It is widely acknowledged that saving is a good thing, putting money away for a first home, a special holiday or simply a rainy day. However, speaking to consumers, some feel that their money is at risk when entrusted to a financial institution.
They find financial products intimidating and hard to understand and don’t approach buying these products with the same confidence they would many other services – so it’s important this issue of confidence is addressed.
For 15 years, the Financial Services Compensation Scheme (FSCS), a body to protect savers in the event a financial organisation should fail, has come to the aid of savers should the worst happen. Yet some savers are still unaware that this financial protection exists.
Here we outline exactly how the FSCS works and how consumers and their savings are protected:
What is the FSCS?
A safety-net for consumers should the worst happen and a financial institution they’ve had dealings with collapses. To date, it has paid out more than £26bn in compensation to 4.5 million consumers.
What is protected by the scheme?
Broadly the scheme covers deposits, insurance policies, investments and mortgage advice and arranging – with varying limits for each:
Deposits – Deposits are covered up to £75,000, £150,000 for joint accounts. This limit applies to one financial banking group or credit union with a single authorisation, rather than each separate bank and building society, so the limit may be spread across several institutions.
This includes overseas banks, but only those which are regulated by the Financial Conduct Authority (FCA). The full register can be found at www.fca.org.uk or call freephone 0800 111 6768. The Prudent Regulation Authority’s list of banks are part of a larger group. To find out more visit www.bankofengland.co.uk/pra.
Cash savings held in a Self-Invested Personal Pension (SIPP) are also covered, but separately to anything else in the same SIPP.
The FSCS also offers compensation for temporary high balances of up to £1 million for money held in a bank, building society or credit union account for under six months, and pertaining to specific life events such as a redundancy payout, insurance payout, divorce, or several other circumstances.
Investments – Investments (advice on stocks and shares and other investments, unit trusts, futures and options, personal pensions) are covered up to £50,000 should an investment product provider go bust, or for a loss arising from bad advice by a failed financial adviser.
Businesses – Whilst the focus is on consumer protection, some qualifying businesses are also covered by FSCS.
It is also worth noting money owed to a bank, building society or credit union (e.g. mortgages or loans) are treated separately. As such they will not be offset against compensation amounts, and consumers will still need to repay the debt to their financial institution.
What isn’t covered?
If you buy shares in a company (rather than product provider) that subsequently goes bust this is unfortunately the nature of investing and you are not entitled to compensation. In addition, FSCS does not cover losses resulting purely from poor market performance, so you will not be compensated if the value of those shares falls.
Complaints with financial services firms that are still trading are also not covered by FSCS, nor are pre-paid currency cards, or money held in PayPal.
It is also worth noting those who bank with an overseas bank which is not regulated by the PRA are not covered, although you may be covered by the home state deposit protection scheme if you’re dealing with a firm based in the European Economic Area (EEA). Furthermore, any money held offshore in the likes of the Isle of Man, Channel Islands or outside of the EEA is also not protected.
If things go wrong how long will it take to receive compensation?
Whilst all claims will differ, typically FSCS will pay compensation for deposits within a week of a bank, building society or credit union failing. For investments, six months is typical.
While all information is up to date at the time of publishing, in the constantly shifting environment of investment and financial services, occasions may arise where elements of a guide become out-of-date. Please double-check the facts before taking any important financial decisions.
For more information, visit www.fscs.org.uk.