When it comes to the economic impact of the coronavirus pandemic, many financial services firms have found themselves impacted in much the same way as other businesses. Many thousands of financial services companies are small or medium-sized businesses that have been affected by furlough, social distancing, and volatility in the markets.
Indeed, the UK regulator, the Financial Conduct Authority (FCA), has warned that up to 4,000 financial services firms are at “heightened risk of failure” as a result of the market downturn caused by the coronavirus pandemic.
The FCA’s executive director of consumers and competition, Sheldon Mills, said small and medium-sized firms made up a large portion of those at risk. He reported that 30% of these firms have the potential to cause harm if they were to fail.
“Our role isn’t to prevent firms failing. But where they do, we work to ensure this happens in an orderly way. By getting early visibility of potential financial distress in firms we can intervene faster so that risks are managed, and consumers are adequately protected”, Mills added.
With thousands of businesses at risk, how can you make sure your cash is safe in these uncertain times?
The protection of the Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) exists to protect consumers when authorised financial services firms fail. If a firm you have been dealing with fails, and can’t pay claims against it, the FSCS can step in.
It’s important to remember that the FSCS is free to consumers as it is funded by the financial services industry.
Some examples of situations where you might be able to make a claim include:
- Failed financial co-operatives
- Failed pension providers
- Mis-sold mortgages and endowment policies
- Failed banks and building societies
- Insurance broker and company failures
- Compensation for investment with firms that have failed.
When it comes to your cash, the FSCS offers protection of up to £85,000 per person, per institution. So, if a bank failed and couldn’t pay back your money, you’d be entitled to compensation of up to £85,000 (£170,000 for a joint account).
Remember that the £85,000 limit is per “banking licence” – it’s not “per brand”. For example, if you held £50,000 with HSBC and £50,000 with First Direct in your sole name, the maximum compensation you would receive is £85,000 as those two brands fall under the same banking licence.
Clydesdale Bank, Virgin Money, and Yorkshire Bank also share a banking licence, and so the maximum payout would be £85,000 even if you had more than this invested across those three institutions.
Keeping your cash safe
As financial planners, we’re big believers in diversification, across asset classes, geographical regions, and sectors. It therefore follows that not putting all your eggs in one basket can also have benefits when it comes to keeping your money safe.
For example, if you had £300,000 in cash savings, it is sensible to split your savings across four different institutions. Investing £75,000 in each of four banks means every penny you have will be protected by the FSCS if a bank were to fail. If your £300,000 was with one bank, and it failed, your compensation would be limited to £85,000.
It may also be the case that you decide to spread your investments in terms of both platform and fund management group so that there is no more than £85,000 with any one provider. You could also ensure that any cash the platform holds isn’t in a bank in which you also have £85,000 or more.
It may also be the case that you consider placing your money with large institutions who keep a lot of free capital over and above the regulatory minimum.
Temporary high balances
There are a range of scenarios in which it could be quite possible that you would have an amount of more than £85,000 with a single institution. Examples might include:
- An insurance payout
- The proceeds of a property sale
- A compensation claim (for personal injury, wrongful conviction, unfair dismissal, etc.)
- A redundancy payment
- A divorce settlement
- An inheritance
- A retirement benefit payout
In these limited circumstances, the FSCS protects “temporary high balances” in your bank account, building society account or credit union account of up to £1 million for six months.
The protection begins on the date the temporary high balance is credited to your account, or to a client’s account on your behalf.
Note that you might have to provide evidence for a claim under this protection. This might be a will, court judgment, insurer letter, property sale agreement, death certificate, probate or HMRC records.
Get in touch
If you would benefit from advice about keeping your money safe in these difficult times, please get in touch. Please email email@example.com or call 01454 416 653 to find out how.