The Financial Services Compensation Scheme (FSCS) was founded in 2001 and acts as a form of deposit insurance for customers, savers and those banking with banks, building societies and other qualifying firms. Hence, if a firm or firm holding customers’ money becomes unstable, the FSCS can pay compensation to qualifying customers.

With potentially far-reaching consequences, it is therefore important to understand:

  • What is the Financial Services Compensation Scheme (FSCS)?
  • The history of the FSCS
  • How the FSCS works

We have all heard about the infamous bank-run. Bank customers fear a bank will collapse, so they all try to withdraw their savings at the same time. It sounds like a thing of the past, but England had its most recent bank run just over a decade ago in 2007.

Concerning, is that this type of hysteria amongst bank customers can lead to the bank’s failure and has had huge effects upon the Greek economy in recent years, with customers being limited with regards to how much they are permitted to withdraw of their own money for this very reason.

What is the FSCS?

Though we may perceive our financial institutions as sound and secure, even banks, credit unions and building societies occasionally collapse and go under.

The FSCS acquires its funds and pool of funding mainly from levies on firms which are authorised and regulated by the Financial Conduct Authority (FCA) as well as those accredited by the Prudential Regulation Authority (PRA), with many institutions being covered by the FCA an larger institutions by both the FCA and PRA. Additionally, the FSCS is not the same as the currently relevant reclaiming of money from previous payday loans, meaning that direct lenders of payday loans are having to pay out a lot in compensation.

Created in 2001, the FSCS functions as the UK’s ‘deposit insurance.’ The scheme will protect your deposits at a given financial institution for up to £85,000 per depositor or firm. This can help customers feel more comfortable keeping their money in UK banks, which maintains trust and capital in the UK economy. This means that there is less likely to be a ‘run on the Pound,’ with people draining their savings and money due to concern and panic.

Am I Covered Under the FSCS?

The FSCS includes a plethora of details and caveats that can affect your finances. There are therefore many questions and nuances to consider:

  • If you have a joint account, you are covered as an individual depositor, not as an account. You and your partner are therefore both covered for £85,000 under the FSCS which means your joint account is covered for up to £170,000
  • If you are a business (a Limited Company, LLP or similar), even if your firm owns multiple brands, the business entity [firm] itself can only be protected for up to £85,000
  • You can temporarily be insured for high balances of up to £1,000,000 for a period of six months in exceptional circumstances, but you will need to discuss this with your specific provider
  • The FSCS can also cover losses when a pension or insurance company goes out of business
  • If you received faulty financial advice resulting from fraud you may be able to claim your money up to £85,000 under the FSCS
 

Percentages

Maximum Compensation

Deposits100% of the first £85,000 per person per authorised firm (for claims against firms declared in default from 30 January 2017)

£85,000

Investments100% of the first £50,000 per person per firm (for claims against firms declared in default from 1st January 2010)

£50,000

Mortgage advice and arranging100% of the first £50,000 per person per firm (for claims against firms declared in default from 1 January 2010)

£50,000

Insurance Business (e.g. pensions, life assurance, home and travel)90% of the claim with no upper limit. Compulsory insurance is protected in full

Unlimited

General insurance advice and arranging (for business conducted on or after 14 January 2005).90% of the claim with no upper limit. Compulsory insurance is protected in full

Unlimited

It is worthwhile to remember the benefits of diversifying your capital. Even trusted financial institutions can sometimes fail, so your money is best protected when it is kept in different forms including stocks, real estate and savings accounts.

The History of the FSCS

Founded in 2001, the FSCS replaced multiple former schemes in the UK. Established by the Financial Services and Markets Act of 2000, the FSCS aimed to protect consumers’ accounts in case a financial institution fails. The scheme has been put to use often. Between 2001 and 2006, the scheme paid out almost £1 billion in compensation. Due to factors such as the 2008 global financial crisis, the FSCS’ pay outs accelerated to £26 billion between 2006 and 2011.

Are All Financial Institutions Covered by the Scheme?

Only financial services firms that have been authorised by the Financial Conduct Authority (FCA) or the Prudential Regulations Authority (PRA) to do business in the UK are covered. Before making an account at a new bank, building societies and credit unions check to ensure they have been authorised by the FCA or PRA to carry out their practices.

Additionally, some financial firms have multiple brands. You may have diversified your accounts into what seems like two banks, but they are owned by one financial firm. Institutions are covered by firm, not brand. Therefore, your deposits may be less insured than you thought as it may be the case that one part of the umbrella institution is better covered than the other. there are a number of online tools to help you find out how, if and where you are covered. You should also check the small print when depositing money anywhere and check who the service or product is underwritten in the UK by.