The Financial Services Compensation Scheme (FSCS)

You may have heard of the Financial Services Compensation Scheme. But what exactly is it? How does it safeguard your money from failing financial institutions, and how do you know if you’re covered by it? Read our guide to keeping your hard-earned nest egg safe and sound with the FSCS.

You may have heard of the Financial Services Compensation Scheme. But what exactly is it? How does it safeguard your money from failing financial institutions, and how do you know if you’re covered by it? Read our guide to keeping your hard-earned nest egg safe and sound with the FSCS.

Anelda Knoesen
From the Money team
9
minute read
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Posted 16 JUNE 2021

Keeping your savings safe

You’ve worked hard to build up a nest egg, so of course you want to make sure the money you’ve saved is protected. That’s a big part of why we put our money in the bank, rather than under the mattress. But as we saw quite dramatically during the global financial crisis of 2008, even big banks can fail. So how can you be sure your savings are safe?

Thankfully, there are safeguards in place to protect your savings. If you’ve ever applied for a financial product, like a savings account, you may have noticed the words 'FSCS protected’. That means that the account is covered by the Financial Services Compensation Scheme (FSCS). The FSCS is an independent body set up by the UK government in 2001 as a safety net, to protect your savings in case the financial institution you bank with goes bust.

If your institution is covered by the FSCS and goes out of business, you can claim compensation for savings of up to £85,000 you hold with that institution. Or if it’s a joint account, up to £170,000. It’s free to claim and the FSCS is fully funded by the financial services industry, so in most cases you get to keep 100% of the compensation.

Who is covered by the FSCS?

The FSCS covers financial organisations, including banks, building societies and credit unions, which are regulated by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA). 

Under the FSCS you can claim compensation of up to £85,000 per failed financial institution, for savings in different financial products, including:

Remember that the compensation limit applies per institution rather than per account or product, so if you have savings of more than £85,000 it’s a good idea to make sure your money is split across financial firms with separate banking licences.

And the FSCS isn’t just about protecting your personal savings accounts. They may be able to compensate you if your pension provider, investment firm, mortgage advisor or insurance provider goes out of business. 

Pensions:
The FSCS covers pensions provided by UK-regulated insurance providers if they are classed as ‘contracts of long-term insurance’. You’ll need to check with your provider to see if your pension fits the criteria. If it does, you can rest assured that the FSCS will cover 100% of the pension, with no upper limit, if your pension provider fails. 

If you have a Self-Invested Personal Pension (SIPP) your savings may also be protected under the FSCS, up to £85,000. But it’s worth checking with your provider to see which bank is holding your money to make sure it’s not linked to any other banks you have savings with. 

The FSCS doesn’t cover Occupational Pension Schemes (OPS), but these may be protected by the Pension Protection Fund (PPF) - a public corporation set up by the UK government to protect people with defined benefit pension schemes from losing their pension if their provider goes bust. 

Investments:
The FSCS may cover investments up to £85,000 per person, per firm, providing that the investment firm and the product or service they provided is authorised by the FCA or the PRA. Before you invest, make sure to ask if the investment is FSCS protected so you’re fully aware of the risk involved. 

Mortgages:
If your mortgage adviser or brokerage firm fails, you may be able to claim compensation of up to £85,000 from the FSCS if you lost money because you were given bad advice, or if you were mis-sold a mortgage endowment policy.

Insurance:
If your insurance provider goes bust, the FSCS may be able to compensate you, providing the insurance provider is regulated by the PRA. Depending on the circumstances they may be able to pay the cost of a new policy with a new provider, refund a percentage of the remaining premiums or pay compensation for valid claims that would’ve been honoured by the failed insurance provider. 

 

What are banking licences?

One of the most important things to bear in mind when ensuring your savings are protected under the FSCS is that the compensation limit applies per financial institution, not per account – or even necessarily per bank

That’s because different banks may operate under the same banking licence. Take HBOS for example. Their banking licence covers Halifax, Bank of Scotland, The AA, Saga and Intelligent Finance – among others. So even if you tried to spread your risk by putting £85,000 of your savings in a Halifax savings account and £85,000 in a Bank of Scotland cash ISA, you would only be able to claim half of your savings as compensation if this financial giant failed. 

Even if you know who owns who, it’s not always cut and dry when it comes to banking licences. For example, although Lloyds Banking Group took over HBOS in 2009 during the financial crisis, they continue to operate under different banking licences. 

Luckily, you don’t need to be an expert in who owns who in the banking world to make sure your savings are safe; the FSCS have a handy online tool so you can check if your money is protected.

Higher compensation limits for temporary high balances

Even if you’re on top of spreading your savings to get around compensation limits and banking licences, there may be times when you end up with an unusually large amount of money in your bank account. Perhaps you’ve recently sold your home, received an insurance or a redundancy pay-out, or maybe an inheritance? What would happen if your bank went bust right then, at literally the worst possible time? 

Don’t worry, the FSCS has your back. The FSCS protects temporary high balances of up to £1 million for up to six months. So you have some time to move your savings around. But you’ll need to provide proof of why you have the money – a property sale receipt, for example.

Is your money protected?

With a little research and planning you can make sure your nest egg is protected, and ready and waiting for you when you need it. 

Here’s a few things to bear in mind to make sure your savings are safe:

  • The FSCS only covers banks and building societies authorised by the Financial Conduct Authority or the Prudential Regulation Authority. If you’re not sure if yours is, you can check on the Financial Conduct Authority’s Financial Services Register.
  • If you have an account with a bank based outside the UK in the European Economic Area (EEA), it may not be covered by the FSCS. Although some European banks, like Spanish Santander, are regulated by the UK, others opt instead for a ‘passport scheme’ that means they’re regulated by their home country until temporary permissions end in 2023. Currently all EU countries have an imposed compensation limit of €100,000.  
  • You might have money saved with different banks that are actually covered under the same banking licence from the FCA. If this is the case, the FSCS will treat them as one bank – so you’ll only be compensated up to the £85,000 FSCS limit (or £170,000 for joint accounts), regardless of how much you have in each account. Use the FSCS online checker to make sure your savings are protected. 
  • FSCS coverage begins at different dates for different types of products. For example, you may be eligible for compensation if your bank, building society or credit union failed after the 1 January 2017. Whereas for investment firms, the amount of compensation you can claim varies depending on whether the firm went bust in the period before 2010, from 2010-2019, or after 2019. 
  • The FSCS can cover customers of firms that are ‘in default’ – that is, one that’s unable, or unlikely to be able, to pay claims against it. If you have a dispute with a company that’s still trading, you might want to contact the Financial Ombudsman Service or Citizens Advice.
  • Any savings you hold with National Savings and Investments (NS&I) are completely backed by the government and have no upper compensation limit. So, it’s arguably the safest spot to stash your savings. But it’s worth noting that NS&I generally don’t offer the most competitive returns, so if you want to grow your savings it’s probably best not to put your nest egg in one basket. 

Frequently asked questions

What should I do if my bank fails? How do I make a claim?

In the case of your bank, building society or credit union failing, the FSCS will compensate you automatically and aim to do so within one week, although complex cases can take longer. You can’t ask for easier than that. Plus, did we mention it’s completely free?

In other cases, for example if your pension, insurance or investment provider goes out of business, you may need to register with the FSCS and answer some questions about your claim first. Before you get started, you can use their eligibility checker to make sure you have basis for a claim.

How does the FSCS work for business accounts?

The FSCS offers the same compensation limit for small businesses and limited companies as individual savers – which is up to £85,000.

Small businesses will have to meet eligibility criteria to make a claim for compensation with the FSCS. This is assessed on a case-by-case basis and varies for different types of claim.

If you’re a joint account holder in a business, remember that a business partnership is counted as a single claim, not one claim per partner. This means the total you’ll be able to claim is limited to £85,000 per eligible business account.

Are overseas banks covered by the FSCS?

If your bank is based inside the European Economic Area (EEA), then it might not be covered by the FSCS. Some banks choose to take advantage of a temporary ‘passport scheme’ that means that the compensation is regulated by the bank’s home country in the case that it fails. As it stands, all countries in the EEA have a set compensation limit of €100,000. These temporary rules are set to end in 2023, when all foreign banks must either establish a banking licence with the FCA or cease operating in the UK.  

If you’re investing in a bank based outside of the EEA, then it must be fully regulated by the FCA in order to operate in the UK, so that means you’ll be protected by the FSCS in the same way as you would with a UK bank.  

 

Has Brexit affected the FSCS?

Brexit hasn’t changed the FSCS protection for customers of UK-based firms authorised by the FCA. But if your bank is headquartered in the EEA, then your entitlement to FSCS compensation may have changed following the end of the Brexit transition period on 31 December 2020. Circumstances vary, so to check if Brexit has affected the protection for your savings, it’s best to speak to your bank or other financial institution directly.

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