FSCS

The Financial Services Compensation Scheme (FSCS) is the United Kingdom's ultimate financial safety net. Think of it as the financial equivalent of a coastguard lifeboat, ready to rescue your money if the authorised financial firm you've trusted it with goes belly-up. It's an independent body, set up by the UK government, and its service is completely free to consumers. The scheme is funded by levies on the very firms it covers—a bit like an insurance pool for the entire industry. For any investor or saver in the UK, understanding the FSCS isn't just a trivial detail; it’s a fundamental part of managing risk and ensuring your hard-earned capital has a powerful layer of protection. It is the bedrock of consumer confidence in the UK's financial system.

The FSCS springs into action when a financial firm authorised by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) fails and cannot pay back what it owes its customers. It's a fund of last resort, meaning it steps in only when the firm itself is officially declared to be in default. When this happens, the FSCS steps into the firm's shoes to pay compensation to eligible customers. The process is designed to be as automatic and straightforward as possible. For simple bank deposits, the FSCS aims to pay compensation within 7 days. For more complex cases, like investments or pensions, the process can take longer as they need to assess the details of each individual claim. You don't need a financial adviser or a lawyer to make a claim; you can deal directly with the FSCS for free.

The protection offered by the FSCS is broad, but the limits and rules vary depending on the type of financial product. It's crucial to know what’s covered and, more importantly, what isn't.

This is the most straightforward protection. If you have cash in a UK-authorised bank, building society, or credit union, the FSCS protects you up to a limit of £85,000.

• Per Person, Per Firm: This limit applies per person, per authorised firm. This means if you have £100,000 in a single account, you'd only be covered for £85,000. If you have £80,000 in Bank A and £80,000 in Bank B, and they are separate firms with different banking licenses, you are fully covered for both amounts. Warning: Some banks operate under the same banking license (e.g., Halifax and Bank of Scotland are part of the same group). In this case, the £85,000 limit applies to the total amount you hold across all brands under that single license.
• Temporary High Balances: The FSCS provides a higher protection limit of up to £1 million for up to 12 months for certain life events, such as receiving money from a house sale, an inheritance, or a redundancy payout.

This is where things get more nuanced, and it's a critical area for investors to understand. The FSCS protects investments up to £85,000 per person, per firm. However, this protection is not for poor investment performance. If you buy stocks in a company and the share price plummets, that's an investment risk you accept. The FSCS will not compensate you for that loss. Instead, the FSCS for investments covers situations where you lose money because the authorised firm providing the investment service fails. Examples include:

• Bad Advice: The firm gave you unsuitable advice (e.g., put a low-risk investor into high-risk products), and has since gone out of business so cannot pay the compensation you are owed.
• Fraud or Mismanagement: The firm acted fraudulently or negligently, and has now failed.
• Administrative Failure: The firm goes bust while holding your investments or cash, and it cannot be returned to you.

Essentially, the FSCS protects you from the firm failing, not from the investment failing.

The FSCS also provides protection for other areas, generally up to the £85,000 limit:

• Pensions: Protection for certain types of pensions if the provider or adviser fails.
• Insurance: Covers 100% of claims for compulsory insurance (like third-party motor insurance) and 90% of claims for non-compulsory insurance (like home or pet insurance) with no upper limit.
• Mortgage Advice: Protection if you lose money due to bad advice from a mortgage adviser whose firm has since failed.

Before you deposit a large sum or open a new investment account, do your homework.

• Check the Bank: Use the FSCS Protection Checker on their website to see if your banks share a license. Spreading your cash across different, unaffiliated banking institutions is a simple way to maximize your protection.
• Check the Firm: Always ensure any firm you deal with is authorised by the FCA. You can check this on the FCA Register. If a firm isn't authorised, you won't be covered by the FSCS.

For investors familiar with the US system, it's helpful to see how the FSCS compares.

• Deposits: The US equivalent is the FDIC (Federal Deposit Insurance Corporation), which insures bank deposits up to $250,000 per depositor, per insured bank.
• Investments: For brokerage firm failures in the US, investors are protected by the SIPC (Securities Investor Protection Corporation). The SIPC protects up to $500,000 in securities and cash, with a $250,000 limit for cash only. Like the FSCS, it protects against the failure of the brokerage firm, not against market losses.