What is the Financial Services Compensation Scheme?
The Financial Services Compensation Scheme, known as FSCS, allows individuals and small businesses to claim money from authorised financial services firms that are unable, or likely to be unable, to pay claims made against them. The FSCS is a non-profit organisation which is funded by taxes paid by authorised firms in financial services and can provide claims for:
- insurance policies
- insurance brokering
- investments, ISA, savings accounts
- mortgages and mortgage arrangements
This gives consumers and businesses peace of mind that when they are investing, depositing or saving money, they have security in the event that their bank or financial institution goes bankrupt.
It is great to know that if you are victim of fraud, or the company your buy from goes bankrupt or takes your money unwillingly, you have this support mechanism that can reimburse you of your losses, up to a certain amount.
The Financial Services Compensation Scheme only offers claims for those companies trading and registered by the Financial Conduct Authority and Prudential Regulation Authority. For information on whether a company is registered, you can do a search on the regulator’s website for free.
History of the FSCS
The FSCS was formed in 2001 and replaced former multiple schemes. Between 2001 and 2006 the scheme paid out close to £1 billion in compensation and due to the financial crisis, they paid out an enormous £26 billion during 2006 to 2011 – showing the extent of the credit crunch.
Initially, the maximum an individual could claim was £75,000 per UK regulated financial institution but this was revised by the Bank of England in January 2017 and increased to £85,000, following the fall of the pound after the Brexit vote.
Whilst an individual claim can require paperwork and approval, the person can usually receive their claim within seven days which is good to know for someone who has been left out of pocket.
Example of when to use FSCS
Example 1: You have deposited £50,000 into your UK savings account. However, the bank has just declared bankruptcy. The Financial Services Compensation Scheme allows you to claim up to £85,000 per person per firm, meaning that your savings are not lost and you have peace of mind that you will receive the money that you have deposited.
Example 2: If you have invested in a life insurance policy, your claim risks being void if the insurance firm go bankrupt. The FSCS will allow you to claim up to £85,000 towards your policy or the full amount if the company is taken over or bailed out. This means that if you lose a loved one or fall ill, those nearest and dearest to you will still receive some form of renumeration.
Example 3: If your mortgage provider goes belly up, your mortgage deposit is not lost. You are able to claim up to £85,000 towards your deposit or the full amount will be protected if the company is taken over or bailed out. You can also receive up to £50,000 for any mortgage advice and arranging that you received from a broker. Whilst this may not be as much as you have paid into your mortgage, it is still worthwhile.
Tips about using FSCS
- Check that your provider has it – when applying for a savings product or ISA, always check whether the provider is covered by the FSCS. Peer to peer lending was officially covered by the Financial Services Compensation Scheme in 2016 – including companies like Zopa, ThinCat, Ratsetter and Lending Works.
There are sometimes different rules that apply with overseas banks, especially those within the European Economic Area which can be regulated in the UK but have an overseas compensation scheme. These banks run on a ‘passport scheme’ and each have their own rules and regulations for treating compensation. Fortunately, the European claim amount is 100,000 euros, around £85,000 and if they have branches in the UK, you will likely find other individuals in the same boat.
- You get £85,000 per institution – This means that if you have a savings account and the bank goes bust, £85,000 is the maximum you can get from each individual bank. As institution is not the same as a bank, for example sister banks Halifax and Bank of Scotland’s accounts are only covered up to £85,000 combined.
For this reason, Money Saving Expert recommends spreading your savings across multiple institutions and therefore you can claim across all institutions if they start to default. They suggest putting a maximum of £83,000 in just one savings account and any additional funds should be put in other institutions or savings products. The £83,000 gives an extra £2,000 room for interest to accumulate over the years.
- Joint accounts get double – If you have a joint account with a sibling, parent or spouse, this can count as double compensation – so together you are protected up to a maximum of £170,000. So there is certainly an advantage of getting a mortgage with another person or loved one.
- Prepaid cards and deposits in e-wallets are not covered – The use of prepaid cards is not covered by the compensation scheme. This is where you load an amount of money onto a card and use it like a debit card. The rules state that this is a type of deposit not covered by the FSCS and is something that cardholders should be aware of. Similar deposits not covered include e-money and loading into online wallets, for things like betting websites, eBay account or Paypal.
Alternatives to Financial Services Compensation Scheme
Bail Out: You can hope as a customer that the bank or insurance provider that you have worked with previously is ‘bailed out’ by another bank or financial institution. In doing so, they purchase the debt so that you can continue to claim or access your savings regardless.
Legal Action: There is an option to take legal action against a company that has lost your savings or income – however, this may take a long time to settle and incur additional legal fees.
Guarantor Loan Comparison allows you to compare guarantor loans in the UK regulated by the Financial Conduct Authority. The use of Financial Services Compensation Scheme does not really apply in this industry since you are the borrower and will receive your funds in one lump sum. Therefore, FSCS is used mostly for deposits, insurance policies, mortgages and savings products.
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