What is the Financial Services Compensation Scheme (FSCS)?
The Financial Services Compensation Scheme (FSCS) is a statutory deposit protection and investor compensation fund in the UK. What does the FSCS do? Operating independently of the government or the financial services industry, the sole purpose of the FSCS is to protect consumers if financial firms fail and are unable to repay their obligations.
Where have you heard of the Financial Services Compensation Scheme?
The Financial Services Compensation Scheme definition is likely well-known by traders and investors, as many online brokerages advertise that they are members of the FSCS. While the FSCS is often seen as a ‘safety net’, it is vitally important for investors to understand exactly what they are covered for. For instance, investors are not covered by the FSCS if the underlying investment collapses; a claim is only eligible if the investment provider fails.
What do you need to know about the Financial Services Compensation Scheme?
The Financial Services Compensation Scheme was founded in 2001 under the Financial Services and Markets Act 2000 and is fully funded by the financial services industry. Authorised firms pay the FSCS an annual levy, based on the size of the institution and how many deposits they hold. The levy is used to fund the Financial Services Compensation Scheme operations, covering management costs and the payment of compensation to customers.
How does the FSCS work? If a bank, building society or credit union collapses, customers can make a free claim to recover any money that has been lost. Customers keep 100 per cent of the compensation they receive from a successful claim made directly through the Financial Services Compensation Scheme.
According to its 2019/2020 annual report, the FSCS helped 258,000 customers, paying out a total of £527m in compensation, and currently has more than 49,000 financial firms that are covered by the scheme.
How much does the Financial Services Compensation Scheme cover? The amount of compensation customers may be eligible to receive depends on the type of claim being made:
The FSCS protects customers of authorised UK banks, building societies and credit unions up to a maximum of £85,000 per institution. For joint accounts, the protection doubles to £170,000. Compensation will be automatically refunded by the FSCS in this event.
Customers claiming against investment providers may be eligible to receive up to £85,000 per firm, depending on the date that the firm failed.
Successful claims made against insurance/pension providers will receive 100 per cent of the policy amount, with no upper limit on compensation.
Now that we have FSCS explained, let’s take a look at some of the scheme’s limitations:
The compensation limit applies to the individual financial firm the claim is being made against. This means that customers with money spread across multiple accounts with the same bank can only claim the maximum amount of £85,000.
Claims can only be made against firms that were authorised by either the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) at the time the money was deposited or advice was given.
All claims must be eligible under the rules set out by the FCA Handbook of rules and guidance.