The Financial Services Compensation Scheme (FSCS) offers consumers financial protection against regulated providers should they go bust. In this article, we take a look at the Financial Services Compensation Scheme including how it works, what it covers and how to make a claim. You can jump to a specific section of the article using the following links:
- What is the FSCS and how does it work?
- Am I eligible for FSCS compensation?
- What does the FSCS cover?
- How to make a claim on the FSCS
What is the FSCS and how does it work?
The Financial Services Compensation Scheme (FSCS), first introduced in 2001 under the Financial Services and Markets Act 2000, is an independent body that provides compensation to consumers in the event that financial firms fail. The FSCS is fully funded by the financial services industry and acquires its funds by charging a levy to the firms that are authorised by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). In the period of 2018-2019, the FSCS paid out £473m to over 425,000 customers of failed firms.
Am I eligible for the FSCS protection?
Not every financial product is covered by the FSCS and eligibility rules for claims on the scheme are set by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). We summarise some of the eligibility criteria below:
- Compensation can only be paid for money that has been lost
- The FSCS was set up to protect private individuals from financial loss but in some instances, small businesses may also be covered
- Claims can be made if the financial service is unable to pay back the money you have lost itself - this is also known as being in 'default'
- Claims can only be made against firms that were regulated at the time of your deposit
It may also be possible to make historic claims but what you can claim for will depend on the financial product and how long ago you suffered the financial loss.
How to check if a product or firm is covered by FSCS protection
When taking out a financial product it is advisable to check if the product is authorised as the FSCS only covers firms that are authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA). You can check a firm's authorisation on the FCA register or by looking for the Firm Reference Number (FRN). If your financial product that is covered by the FSCS goes bust you can claim for the money you have lost up to a maximum limit. How much can be claimed varies depending on the financial product. The FSCS covers a number of financial products including banks, insurance, mortgages and investments. For a full list of what the FSCS covers click here.
What financial products are covered by the FSCS?
Below, we explain which types of financial products are covered by the FSCS and how much you are covered for.
Banks, building societies and credit unions
The FSCS covers money held in regulated UK current accounts, savings accounts and credit unions. This means that if your bank, building society or credit union goes bust the money held in your account up to the value of £85,000 per person will be covered. If you hold a joint account this limit is per individual and will therefore be up to the combined value of £170,000. Any money over the £85,000 limit per individual will not be covered so you may wish to consider holding money over this amount with separate banking institutions. Money held in a bank, building society or credit union will be automatically compensated if the regulated provider goes bust.
The FSCS limit applies per authorised firm so you would need to check if your bank account falls within the same licence. For example, HSBC and First Direct bank share a banking licence and so only £85,000 would be covered across both accounts.
The FSCS will also protect certain deposits over £85,000 for a period of 6 months, these are known as 'Temporary high balances'. This applies to certain events that have resulted in high deposits of up to £1m being made into a bank account, building society or credit union. If you have suffered a financial loss of over £85,000 then you will need to make a claim for the lost deposits over the £85,000 limit and you will need to provide evidence that your deposit is classed as a 'temporary high balance'.
The following deposits are considered 'temporary high balances'. This list is not extensive, however, and more information can be found on the FSCS website:
- Money deposited in relation to the buying and selling of property (main residency only)
- Deposits related to marriage or divorce and civil partnerships
- Redundancy payouts
- Unfair dismissal compensation
- Insurance policy payouts
- Payouts related to disability, incapacity or personal injury claims (no claim limit applies)
Money held with a debt management firm that has gone bust is also protected under the FSCS and will be compensated automatically. If the firm went bust between 01/04/18 and 31/03/19 then the money is protected up to £50,000. If the firm went bust after 01/04/19 then the deposits will be covered up to £85,000.
The FSCS also provides protection for insurance policies if the regulated provider was to go bust. The FSCS covers a range of insurance policies including home, pet, travel and life insurance but how much you can claim will depend on the policy. The FSCS does however say that its main aim if a long-term insurance provider goes bust, is to 'get continuity of cover for policyholders' and will therefore try to transfer the insurance policy to another provider. If the policy cannot be transferred then compensation may be paid. You may also be able to claim for money lost as a result of a failed insurance broker or financial adviser. How much compensation is paid will depend on the policy type, which we explain in more detail below (the lists are not extensive and other insurance products may also be covered):
100% of the compensation is likely to be paid for the following insurance products:
- Compulsory insurance such as third-party motor insurance or employers' liability insurance
- Building guarantee policies
- Long-term insurance such as critical illness, income protection and life insurance
- Claims arising from the death or incapacity of the policyholder due to injury, sickness or infirmity
- Professional indemnity insurance
90% of the compensation is likely to be paid for the following insurance products:
- Public liability
Your investments with an authorised investment provider are protected up to £85,000 if the provider goes bust and cannot give you back the money you have lost. You may also be protected if you lose money due to poor investment advice, fraud, misrepresentation or negligent management of investments.
Mortgage advice or brokering
You may be able to claim through the FSCS if you have been misadvised entering into a mortgage agreement and subsequently lost money. If the firm that misadvised you goes bust and cannot repay you the money owed then you may be able to claim with the FSCS for any money lost up to £85,000.
The FSCS does not compensate financial losses as a result of mortgage admin or lending.
Pensions are also covered by the FSCS as they are considered a long-term insurance contract. You can submit a variety of different pension-related claims and how much you can claim depends on what you are claiming for. If your pension provider goes bust the FSCS will cover 100% of your claim with no upper limit. If your SIPP provider fails then the FSCS will cover you for up to £85,000 per person per firm. Finally, if you received bad pension advice you may be able to claim up to £85,000 for any money lost as a result of the poor advice.
If your funeral plan or provider went out of business on or after 29th July 2022, you may be able to make a claim on the FSCS. A funeral plan is a fixed-cost plan that allows you to pre-arrange and pre-pay for your funeral. Funeral plans can be bought from funeral plan providers or via third parties such as funeral directors or will writers. From 29th July 2022, any firm that provides a funeral plan will need to be regulated with the FCA or be an appointed representative of a regulated firm. From 29th July 2022, all regulated funeral plan providers were required to be FSCS protected and any providers that were not regulated had to cease trading. If you have an existing funeral plan you can check to see if your provider is regulated here.
How to make a claim with the FSCS
If you have lost money with a bank, building society or credit union you will be automatically compensated if the regulated provider goes bust. However, for other financial losses covered by the FSCS, you will need to make a claim yourself and you can check if your claim is eligible on the FSCS website. Making a claim with the FSCS is free and easy to do using the online claims process. The claims process will take 1-2 hours but if you claim directly with the FSCS you will keep 100% of the claim compensation and you will receive regular updates on the status of the claim.
Before making a claim you will need to prepare some documentation that is required throughout the claims process. The documentation needed for making a claim varies depending on what you are claiming for but more information can be found on the FSCS website. How long your FSCS claim takes will vary depending on your claim and how long it takes to gather supporting evidence from third parties. In the below table, we summarise the latest claim periods for different financial providers. The table shows the FSCS claims completed in the last 6 months and the time frame that 8 out of 10 customers received their claim. It was last updated by the FSCS on 10/08/23.
How long does an FSCS claim take?
|Claim length (months)
|Whole of life insurance
(Source: FSCS - correct as of 10/08/23)