Put simply, the Financial Services Compensation Scheme (FSCS) is a compensation scheme set up by the UK government to protect customers of authorised financial services firms if their provider fails.
The FSCS covers an extensive range of activities and products, including insurance, deposit taking, investments, mortgages, payment services, and consumer credit.
The scheme's purpose is to provide financial protection to customers if an authorised firm cannot meet its financial obligations. It also aims to promote consumer confidence in the UK's financial services industry by providing a safety net for customers should anything go wrong.
The scheme was established in 2001 and is administered by the Financial Services Authority (FSA). Currently, the FSCS provides compensation of up to £85,000 per person per firm.
This guide provides a detailed explanation of what the FSCS is, how it works, and what financial products it covers.
What Does the FSCS Protection Cover?
The FSCS covers all UK-based institutions authorised by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).
The scheme generally provides protection for most financial services products, including but not limited to deposits, investments, insurance policies, and mortgages. It also covers payment services such as credit cards and cheques.
FSCS protection only applies to bank accounts held in the UK. Overseas accounts, and accounts held by non-banks like MoneyBox, Raisin, and Chip will not be protected directly by the FSCS.
However, e-money and payment services like these are required to safeguard funds they receive from customers when providing services. These must be kept separately from the firm’s own funds, typically in a bank account, to enable these funds to be returned to you should the company fail.
The accounts where these are held (typically with banks) are also likely to be protected under the FSCS.
The FSCS protects a wide range of activities and products. However, the extent or amount of coverage varies based on when the firm failed. Let's look at these in detail.
1. Bank Accounts
If you're a customer of an authorised UK bank or building society and it fails, the FSCS will compensate up to £85,000 per person per firm.
For joint bank accounts, each account holder is eligible for up to £85,000 in compensation, meaning a maximum of £170,000 per joint account.
Compensation covers the majority of the bank account types, including current accounts, deposit accounts, and e-money products. It is typically paid within seven days of the bank failing unless you have some complications or additional funds that need verification. It is important to note that the £85,000 limit applies per person, per firm, not per account. This means that if you have more than one account with the same bank or building society, the total amount of compensation you can receive from the FSCS is still limited to £85,000.
Note: This protection applies to UK banks or building societies authorised by the Prudential Regulation Authority.
2. Pensions
If your pension provider fails, the FSCS will pay 100% of your pension savings.
If you use a SIPP provider, the FSCS will pay up to £85,000 per person per firm.
If a UK-regulated firm gives you bad pension advice, the FSCS will pay £85,000 in compensation.
The FSCS provides protection for personal, stakeholder, and occupational pensions. The amount of compensation depends on the type of pension and when the firm failed. Here's a rundown of the term changes over the years:
Between the 3rd of July 2015 and the 31st of March 2019:
If your pension provider failed, the FSCS would pay 100% of your pension savings.
If you used an SIPP provider, the FSCS would pay up to £50,000 per person per firm.
If a UK-regulated firm gave you bad pension advice, the FSCS would pay £50,000 in compensation.
Between the 1st of January 2010 and the 2nd of July 2015:
If your pension provider failed, the FSCS would pay 90% of your pension savings.
If you used an SIPP provider, the FSCS would pay up to £50,000 per person per firm.
If a UK-regulated firm gave you bad pension advice, the FSCS would pay £50,000 in compensation.
3. Mortgages
If your mortgage provider fails, the FSCS will pay £85,000 per person per firm.
If you receive poor advice from a UK-regulated mortgage provider, the FSCS will pay up to £85,000 in compensation per firm
The FSCS provides protection for mortgage-related claims against authorised firms that are unable to meet their obligations. This includes claims for mortgage-related advice.
If you have received poor mortgage advice that caused you to lose money, you may be eligible for compensation from the FSCS. To be eligible, the advice must have been given to you on or after 31 October 2004.
Some examples of situations where you may be able to claim compensation for bad mortgage advice include:
If you suffered losses because you were not properly advised about the different types of mortgages available and chose an unsuitable one.
If you suffered losses because certain details of your mortgage were incorrect, such as a longer term than you needed.
If you suffered losses because you were advised to switch mortgages without a proper explanation.
If you suffered losses because you were advised to take out a lifetime mortgage that was unsuitable for you at the time.
The amount of compensation depends on when the firm has failed. Here's how terms changed over the years:
Between the 1st of January 2010 and the 31st of March 2019:
If your mortgage provider failed, the FSCS would pay £50,000 per person per firm.
Before the 1st of January 2010:
If your mortgage provider failed, the FSCS would pay you 100% of the first £30,000 and 90% of the next £20,000 up to £48,000.
4. Investments
If the firm fails, the FSCS will pay £85,000 per person per firm.
Many trading platforms have failed or experienced security breaches in the past, which is a daunting scenario for many. In these cases, the FSCS can help by providing compensation for authorised UK-regulated investments —including stocks, bonds, funds, and more— depending on when the firm failed:
Between the 1st of January 2010 and the 31st of March 2019:
If your firm failed, the FSCS would pay £50,000 per person per firm.
Before the 1st of January 2010:
If the firm failed, the FSCS would pay 100% of the first £30,000 and 90% of the next £20,000 up to £48,000.
Note: This protection doesn't cover losses incurred solely from poor investment performance. Many of us have been there. We make an investment, but it turns out differently than expected, and we end up losing money. Unfortunately, there isn’t a coverage for such cases.
5. Insurance
If the policy is replaced by a new one with a different insurer, the FSCS can contribute towards the cost of the new policy.
If the insurance policy is not replaced, but eligible customers are owed a portion of their insurance policy premium, the FSCS would fund and process the payment for them (up to 90% of the calculated refund).
The FSCS also ensures that policyholders with valid claims under an insurance policy with a failed insurer receive either 90% or 100% of the claim value.
When an insurance provider fails, the FSCS will provide protection for policies that have been in force. This compensation is subject to terms and conditions set by the Prudential Regulation Authority's rulebook. The FSCS provides compensation to eligible policyholders, up to certain limits, in the event that their insurance company is unable to meet its obligations.
A range of insurance products are included within the coverage, including:
Motor insurance
Home insurance
Travel insurance
Pet insurance
Life insurance
Income protection insurance
Payment protection insurance (PPI)
Employer's liability insurance
Public liability insurance
The level of FSCS protection and limits depend on the type of insurance product and the circumstances of the claim. For example, motor insurance and home insurance policies are protected for 100% of the claim, while the protection for long-term insurance products such as life insurance and income protection insurance is typically 100% of the claim with no upper limit.
6. Credit Unions
The FSCS will compensate up to £85,000 of a member's savings if their credit union fails.
A credit union is a financial cooperative owned and run by its members. They offer similar services to regular banks and building societies, but with lower loan interest rates. FSCS provides protection to members of credit unions if it becomes insolvent or is unable to repay their deposits. To be eligible for compensation, the credit union must be authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), and the deposit must have been made by an eligible depositor. Eligible depositors include individuals, small businesses, and charities.
It's important to note that the FSCS coverage for credit unions only applies to deposits, and not to other financial products or services offered by credit unions, such as loans or insurance.
7. Funeral Plans
If the provider went out of business, the FSCS would cover up to £85,000 per eligible person per firm.
In the event that a funeral plan provider goes bankrupt, it should have measures in place to ensure that another regulated provider can carry out the funeral plan or offer compensation. FSCS will provide protection to policyholders of authorised funeral plan providers that have failed.
FSCS will collaborate with the failed firm, the FCA, and the insolvency practitioner (IP) to ensure that all necessary information is obtained. In most situations, you don't need to make a claim.
If feasible, FSCS will attempt to give you the choice of entering into a new contract with a regulated funeral plan provider to replace the original plan. If this is not possible, FSCS will provide compensation for your plan.
If you would like to receive compensation instead of a replacement funeral plan, FSCS will determine the amount by comparing it to the current market price of a similar plan.
From July 29, 2022, you may be able to claim compensation for certain activities performed by a funeral plan provider or their intermediaries, such as funeral directors and will writers. This includes advice on obtaining a funeral plan or how it was set up.
What If You Have More Than One Account With Different Providers?
Managing multiple accounts with different providers can be confusing, and it's natural to wonder how the UK's £85,000 savings protection applies to such scenarios.
The level of protection you receive hinges on the specific institutions or banking groups you have accounts with. If you have accounts with different bank brands that share a single registration with the Financial Conduct Authority (FCA), you will only be covered for a maximum of £85,000 combined across all accounts.
For instance, suppose you have £85,000 in a savings account with First Direct and another £85,000 in an account with HSBC. In that case, you might mistakenly assume you are covered for a total of £170,000 since they are different banks. However, since both banks operate under the same banking licence, the protection you obtain would only amount to £85,000.
The FSCS only protects customers of authorised banks or financial institutions. If you're unsure whether or not a financial institution is registered with the FCA, you can them directly. Alternatively, you can check the FCA website to see if they are authorised.
You can also check if your funds are protected via the FSCS protection checker.
How to Make a Claim
For starters, if your bank, building society, or credit union has failed, you don't need to make a claim. There is an FSCS system in place, which means your money would be returned automatically within the compensation limits.
For other payments, you need to use the claims service and follow these five steps.
Step 1: Log in to the FSCS Website
Step 2: Confirm Your Eligibility
Step 3: Create an Account and Enter Your Details
Step 4: Provide More Information and Documents
Step 5: Monitor Your Progress Using Your Account
The Bottom Line
The Financial Services Compensation Scheme (FSCS) is a safety net designed to protect customers' financial losses in the unlikely event of a bank, building society, or other authorised company failing.
The scheme typically covers up to £85,000 per eligible person per firm and provides peace of mind for consumers with money tied up in banks and savings accounts. It's important to know that not all products and services are covered by the FSCS, so it's worth checking beforehand if your funds are protected.
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