The Financial Service Compensation Scheme FSCS and its Limits Explained

Protecting your savings is essential. In the past, we have heard various scandalous stories about people who have either been duped or badly let down by financial institutions that were responsible for the safekeeping of their savings, pensions, or investments.

The FSCS (Financial Service Compensation Scheme) was introduced in 2001 to help protect people from losing part or all of their savings and investments when authorised financial service companies go into liquidation. Please read on to learn more about the FSCS, how it works, and its limitations.

What is the FSCS?

In answer to the question, what is FSCS? – it is a free savings protection service that was introduced in 2001. It is funded by financial companies registered with the Prudential Regulation Authority and the Financial Conduct Authority.

After the financial crisis of 2008, the FSCS created the capability of compensating those who saved in failed institutions such as banks, building societies and credit unions within seven days.

Since its launch, the FSCS has compensated hundreds of millions of £s, covering failed financial service providers, some of whom mis-sold their products.

In the 2017/18 financial year, the FSCS paid out more than £405 million, £185 million of which related to products mis-sold by various investment advisers and pension companies. New figures yet to be published suggest that these compensation losses are still rising.

The range of financial products protected by FSCS

The range of financial products that are protected when taken from appropriately authorised, regulated, failed companies include:

  • Banks
  • Building Societies
  • Credit Unions
  • Debt management
  • Insurances
  • Mortgages
  • PPI
  • Pensions

If you have been let high and dry by a bank, building society, or credit union, the FSCS will compensate you within the established limits. If your insurance company has failed you, the FSCS will attempt to provide you with seamless cover from a different insurer. If that is not possible, then the scheme will set about arranging the return of any remaining premiums. Any other types of claims concerning FCSC protection must be pursued via the FSCS’s online claims facility.

Establishing whether your savings and investments are safe

The first thing to understand if you want to check whether or not your savings or investments are safe is that it is not necessarily the service provider you need to check out but the people who gave you the advice. They may, of course, be one and the same.

You can establish the safety of your savings and investments by verifying whether the company from which you were offered advice is or was at that time authorised by either the Financial Conduct Authority or the Prudential Regulation Authority.

It is also possible that the company in question might still be under investigation but is not yet listed as being under FSCC protection,  in which case you should check the FSCS’s list of firms that have failed or are under investigation. If you find a company that is still being investigated, you can register for updates on progress via email.

FSCS compensation rules and limits

Regrettably, you may not be able to recover all of the money you might lose when the financial company through which you have savings or investments fails. FSCS protection has set limits.

  • For individuals with money held by the UK authorised banks, building societies or credit unions, the limit is up to £85,000 per person.
  • If the savings or investments in question are in a joint account, the combined FSCS limit is £170,000.

In certain circumstances, balances of up to £1 million that qualify can be protected for up to six months from when the sum was first deposited.

Circumstances where the protected sum can be up to £1 million

The FSCS is unable to confirm if a particularly high balance is eligible for protection until the relevant bank or building society goes into liquidation. This is on account of the fact that all evidence must be checked to verify that there is a genuine connection between real-life events and the sum of money involved. Typical events include:

  • Benefits due under a specific insurance policy
  • Compensation regarding unfair dismissal
  • Compensation for unlawful dismissal
  • Death benefits
  • Inheritance
  • Injury compensation
  • Money due regarding being made redundant
  • Property transactions – sales, equity release, etc.
  • Settlement relating to a personal injury claim
  • Payments regarding civil partnership or marriage break ups
  • State benefit (disability or incapacity)

You will, of course, have to provide some sort of proof. It can include court judgements, legal letters from employers, mortgage providers, and pension trustees. Other proofs might be death or marriage certificates, HMRC or Land Registry records, social security statements, and wills.

Limitations on FSCS compensation for money in banks and savings accounts

Where your money is held can be a deciding factor in determining the amount of compensation to which you are entitled. For example, if the money is held in multiple accounts in banks that are part of one banking group that share one banking license, FSCS views those savings as being held in one bank, and the total amount eligible is the total across all of the accounts.

If you want to check which banks hold shared licenses, you can refer to the financial services register on the FCA’s website.

How FSCS compensation works regarding investments

If you were advised to invest or you hold an investment and your provider goes out of business, you could be entitled to FSCS compensation. The first thing you must do is establish whether or not the investment is FSCS protected. The set dates for FSCS compensation limits are as follows:

  • If the provider went down after the 1st of April 2019, you could be eligible for up to £85,000 worth of compensation per provider.
  • If the provider went down between the 1st of January 2010 and the 31st of March 2019, you could be entitled to up to £50,000 per provider.
  • If the provider went down prior to the 1st of January 2010, you could be entitled to 100% of the initial £30,000 and 90% of the next £20,000 to a maximum of £48,000 per provider.

In summation, there are three steps you must take when verifying investment protection:

  • 1st Step – Confirm that the provider in question is, or was, authorised by either the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA).
  • 2nd Step – Ascertain that the activity for which you hold the provider responsible (providing financial advice, for example) is or was regulated by the FCA or PRA.
  • 3rd Step – Ask the provider to verify that the service they carried out for you is or was a regulated activity that was FSCS protected.

It’s important to remember that you can lose money when you invest. Be wary of investments that offer high returns. Generally speaking, the higher the return, the higher the risk. The wisest course of action is to only invest what you can afford to lose.

Making historical claims for FSCS compensation

If your claim concerns something that happened before the 28th of August 1988, it is unlikely that the FSCS will be able to assist. Before this date, investor compensation schemes simply did not exist.

Regarding claims relating to mortgage advice, the date from which you may be able to claim FSCS compensation is on or after the 31st of October 2004.

As for claims concerning insurance intermediaries, they will only be considered for business transacted on or after the 14th of January 2005.

Finally, travel insurance-related claims regarding policies sold along with holidays or other types of travel can only be made for business transacted on or after the 1st of January 2009.

What is the position with FSCS protection post brexit

If you are concerned about the FSCS protection limit now that Brexit is done and dusted, don’t be.

The £85,000 limit per person or £170,000 per joint claim is unaltered. However, you should be aware that the Bank of England has abandoned plans to keep the protected amount in alignment with the EU’s figure of €100,000. The compensation limit is next due for review in 2025.

How to go about making a claim

If you believe that you may have a legitimate claim regarding a financial organisation that has let you down, you may be eligible to apply to the FSCS for redress. You should first, of course, ensure that your claim meets the eligibility parameters discussed above. Once you’ve satisfied yourself that you could have a legitimate claim for FSCS compensation, there are two ways you can proceed. You can:

  • Apply directly to the FSCS
  • Apply via a claims management company (CMC).

Raising a claim directly via the FSCS is completely free, and if you decide to proceed with this option, and you make your claim online, the FSCS will tell you immediately whether or not you have a valid case. To start a new claim, you will first need to register an online account with FSCS.

If you decide to go down the CMC route, they will probably charge you a commission based on the amount of compensation you could be awarded.