Financial Services Compensation Scheme (FSCS): Are you banking on their cover?

When looking at different financial services such as banks, investment firms or insurance companies, we are often told, as a way to attempt to make us feel safer, that “You will be covered by the FSCS”. But what exactly does that mean? This article will briefly go through what the FSCS is and how the coverage it provides is triggered.

What is the FSCS?

The FSCS was created to help protect customers of financial service firms who fail. So in other words if a financial service firm, which is covered by the FSCS, fails and can’t pay out claims against it (defaults), then the FSCS helps compensate the consumer (up to a certain amount) for any loss they have suffered as a result of that firms failure. It helps consumers have faith in financial institutions, and adds stability to the UK’s financial infrastructure. Similar schemes are common throughout the world.

For the FSCS scheme only ‘eligible complainants’ will be able to claim. This in practice means retail customers and some smaller institutions. There are a number of criteria to meet in order to be eligible to claim from the FSCS, an example of one is that the firm must owe you a civil liability in connection with a regulated activity that the FSCS covers (e.g., deposit taking).

The FSCS writes that you could claim compensation from them if you meet all the following criteria:

1. The financial services firm you did business with has failed and is unable to return your money itself (the company is ‘in default’).

2. The FCA or PRA authorised the firm under the Financial Services and Markets Act 2000 to carry out regulated activities at the time you did business with it.

3. The firm owes you a civil liability (e.g. negligence) in connection with a regulated activity that we cover (e.g. advising on designated investments).

4. You have suffered actual financial loss as a result; and

5. You’re a private individual (although some businesses and charities may be eligible, depending on the type of claim).

 The FSCS is funded by an annual levy paid by firms who are authorised by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). So, it is funded by the financial services sector.

The FSCS covers a wide range of financial services including the following:

·       Deposits;

·       General insurance;

·       Long-term insurance (e.g. pensions and life assurance);

·       General insurance advice and arranging;

·       Investments;

·       Mortgage advice and arranging; and

·       Debt management.

When is the FSCS coverage triggered?

Since the FSCS covers a wide range of financial services, its cover is triggered at different events depending on the financial service. For example, for deposits, FSCS cover is triggered when an authorised deposit taker (e.g., a bank) is unable, or likely to be unable, to repay its depositors. Another example would be investments; if an authorised investment firm is unable to pay claims against it, for example:

·       For loss arising from bad investment advice, poor investment management or misrepresentation; or

·       When an authorised investment firm goes out of business and cannot return investments or money.

Investments that are covered include stocks and shares, unit trusts, futures and options, personal pension plans and long-term investments (e.g., Mortgage endowments). Remember that the claim must be due to a civil liability that the firm owes you, so for investments this does not include cover of poor investment performance. If the value of your investments falls and you lose money then this will not be covered – as we are so often reminded “your capital is at risk.”

There are also compensation limits. This means that there is a limit that each eligible person may claim for their loss. For investments, banks, credit unions and building societies the limit is £85,000 per eligible person.

There are a wide range of limits and rules for each area of the financial service sector the FSCS covers. At RiskSave customers of the appointed representatives on our regulatory hosting network are covered by the FSCS for many of the activities that our ARs undertake. If you’d like to learn more about how the FSCS scheme is used for investment services or financial advisors or affects the appointed representative regime, please do get in touch at team@risksave.com