The Financial Services Compensation Scheme (FSCS) is a government-backed scheme that protects savers and other consumers of financial products in the UK in the event of a financial institution’s failure. The scheme was established in 2001 and protects customers of banks, building societies, credit unions and insurers that are authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and is funded by levies on those companies.
It’s not just for savings accounts
The FSCS actually provides consumers with protection for a variety of financial products, not just savings accounts. For example, if you have a stocks and shares investment account, and the provider subscribes to the FSCS, you should be protected if the provider fails and cannot pay you back what your investment is worth. However, it doesn’t mean the value of any stocks and shares you’re invested in is guaranteed. Their value can still go up and down.
As well as protecting savers and investors in the event of a financial institution’s failure, the FSCS also has a role to play in helping consumers who have been the victims of financial mis-selling. For example, if an individual has been sold or advised on a financial product such as a mortgage that was unsuitable for their needs, and the firm responsible for selling the product subsequently goes out of business, the FSCS may be able to provide compensation. It can also provide compensation if an insurer subscribed to the FSCS fails and cannot meet its valid claims.
However, the FSCS is best known for providing savers peace of mind that their money is protected in the event of a bank or other savings provider failing and helping to maintain confidence during a financial crisis. For example, if a saver has £85,000 or less in one or a number of savings accounts with a bank or building society that fails, they will be fully compensated by the FSCS limit, £85,000 per customer. This level of protection applies to each individual and not each account, meaning that savers who have multiple accounts with the same institution will still be protected up to the £85,000 limit (per customer). However, if you have a joint account, both savers are covered up to the £85,000 limit each customer, so you effectively have £170,000 protected in that account. In some unusual circumstances, for example in the event of a customer receiving a large amount of money from a redundancy, an insurance pay out, a pension lump sum or compensation for a personal injury (to name but a few) the cover can be temporarily increased to £1m for a period of six months in order to give the recipient time to reorganise their finances.
The scheme protects a wide range of savers
It is important to understand who the FSCS scheme protects. The scheme covers individuals, small businesses, and charities, as well as larger institutions such as pension funds. The exact level of protection available can vary depending on the type of financial product, but the FSCS provides a useful tool for assessing the level of protection available for a particular product. It is worth remembering that savers who invest in peer-to-peer lending are not covered by the FSCS.
It is designed to help stabilise the financial services industry
The FSCS scheme was created to help promote financial stability. By providing a guarantee for savers, the FSCS helps to reassure savers that their money is protected even if their provider finds itself in difficulty. This extra peace of mind can help to prevent runs on banks and building societies that could lead to wider financial instability. In the aftermath of the 2008 financial crisis, the FSCS was instrumental in restoring confidence in the financial system, reassuring savers that their deposits were not at risk.
The FSCS also helps to maintain competition in the financial services industry. By providing an equal level of protection to savers and investors, the scheme helps to level the playing field between established financial institutions and newer, smaller firms. This can encourage new entrants to the market, leading to greater competition and better outcomes for consumers.
The benefits of the FSCS for UK savers and investors
The Financial Services Compensation Scheme provides peace of mind, consistency, reliability, and promotes competition in the financial services industry. It can also help to protect savers from miss selling and promotes financial stability in the UK.
While savers should always take responsibility for their own financial wellbeing, the FSCS provides an essential safety net that helps to support a healthy and dependable financial system in the UK.
Although this email and article may contain helpful information and tips, these are not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.