Since 2001, the Financial Services Compensation Scheme (FSCS) has been the safety net for British savers. The scheme, beefed up after the global financial crisis a decade ago, has now paid more than £26 billion to savers, helping more than 4.5 million people.
If you have savings with a UK provider, then the FSCS provides reassurance that your money is protected. However, there are limits and other factors to consider. Here, we look at what the FSCS covers, why you need to be careful if you have accounts with multiple providers, and why it doesn’t always provide protection if your provider fails.
What you need to know about the Financial Services Compensation Scheme
The FSCS came into effect in 2001 and protects deposits made with high street banks, building societies and credit unions.
If your provider collapses, the scheme provides compensation for deposits up to £85,000. If you hold a joint account, you could receive compensation of up to £170,000. The limit applies to each ‘banking licence’ (see below).
So, if you have £100,000 in a savings account in your sole name and your provider fails, you would receive compensation of £85,000. For this reason, it can be sensible to hold your savings with multiple providers so your entire savings would be protected by the scheme.
Some products aren’t protected by the FSCS, and so always check with providers whether the scheme covers their accounts.
The temporary ‘high balance’ clause
A little-known aspect of the FSCS also provides protection of up to £1 million for cash you have in a bank or building society. This is the ‘temporary high balance’ clause.
Here, the FSCS will compensate you up to £1 million if you have a large balance in your account for a period of up to six months, in certain circumstances. These include:
- Proceeds of a property sale or equity release
- Benefits paid by an insurance policy
- Personal injury compensation
- Money from a claim for unfair dismissal or wrongful conviction
- Benefits payable on retirement
- Benefits payable on death
- Proceeds of a deceased’s estate held by their personal representative
To take advantage of the safety net, you may have to provide proof of the funds – for example, a property sale receipt, will, or court judgement.
Be careful if you hold money with banks that are part of the same group
In the last two decades, takeovers and mergers have been commonplace in the financial services sector. It can be useful to know who ultimately owns each of the providers where your cash is invested as the £85,000 FSCS limit applies per ‘banking licence’.
Here’s an example. Imagine that you held:
- £125,000 in a Halifax account
- £80,000 in a Birmingham Midshires account, and
- £150,000 in a Bank of Scotland account
Assuming all these accounts were in your sole name, the FSCS would only cover the first £85,000. That’s because the HBOS group owns all three of these brands and operates under the same banking licence. You could lose the remaining £270,000 of your savings.
The same situation would apply if you held more than £85,000 with both the Clydesdale and Yorkshire Banks or with HSBC and First Direct. And, you’d only be covered for the first £85,000 of your savings if you held more than that sum with the Nationwide, the Derbyshire and the Dunfermline Building Societies (they are all Nationwide brands).
If you have money with multiple institutions, make sure you don’t fall foul of this rule. Use the online check to make sure.
Collapsed ‘mini-bonds’ firm shows risks of investing directly
The recent case of the collapsed bond provider London Capital & Finance (LCF) highlights the importance of choosing savings and investments that offer the FSCS safety net.
In the case of LCF, the company took £236 million following a marketing campaign before going into administration earlier this year. Thousands of investors were set to lose their life savings in the collapse.
In the aftermath of the firm’s demise, the Financial Conduct Authority issued this statement:
“Issuing mini bonds is not a regulated activity, just as is typically the case with other corporate bonds. This means investors are unlikely to have access to the FSCS in the event the firm is declared in default, but this would be a matter for the FSCS to determine.”
Initially, the FSCS stated that the 14,000 investors would not be covered by the compensation scheme. However, having reviewed the business, the FSCS has concluded that some clients were advised by Surge Financial, which acted on behalf of LCF. As advice is a regulated activity, investors can, therefore, claim they are eligible for compensation from the scheme.
This episode underlines the importance of checking that you are protected when you come to invest your money. Investing directly adds an additional layer of risk, while using a financial adviser, for example, gives you an added layer of protection.
Ultimately, these investors may be able to claim compensation, but it took a U-turn from the lifeboat fund for that to happen. Would you want to take such a risk?
We’re here to help
Have any questions about the FSCS or your savings or investments? Get in touch. Email firstname.lastname@example.org or call 01454 416 653.