What Is the FSCS Compensation Scheme and How Does It Work?


Team Money Savings Advice

Money Savings Advice Our guide to the FSCS compensation scheme

It’s never easy to decide who you can trust with your money. If a company goes bust, you’ll want to know that you won’t lose your hard-earned savings. If you transfer your pension, you’ll want to be sure that you’ve been given good financial advice.

FSCS stands for Financial Services Compensation Scheme. If you’re the victim of poor pension advice, or if you lose money as a result of a financial company closing, you could be entitled to up to £85,000.

The Financial Services Compensation Scheme might protect you if something goes wrong. The FSCS provides protection of up to £85,000 per person, and that protection is available for every relevant financial institution.

If your bank suddenly shuts down, you won’t lose the money that you’ve paid in through the years.

Read on to learn more about the FSCS and how your money is being protected.

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What Is the FSCS?

The Financial Services Compensation Scheme (FSCS) exists to protect your money. It’s been in existence since 2001.

The FSCS protects deposits made to registered banks on the high street and online, as well as many other financial institutions like credit unions and building societies.

If a financial institution goes under, you’ll be entitled to up to £85,000 in FSCS compensation. That figure is doubled for joint accounts, giving up to £170,000. In very rare cases, such as just after a life insurance payout or in preparation for purchasing a property, you may be temporarily covered to a higher value of up to £1,000,000.

Compensation is applied per individual and per financial institution. Watch out for the exact definition of a financial institution, as this can catch out even some of the most careful investors!

Why Is the FSCS Needed?

The Financial Services Compensation Scheme provides protection, so you don’t lose your money. It doesn’t just benefit you, but also helps the banks to avoid what’s known as a ‘bank run’.

In the past, if word got out that a bank might be struggling or was likely to close, customers would rush to withdraw their money as quickly as humanly possible. In the days before online banking, this meant a literal rush as worried bank customers hammered on the windows and doors. Sometimes concerns were unfounded, but the resulting chaos forced the banks into failure. Other times, the panic was justified.

Thanks to the FSCS, a bank rush need not be something you’ll have to get involved in. If the worst did happen, you’d get your money back without a fight.

Though we consider banks to be safe and secure, none are completely risk-free. You can pick a well-known bank that’s survived on the high street for decades, but even being careful there’s always a chance that your money is in the wrong place.

Best Ways to Protect Your Money

As you’re only covered for up to £85,000 of loss, it’s up to you to spread your money if it’s likely to go over this limit.

If you had £120,000 of savings and kept the whole lot with one bank, you could lose up to £35,000 if that bank suddenly ceased trading. If you kept £85,000 with that bank and the rest of the money elsewhere, you could be sure that every penny was protected with no risk if anything went wrong.

Your financial adviser can help you ensure your funds are best protected across multiple accounts.

Being Sure That Your Money Is Protected

Banks and building societies will usually say if they’re covered by the FSCS. Don’t trust everything you read – you can always make sure with the FSCS Protection Checker.

If a financial firm is failing, there’s no need to panic if you’re FSCS protected. You won’t have to race to the bank straight away to make sure that you’ll get your money back. In many cases, your compensation is paid to you automatically, so you don’t even need to worry about the effort of making a claim.

Watch Out for Banking Groups

Not all banks are as separate as they seem. Some financial institutions operate several different banks under several different names or brands. If you keep money in two different banks, make sure they’re not under one umbrella.

Banking groups may only be covered for £85,000 in total per customer. You might think that you’re using two separate banks, but they may both be the same below the surface.

Look out for Financial Conduct Authority (FCA) authorisation. Trusted financial companies should be FCA registered, and the devil is in the detail. If one FCA authorisation covers several different banking brands, then you’ll only be entitled to £85,000 in total. If each different brand has separate authorisation, you’ll get separate compensation for each.

Let’s use the Bank of Scotland as an example. £85,000 of compensation won’t just cover your Bank of Scotland accounts, but also any accounts you have with any of the bank’s other brands. Look out for names like Halifax, Bank of Wales and Intelligent Finance, amongst others.

If you have £50,000 in a Halifax account and £50,000 with the Bank of Scotland, you won’t be covered full the full amount if the Bank of Scotland goes bust.

You can check the Financial Services Register to see which brands and companies are linked. You can also check the footer of most bank websites for their FCA authorisation code.

Does the FSCS Cover Investments?

Investments are covered up to a total value of £50,000. This doesn’t cover money lost through your investments – otherwise, they would be a much more appealing financial product! However, they will protect you if the holding company fails and can’t give back your money.

What About FSCS Pension Protection?

e Financial Services Compensation Scheme offers some pension protections. You may be able to claim up to £85,000 if your pension provider fails, or if a regulated advisor gave bad advice that caused you to lose out on money.

Private pensions are often classed as a form of insurance policy, and therefore covered by the Financial Services Compensation Scheme.

The FSCS doesn’t cover all types of available pension. Workplace pensions are unlikely to be covered, though defined contribution private pensions typically will be protected. Generally, defined benefit pensions will not be.

If your specific pension isn’t covered by the Financial Services Compensation Scheme, you may still be able to claim money back through the Pension Protection Fund. Sometimes, when larger companies go bust, the government may step in to protect workplace pensions.

Do You Have to Claim FSCS Compensation?

In many cases, you won’t need to submit a manual claim. Compensation payments are arranged automatically if a bank goes bust or shuts down.

You may need to make a complaint and a claim if you’ve received bad pension advice.

If the FSCS is already aware of a financial institution failing, they’ll already be acting to get the money back to anyone that’s due compensation. They are proactive, rather than reactive, and so you can bet you won’t be waiting too long for your compensation to be paid.

When Was the Financial Services Compensation Scheme Set Up?

The FSCS was set up in 2001 as a consequence of the Financial Services and Markets Act 2000, which was part of the continual updating and upgrading of consumer protection in the UK. It is fair to say that the UK has one of the most heavily regulated financial sectors after a period in the 1980s of what many saw as “self-regulation”.

Who Finances Compensation Payments Made by the FSCS?

All regulated financial service companies in the UK pay a levy towards the FSCS, which funds compensation for those who have suffered as a consequence of failed businesses. The FSCS is a very important element of the UK financial services industry because it gives consumers confidence in the event they are mistreated then they have recourse to compensation, even if the companies in question have gone out of business.

How Much Has the FSCS Paid Out in Compensation?

To give you an example, in the tax year 2018/19 the FSCS paid out a staggering £473 million in compensation to 425,760 customers of failed firms. It is fair to say that over the last ten years, there have been some extremely challenging moments for the UK financial industry, although the FSCS has been extremely active.

The FSCS managed to recover £20 billion from the 2008 bank failures, all of which was repaid to the HM Treasury. A further £375 million has also been recovered from other avenues over the last five years.

Is the FSCS Independent?

It is worth noting that the FSCS is an independent body with no input from the UK government or the financial services industry. As a consequence, compensation rulings are made on a stand-alone basis with no influence by third parties.

In many ways, this is one of the strengths of the FSCS at a time when the government, Bank of England and the financial services industry like to flex their muscles.

Will the FSCS Automatically Pursue Compensation From Failed Firms?

Yes. While there are scenarios where you will need to apply for compensation, where a financial services firm has failed then the FSCS will automatically be involved in reclaiming client funds. As we saw back in the 2008 UK banking crisis, the FSCS is a very powerful body having reclaimed £20 billion from failed banks.

Money Savings Advice Tip

If you think you could been the victim of pension fraud then you could have a compelling claim for compensation. Thousands of people throughout the UK are making compensation claims every week, our advice is to speak to a mis-sold pension specialist.

Which Financial Sectors Pay Into the FSCS Levy System?

The FSCS compensation system obliges an array of financial services industries in the UK to contribute in the form of a levy.

These payments are split into eight funding classes:-

  • Deposits
  • Life and pensions provision
  • General insurance provision
  • General insurance distribution
  • Investment intermediation
  • Home finance intermediation
  • Investment provision
  • Debt management

The levy paid by companies in these particular sectors will depend upon the rate of failure in that area of the market. This ensures that relatively stable areas of the UK financial sector are not overly impacted in terms of levy paid by those who are more prone to failure. This has prompted ongoing activity from specific industry bodies to protect legitimate operations.

Why Check for FSCS Cover?

Not all financial companies are FCA approved and covered by the FSCS. Many newer online banks operate in a different way, acting as prepaid cards rather than registered banks. Any money that you add to a prepaid card account could be lost if the company fails.

How Can Money Savings Advice Help You With Making a Mis-Sold Pension Claim?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for a mis-sold pension and they can do the same for you.

Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.

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