Financial Services Compensation Scheme Explained
Back in August 2007, the UK experienced its first run on a bank in more than 140 years. TV crews rushed to film long queues of deposit holders outside branches of Northern Rock, at the time the 7th largest ranked bank in the UK in terms of assets, as fears grew that the bank and mortgage lender had run out of cash, and would allocate pay-outs to their customers on a first-come first-served based.
The Financial Services Compensation Scheme (FSCS) was designed precisely to ward off such an event, which could all too easily have a domino effect – sentiment is a very powerful force within the financial markets – and when people lose faith, big banks can topple in the face of hysterical demand, Mary Poppins style.
So the FSCS has an important role to play – but what exactly does it do – and not do?
The FSCS exists to protect customer’s money, providing automatic protection of deposits of up to £85,000, usually paid out within seven days, should a bank, building society or credit union fail.
The service is provided free to all customers, and paid for by the banks in the form of proportional levies on firms that are authorised by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA).
Probably the most important thing to know about the FSCS is that it does not protect firms that are not authorised by the FCA or the PRA!
There are several ways to know if a financial services firm is authorised; authorised firms will typically quote a Firm Reference Number (FRN) or authorisation number on all their documentation, as well as on their website, usually within the “legal information” section.
If you cannot find the FRN, then you should call the firm and ask for it, or visit the Financial Services Register which lists all the financial services firms authorised to do business in the UK.
As a customer, it is almost always a very bad idea to entrust funds to a financial services firm that is not authorised! Some overseas firms may be EEA authorised, which means that their head office is based overseas and compensation is dealt with according to the rules in that country. Make sure you check with an EEA authorised firm about what protection they provide and which scheme provides it.
What constitutes a financial services firm?
Financial services firms are not just high street banks – they are banks, building societies, credit unions, insurance companies, insurance brokers, investment firms, financial advisors and mortgage brokers.
Not at every firm are deposits protected to a limit of £85,000 – some are limited to a smaller amount, so before you open an account with a firm, it is well worth checking to see what the limits may be.
Obviously, financial services firms sell financial services products and run financial services promotions, which can include current accounts, savings accounts ISAs, insurance policies, investments and mortgages.
Deposits – the FSCS protects deposits on behalf of individuals and firms up to £85,000 providing it is FCA authorised. The limit applies to individuals, not accounts, which means that if you have a joint account with a partner or spouse, you will be protected up to £170,000 - £85,000 per person.
The limit also applies per authorised firm which is important to note because if you hold deposits with two separate entities that are actually part of the same umbrella organisation, you will only be entitled to £85,000 no matter the size of the deposits across the two accounts. Always check the FRN or authorisation to make sure separate deposit takers are not linked to the same FRN.
Insurance Policies – if an insurance firm fails and is unable to settle your insurance claim, the FSCS will provide protection. The policies covered include motor, home, travel, pet and payment protection insurance (PPI) but not credit, marine, aviation or transport business insurance.
In the first instance the FSCS will try to transfer your policy to a new insurer, but where this is not possible the FSCS will pay out the entire claim relating to the third-party element of your insurance, as well as 90% of its remaining elements, in the case of motor insurance, employer’s liability insurance and Professional Indemnity, and 100% of the claim in the case of death or incapacity of the policyholder.
Home, pet and travel insurance as well as PPI will receive 90% of the claim, and pension savings or retirement income, 100% provided it is under a life insurance contract. Endowment policies and investment bonds will also receive 100% of the claim.
Mis-selling of insurance policies, and fraud, where the broker has subsequently gone out of business, are also eligible. In the case of insurance policies, compensation has no upper limit.
If a firm has gone under and is unable to return investments resulting in a financial loss due to bad or misleading investment advice, mis-management of investments, misrepresentation or fraud, the FSCS will protect customers up to a limit of £50,000 per person, per authorised firm. Be warned however, badly performing investments are not covered, and the FSCS will not pay out if you complain that your investment has not performed as well as you had hoped!
Mortgages – the mis-selling of mortgage products i.e. if a firm has arranged a mortgage agreement for you that is not suitable, are protected up to £50,000.
What doesn’t the FSCS Cover?
Besides what we have already mentioned, The FSCS will not cover peer-to-peer lending sites, pre-paid credit cards, boiler room scams sold by non-authorised companies, some electronic payments services (including PayPal), reinsurance or mortgage lending or administration.
The FSCS say they will settle compensation claims arising from a bank, building society or credit union failing within seven days. For general insurance, the standard period is 14 days, PPI claims are settled within 3 months and for any other claims, customers should expect to wait up to 6 months.
Finally, in certain cases, the FSCS will provide protection above £85,000 for “temporary high balances”, up to £1 million for a period of six months. These include money deposited in advance of purchasing a property, or proceeds from the sale of a property.
To see the above content presented visually, check out this PDF guide, produced by the State Bank of India (SBI) UK