The collapse of Northern Rock, Bradford & Bingley and the Icelandic banks may seem like distant events, however with the Covid-19 pandemic savers are understandably concerned, are my savings safe?
You may have heard of the Financial Services Compensation Scheme or FSCS and you probably have seen their logo at the bottom of any leaflets you get in the post from your bank. The Scheme is there to provide a safety net if your bank, building society or credit union goes bust. But how does it work and what is the cover, read on to find out.
- What is the FSCS?
- What does the FSCS cover?
- How do you claim?
What is the FSCS?
The FSCS was established in 2001 with the Financial Services and Markets Act (FSMA) 2000 and is funded by a levy on authorized financial services firms. The Scheme’s rules are made by the Financial Conduct Authority (FCA) who also appoints its board members. Since its inception the FSCS has helped more than 4.5 million customers and paid out more than £26 billion.
Financial regulation was massively overhauled in the wake of the 2008 financial crisis where the Financial Services Authority was replaced by both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRU) in 2013. While the FCA regulates the behavior of financial services firms and protects customers, the PRU regulates and supervises all the major banks, building societies, credit unions, insurers and major investment firms. The FSCS works with both of these regulatory bodies and their respective financial services companies to provide protections to customers should the worst happens.
Some additional facts about the FSCS are taken from their website:
- In 2018-19 £473 million was paid out to 425,760 customers of failed firms,
- £20 billion was recovered from the 2008 bank failures,
- The FSCS is independent of government and the financial services industry.
What does the FSCS cover?
All UK-regulated savings accounts and cash ISAs in banks, building societies and credit unions are protected by the FSCS. The FSCS protects cash deposits up to a value of £85,000, however this does not mean £85,000 per account but per financial institution. Therefore, if your bank fails you could claim up to £85,000 per person, per financial institution.
For joint accounts the cover is doubled to £170,000.
In 2015 new rules were brought in to cover deposits of up to £1 million for a period of 6 months for life events. These events include when you sell your home (excluding buy to lets or second homes), inheritances, insurance payouts and redundancy payouts; essentially giving you protection for when you would have an temporarily high savings balance.
An institution is not the same as a bank! The FSCS protection applies on a per institution basis. So if you had four accounts with the same bank then you would only have cover of £85,000 across all of those accounts. The definition of ‘institution’ depends on a banks license and can get complicated when you look at the giant banking conglomerates.
E.g. in sister banks Halifax and Bank of Scotland, both part of the Lloyds Banking Group, accounts are covered up to £85,000 combined. However, RBS and NatWest, both part of the NatWest Group have separate cover.
If you do have large amounts of savings the general consensus is to spread out your money across a range of separate financial institutions, that way to can take full advantage of the FSCS protection offered.
How to Claim?
Should the worst happen and your financial institution goes bust, you will need to know how to claim. The FSCS recommends that before you even start to work on producing a claim you should do their claim checker.
Once you have checked their claim checker you should create an account with the FSCS. In your online account you will be able to start a new claim. They will ask you a lot of questions regarding your claim and will ask for evidence documents, so it is worth you collecting as much information on your account you are claiming for prior to you starting your claim. Luckily you will be able to save your progress so you can comeback to your online claim when you need to.
The FSCS have a set criteria that you must be able to satisfy in order to submit a claim, these are:
- The financial services firm you did business with has failed and is unable to return your money itself (the company is ‘in default’).
- 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.
- You have suffered actual financial loss as a result; and
- You’re a private individual (although some businesses and charities may be eligible, depending on the type of claim).
The time it takes to process your claim can vary depending on the product you are claiming for. The FSCS advises anywhere between 2 and 10 months for a claim to be processed, with mortgage advice and whole life insurance taking 2 months and pensions taking 10 months. However, you will be able to track your claim through the online login you set up to make your claim.
Are Investments Guaranteed by the FSCS?
If your stocks and shares ISA or SIPP provider goes bust, will your investments be protected by the FSCS?
The good news is yes, in a way. If your provider is regulated by the FCA it will be required to separate their money and assets from your money and assets, but if their is a shortfall the FSCS will step in as a last resort to to a value of £50,000.
E.g. If you hold £100,000 invested in a stocks and shares ISA with a UK FCA regulated brokerage, the stocks that you own will be kept separate, usually with a third party, from your brokerage’s own accounts. But should the worst happen and you only be able to get back £75,000 of your investments, you could potentially claim with the FSCS for the £25,000 that is missing.