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The Financial Services Compensation Scheme (FSCS)
The financial crisis of 2007/8 made everyone think about their money - who they held it with and how safe it really was.
As queues of people ran around the block of their local Northern Rock branches in late 2007, following reports that the provider was in trouble, suddenly it seemed that even our everyday savings, held with our bank or building society could be wiped out if we didn’t make sure it was protected.
Are my savings safe?
All UK regulated banks are covered by the Financial Services Compensation Scheme (FSCS) for cash deposits. This means your savings are safe up to the amount of £85,000 per person, per financial institution. This is increased to £170,000 if the account is held jointly.
There is also a measure in place to protect balances up to £1m with a single institution following a ‘life event’ e.g. a house sale or inheritance. Please note that this is only valid for 6 months (12 months for deposits received between February 2020 and February 2021).
What is the Financial Services Compensation Scheme (FSCS)?
The Financial Services Compensation Scheme (FSCS) is a scheme that protects savers and compensates them if their chosen savings provider ceases trading and is unable to return their funds. It is funded by the financial services industry as a whole, in the form of a levy paid by each UK authorised financial services firm.
Any firm that is authorised by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) is covered by the FSCS. The scheme was set up under the Financial Services and Markets Act 2000 and became active on 1 December 2001.
Crucially, the FSCS is free to consumers and is independent of the Government and the financial services industry, including those firms that participate in the scheme. But it is important to remember that not all products are covered, so be sure to check with your provider about yours.
How much is protected by FSCS?
The FSCS protects deposits up to the amount of £85,000 per person, per financial institution. Those with joint accounts would be protected up to £170,000 with each financial institution.
It is important to remember that your funds are only protected up to the £85,000 limit through each financial institution with banking ‘authorisation’ and does not necessarily apply to different accounts or even different banks. Banks that are part of the same group e.g. Bank of Scotland and Halifax, often share a single licence, meaning FSCS protection is only covered up to £85,000 across all the banks collectively.
For the majority this is not a concern as many people do not hold more than £85,000 in savings. But if your do, then you need to think hard about how comfortable you are if, should the worst happen, you lose any cash saved above the £85,000 limit.
The FSCS covers a number of different types of financial products and services - for example investments, home finance and some insurance policies, to name just a few. However, importantly from a saver’s point of view and what we are looking at in more detail, are cash deposits.
All cash deposit accounts are covered as long as the provider is a member of the FSCS. But make sure you have a cash deposit account as there are products that can look like a cash savings, but are not. For example, did you know peer to peer lending is not covered by the FSCS – although it can often be confused as a cash savings account?
The protection limit is actually at its highest level since the introduction of the FSCS and there have been a number of changes to the limit over the years. Before 2007, the maximum FSCS pay-out for depositors was just £31,700 per person, made up of 100% of the first £2,000 and then 90% of their next £33,000.
Temporary high balance protection
Temporary high balance protection was introduced in 2015 and provides cover of up to £1million per person, per banking licence for a period of no more than 6 months.
Please note: Due to covid-19 the period was extended to 12 months from August 2020. This extension is temporary and will revert to six months for a temporary high balance made from the 1st February 2021.
So, if you have received a large lump sum as a result of one of a number of specified major life events, temporary high balance protection may apply. This means that you would have time to carefully consider what to do with these funds, rather than making any hasty decisions.
It is important to note that this protection does not cover every type of windfall or lump sum, but a specified list of major events. This includes but is not limited to;
- Inheritance
- Divorce
- Proceeds from the sale of your main residence
- An insurance pay-out
If you have a lump sum and are not sure if it is covered, you might benefit from speaking to an adviser who can give you information on the best way to proceed.
Does your provider have its own banking licence or is it shared?
If you have less than £85,000 with any one banking licence, you can be confident that your savings will be protected by the FSCS should the worse happen and your chosen provider goes out of business.
But, a number of providers share a banking licence, so it’s easy to see how you might be under protected without even realising it. For example, Bank of Scotland shares its licence with Halifax, Birmingham Midshires, Saga and some old AA savings accounts - so any money in excess of £85,000 held in total with these brands is unprotected.
The key point here is that you wouldn’t automatically put some of these providers together and the fact that they share a banking licence can be very easy to miss.
Providers with parent companies outside the UK
There is a diminishing number of providers operating in the UK savings market, but their parent company is based outside the UK, though within the European Economic Area (EEA).
This means that they are covered by their own country’s compensation scheme, rather than the UK FSCS and you will need to check the amount protected.
Ikano Bank, for example, is covered by the Swedish equivalent scheme and Agribank, the Maltese scheme.
Generally, deposits held with providers covered by European compensation schemes are protected up to a maximum of €100,000 per customer – but this isn’t always the case.
In this respect, these schemes work in a similar way to the FSCS, but it is important to be aware that if your chosen provider goes out of business, generally it is the relevant European scheme that you will need to deal with and the money may be paid out in Euros.
We expect Brexit to have some effect on how you interact with these providers and will confirm more details once we have them. There is no reason not to consider using these providers, but it is important that you investigate and are comfortable with the scheme that it comes under or call us for more information.
How do I claim compensation?
Individuals and small companies can claim compensation from the FSCS. Large companies can also claim compensation, though there are some exclusions that could apply.
In most cases, the FSCS aims to pay compensation within seven days of a bank or building society going out of business. More complex deposit claims could take longer, but should take no more than 20 working days.
It is important to note that there is no charge or fee for the service provided by the FSCS – it is a non-profit, independent organisation.
Once you are made aware that there is a problem with your chosen provider, you should get in touch with the FSCS as soon as possible. Whilst there are no set time limits for claiming compensation – it makes sense to take action as soon as possible.
The FSCS states that if you are facing immediate financial hardship as a result of a firm going out of business, it will try to deal with your claim as a priority. In this situation, you should get in touch with the FSCS as soon as possible.
It is also worth noting that if a bank or building society is declared in default by the FSCS, interest will form part of the compensation amount – so you should factor the potential interest you will receive when deciding how much to deposit with a provider.
How can we help?
FSCS protection is important for savers, giving the peace of mind that if a bank or building society was to fail, you don’t lose your hard-earned savings.
If you are concerned about this and think you might be affected please get in touch and speak to a financial adviser who can help you.