00 limit if you banked with both.
The Financial Conduct Authority (FCA) publishes a full list of registered banks, and which brands come under the same umbrella.†
The Deposit Guarantee Schemes Directive was first implemented in 1995 to make sure European Union (EU) member states all had a deposit guarantee scheme in place.
The level of protection given is fixed across the EU at 100,000 euros and the sterling equivalent to this level is recalculated every five years.
The 100,000 euro limit was agreed and that hasn’t changed. However, at the latest sterling recalculation the limit in the UK was recalculated as £75,000 instead of £85,000 due to the value of the euro falling against the pound.
This means that the FSCS deposit limit reduced to £75,000 per person, per firm from 1 January, 2016.
Deposits up to £1m can be protected for up to six months from when the amount was first credited.
Because the FSCS is per person, each holder of a joint account receives the £75,000 limit.
So, for example, a couple with savings held in a joint account would be protected up to £150,000.
In July 2002, FSCS protection was extended to cover claims by members of credit unions.
If a credit union becomes insolvent, members with current account and savings balances will be protected in the same way as they would if they’d used a regular bank or building society.
The FSCS doesn’t cover deposits held with peer-to-peer lending sites, despite the industry becoming FCA regulated in April 2014.
However, if the peer-to-peer site holds un-lent funds in an account from an FCA-authorised bank or building society, the FSCS would cover the peer-to-peer investors if that FCA-authorised bank became insolvent.
Peer-to-peer sites must have a collateral buffer of £50,000 or more in case of financial difficulty and insurance to pay for collection agencies to attempt to recover money loaned on behalf of peer-to-peer depositors.
The FCA has considered bringing peer-to-peer lending under FSCS protection and has said it’ll review the situation again in 2016.
It also says that peer-to-peer firms should make clear to investors the absence of FSCS protection.
Although FSCS’s compensation for deposits following bank collapse is its best-known function, the fund also covers a number of other types of financial loss.
In October 2004 the FSCS was extended to cover mortgage arranging and advice, and this was then extended to cover mortgage intermediaries.
Customers may be able to claim compensation in any circumstances where they received incorrect mortgage advice that resulted in them losing money from a firm that then went out of business.
Claims can only be considered against authorised companies.
If an authorised insurance firm is unable to pay claims against it, for example because it’s gone into administration, FSCS may be able to compensate for outstanding claims and/or the return of premiums.
FSCS might also be able to arrange the transfer of insurance business to alternative companies.
If an authorised investment firm is unable to pay claims against it, for instance, if it goes out of business, FSCS may be able to compensate for losses arising from bad investment advice or poor investment management.
FSCS investments compensation has a limit of £50,000 per person, per firm.
FSCS may be able to pay compensation for loss of pension funds if your FCA-authorised pension provider goes bust, but how much it’ll cover depends on how your pension has been invested.
As with all types of FSCS compensation, it only covers authorised companies.
Deposits in a bank, building society or credit union will have the deposit limit of £75,000 per person, per firm.
Pension funds placed in investments are protected up to £50,000 per person, per firm.
If you’re drawing a retirement income from an annuity, 100% of this income is protected by FSCS.
Investment life policy savings, which are long-term life insurance policies with a savings element, are also protected up to 100%.
If your bank, building society or credit union fails, you shouldn’t have to do anything - FSCS should contact affected account holders and handle claims.
In most cases, FSCS aims to pay compensation within seven days of a bank, building society or credit union failing, but more complex cases have a time limit of 20 days.
For claims against other types of firms, such as investment firms or insurance brokers, FSCS aims to resolve claims within six months of receipt of claim application forms.
The FSCS only covers companies that have gone out of business - if your financial services provider is still in business you’ll have to take your complaint to it directly.
The FSCS also doesn’t cover companies that aren’t authorised by the FCA, which may be the case for offshore banking providers - although they may be covered by compensation schemes within their home country.
The FSCS covers individuals and some small businesses and charities, but larger businesses and charities may not be covered.
You should never have to pay to make a claim from FSCS. If you’re contacted by a company offering to help you claim in return for a fee, it could be a scam.