Guide to the FSCS
The collapse of major high street banks like Northern Rock has led to concern amongst savers that their money isn’t safe. However, the Financial Services Compensation Scheme (FSCS) is designed to protect cash as it will pay compensation in the event that customers do lose their money.
The FSCS is an independent fund set up by UK financial bodies. It promises to pay the first £85,000 (from 30/01/17) of savings in compensation to customers that end up out of pocket when a bank or other financial services provider authorised by the Financial Conduct Authority goes out of business.
What does it cover?
While the most common type of financial service is a bank or building society, the scheme does cover all sorts of financial services, including insurance policies, investment business, home finances, and deposits in current accounts, savings accounts, and cash ISAs.
Individual customers and small businesses may be eligible for compensation if they have lost money in bank or building society accounts, they followed poor financial advice, if their insurance or pension provider goes bust, and if the provider was negligent or fraudulent.
The FSCS won’t offer cover if the company in question is still in business, not authorised by the Financial Conduct Authority, the claim took place before a certain date, or if the firm was not directly responsible for the loss.
How much compensation?
In the event that the financial services provider fails, the FSCS will step in and provide customers with compensation.
However, there are different limits for each type of product and the exact amount depends on a number of factors, including the amount of money lost, the limit for the type of product affected, and the date the company was declared in default.
Account holders have the reassurance of protection of up to £85,000 per individual, per institution, for providers declared in default after 1st January 2016. This means that people with £100,000 in their savings account will receive £85,000 compensation in full, but may still lose the additional £15,000.
From 3rd July 2015, the FSCS will provide £1 million protection limit for temporary high balances held with your bank, building society or credit union if it fails.
Savings may get the most attention when it comes to the FSCS, but other financial products are also protected. Investments are protected up to £50,000 per person, per company, for firms declared in default on or after 1st January 2010.
There are many types of insurance and so the level of compensation can differ. Compulsory insurance policies, such as third party car insurance, receives 100% protection with no limit whatsoever. Long-term insurance, such as life insurance, non-compulsory insurance, such as contents insurance receive 90% protection.
What is an institution?
The maximum allowances offered by the FSCS for various financial products are per person, per institution.
This means that customers with more than one account with the same bank, will only get £85,000 protection for both accounts. Customers with one account with Halifax, and another with its sister bank, Bank of Scotland, will also only get £85,000 combined.
However, sister banks RBS and NatWest have separate limits, so customers with an account at each bank will have a total of £170,000.
There have been a number of mergers within the banking industry in recent years, so it is important to be aware of which providers share the same FCA authorisation.
Santander took over Alliance & Leicester and Bradford & Bingley in 2010, while Nationwide Building Society took over Cheshire, Derbyshire and Dunfermline building societies, and The Co-operative and Britannia merged in 2009.
How to protect your money
The golden rule with protecting savings is to not deposit more than £85,000 in any one single financial institution; remember that two banks could belong to the same institution. However, this can mean losing out on interest, as the additional accounts may not pay the same rate.
Should this be the case, it is up to the individual as to whether they would prefer to be 100% protected by the FSCS, or whether they would rather earn the best rates and only split their cash between two or three accounts.
Anyone with savings of less than £85,000 is fully protected by the FSCS and won’t be affected by shared FCA authorisation or sister banks. As it can still take time for claims to pay out, it is still worth splitting cash between banks or building societies.