The Financial Services Compensation Scheme (FSCS) is a government-backed compensation scheme that’s designed to protect you from losing money if a regulated financial services firm goes out of business. If an authorised firm goes bust and can’t repay your money, the FSCS will provide compensation up to a certain limit. The aim of the scheme – which was set up in 2001 – is to create trust within the financial services industry and enable people to buy regulated financial services products with confidence.
The FSCS covers a wide range of financial products including bank accounts, pensions, investments, mortgages, and insurance. It is free to use and funded by levies on firms authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). In the 2020/2021 financial year, the scheme paid out total compensation of £584 million to customers of failed financial services firms.
How does the FSCS work?
The FSCS will pay out compensation if a regulated financial services firm you’re using goes out of business and you can’t get your money back.
If you have suffered financial losses as a result of the failure of a regulated firm, you can make a claim with the FSCS online. The process is free and quite straightforward. You can also make a claim through a claims management company (CMC). However, a CMC is likely to charge you a handling fee. It’s worth noting that if your bank, building society, or credit union has failed, you don’t need to make a claim. In this scenario, the FSCS will return your money automatically, up to its compensation limit.
To receive compensation from the FSCS, you must be eligible under the scheme’s rules, which are set by the FCA and the PRA. Some points to note here include:
- The FSCS only pays compensation when an authorised firm is unable, or likely to be unable, to pay claims made against it.
- For the FSCS to be able to provide compensation, it must be in connection with a type of regulated activity that was being carried out for you by the authorised firm.
- The FSCS will only pay compensation for financial loss and there are limits as to the amount of compensation it will pay.
- The scheme is mainly designed to assist private individuals, although smaller businesses are also covered.
If your claim is successful, FSCS will pay compensation up to a certain limit. When you accept this compensation, you transfer your legal rights against the firm to the FSCS. This means you can no longer claim against the firm or any other relevant party.
What is covered by the FSCS?
The FSCS covers a broad range of financial services firms and products. Here’s a look at the types of firms and products it covers and the maximum amount of compensation you can claim if you have suffered financial losses.
- Banks, building societies and credit unions: up to £85,000 per person, per institution, or £170,000 for joint accounts. There is protection for temporary high balances up to £1 million for six months from when the amount was first deposited.
- Investment firms: up to £85,000 per person, per firm.
- Pension firms: up to £85,000 per person, per firm for SIPP operators, or 100% your claim for other pension providers.
- Debt management firms: up to £85,000 per person, per firm.
- Mortgages: up to £85,000 per person, per firm.
- Insurance: 90-100% of your cover depending on the type of insurance policy.
- Payment protection insurance (PPI): 90% of the total claim.
What is not covered by the FSCS?
The FSCS does not cover:
- Peer-to-peer lending
- Cryptocurrency exchanges
- Some electronic payment services such as PayPal
- Currency transfer firms such as Wise
- Money held on prepaid credit cards
- Christmas or other savings clubs
- ‘Boiler room’ scam investments
- Insurance policies for credit, marine, aviation or transport business
The FSCS also does not cover you if you make an investment and the investment loses value. For example, if you invest in a publicly-traded company or an investment fund, and the value of your investment falls by 20%, you cannot make a claim under the FSCS.