The Financial Services Compensation Scheme (FSCS) was set up in 2001 with the aim of protecting retail savers and investors against banks or building societies going under as a result of financial difficulties. This article looks at what that means in terms of the available protection for consumers, what the limits are and details how the scheme works in practice.
When it comes to financial matters, especially the safety of your money and investments, you may see the acronym FSCS appear, but what is it and how can it help? This article looks at what that means in terms of the available protection for consumers, what the limits are and details how the scheme works in practice.
What is the Financial Services Compensation Scheme (FSCS)?
The FSCS is an independent body which was established in 2001, under the Financial Services and Markets Act 2000. It was set up with the aim of providing financial protection for retail customers of authorised financial services firms – including banks, building societies and credit unions – in the event that a financial institution goes into insolvency.
The FSCS covers retail clients of firms that have been authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA).
It is an independent organisation rather than a government or financial services associated business. However, it is funded – as are compensation payments to customers – through levies that all authorised financial services firms must pay to the relevant regulatory body.
As an authorised investment provider, Liontrust is registered with the PRA. Our LFP firm reference number is 518165.
Am I eligible to claim under the FSCS?
Investors who have lost money must be eligible under the FSCS compensation rules to claim compensation. There are limits to the protection the FSCS can provide and rules around who can claim and when a claim is eligible or not.
- The FSCS only covers claims relating to firms that are authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA).
- Compensation is only payable if an authorised firm is “unable, or likely to be unable, to pay claims against it”. In other words, if it is in default.
- Compensation is paid only for financial loss and there are limits to the compensation payable.
- The FSCS is mainly intended to cover individuals, though some smaller businesses may be covered. Larger businesses are generally excluded from being able to claim.
- There are restrictions on historical claims depending on when the FSCS was in place. For investment, only claims relating to business conducted from 28 August 1998 onwards are covered. For mortgage advice and arranging, claims must be related to business conducted on or after 31 October 2004. Claims relating to insurance intermediaries must refer to business carried out on or after 14 January 2005.
How much does the FSCS cover me for?
Where firms have failed after 1 January 2017:
Typically, savers or investors are protected up to a limit of £85,000 per person, per firm under the FSCS. This means if someone has £85,000 in bank XXX which collapses, and a further £85,000 in an entirely unconnected adviser firm YYY, which also collapses, they could potentially claim £170,000 in compensation overall if both authorised firms enter bankruptcy.
For eligible insurance claims, the FSCS will pay out between 90% to 100% of the compensation claim depending on the type of insurance and the time period that the claim relates to.
How does the FSCS work for savings and bank accounts?
The FSCS covers only those companies that are authorised by the FCA or PRA to offer saving and banking services. Furthermore, the £85,000 cap on compensation applies to funds saved within each financial institution with a banking authorisation, rather than necessarily for each bank or bank account.
This means that if someone has more than £85,000 saved across two banks that are both owned by the same institution then the £85,000 compensation cap will apply.
As an example, Lloyds Bank took over HBOS in 2009. If someone held both a Lloyds Bank account and an HBOS account with £170,000 in total across both accounts, they would only be eligible for compensation of £85,000.
It is therefore worth finding out who owns your bank account if you are not already sure.
Alternatively, you may want to consider opening a joint bank account, as the £85,000 compensation cap is per individual, per financial institution.
