Understanding the Financial Services Compensation Scheme

• What is the FSCS?
• What financial products and services does the FSCS cover?
• What does FSCS not cover?
• Has the FSCS paid out in the past?

There is little doubt that FSCS provides consumers a safety net if things go wrong. It means consumers can have peace of mind knowing that money in a savings account or bank current account has some protection.

Apart from the compensation the scheme can provide, it also creates public trust in the UK banking system, which is essential for the economy to function. But what exactly is the FSCS, and what does it cover?

What is the FSCS?

The Financial Services Compensation Scheme was established in 2001 and operates independently of the government and financial services companies. It is funded by the financial services industry through levies paid by authorised financial services firms.

The scheme protects and compensates consumers if their chosen financial services provider ceases trading and cannot return their funds or savings. It is funded by the financial services industry through a levy paid by authorised financial services firms in the UK.

What financial products and services does the FSCS cover?

First, the company must be authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) to do business in the UK. This can be checked in a number of ways, for example, on the FCA Register.  The firm should also have a Firm Reference Number (FRN) or authorisation number.

An important note here is that some brands operate under one single FRN or authorised firm. This means if you have multiple bank accounts with different brand names but all under one FRN or authorisation number, you will not be entitled to compensation from all the bank brands.

Examples of bank brands with the same FRN are HSBC and First Direct, NatWest and Ulster Bank, and Clydesdale Bank and Virgen Money. In such cases, you would be compensated per authorised firm or FRN and not by bank brands - something worth checking.

The scheme covers eligible personal current accounts and savings accounts. Generally, bank accounts for 16-year-olds (or kids) are covered if the bank is authorised, meaning young savers can enjoy a similar level of protection. However, some child accounts are linked to the parents’ or guardians' accounts. Prepaid card accounts for kids are not covered, so it’s worth checking with the provider or the FSCS website.

Business bank accounts can also be covered by the FSCS if the money is with a UK authorised bank or building society. This can include bank accounts for small businesses.

Examples of where the FSCS may offer compensation include:

• Bank, credit unions and building societies:
  Up to £85,000 per eligible person, per UK-authorised bank, building society or credit union (or up to £170,000 for joint accounts). Additionally, some temporary high balances may be protected by up to £1 million. Usually, this applies to significant life events, for example, when a property is sold or an inheritance. Temporary high balances are covered for six months from when the amount was first deposited.
• Insurance policies:
  If an insurance provider fails and cannot pay valid claims or return your premiums, you may be eligible for compensation. This includes motor, home, pet, travel, and life insurance (there are some exceptions). The FSCS will first try to transfer insurance policies to a new provider; when this is not possible, it may offer compensation based on the type of policy you have.
• Debt management:
  A claim must meet all the required criteria, up to £85,000 per eligible person when money is held with a debt management firm that fails.
• Pensions:
  Compensation depends on when and the type of provider. For example, if a pension provider fails after 1 April 2019, 100% compensation can be claimed.
• Funeral plans:
  For all types of funeral plan claims, up to £85,000 per eligible person, per firm.
• Insurance brokers or financial advisors
• Payment protection insurance (PPI)
• Investments
• Mortgages

You may not always be eligible for full compensation if things go wrong, plus there are limits and requirements. You can learn more by reading what the FSCS covers.

What does FSCS not cover?

Some financial products and services may not be covered, these include:

• Peer-to-peer lending
• "Products" sold by unauthorised firms
• Savings clubs
• Currency bureaux and crypto-assets
• Electronic payment services (such as PayPal)
• E-money accounts and prepaid cards

Some institutions offer banking services but do not have a full banking licence - these, too, will not be covered by the scheme. For example, electronic money institutions (EMIs), which normally include electronic wallets and e-money accounts, differ from regular banks.

In particular, if you apply for an online bank account, check that it is covered by the FSCS. Just because a firm offers banking services does not make it an authorised UK bank. The same applies to getting a prepaid card.

While these products have other safeguards in place or cover through a third party, you might decide that, especially for larger amounts, it's not worth the risk. It's always worth being safe and double-checking if your money is covered on the FSCS website.

Has the FSCS paid out in the past?

Yes. According to the FSCS 2021/22 Annual Report, more than 4,000 firms have failed since 2001, and over £26.5 billion has been paid to around 6.5 million customers.

A recent example is Castle & Crystal Credit Union Limited, which was declared in default in May 2024, and the FSCS stepped in to protect the 7,173 members. The FSCS estimates the total compensation for the credit union members to be around £2.6m.

In August 2023, Hastings & Rother Credit Union Limited (trading as 1066 Community Bank) was declared in default, affecting 590 members. The following month, 6 Towns Credit Union Limited was declared in default, affecting 7,416 members. In both cases, the FSCS ensured members’ money was safe and those with accounts received compensation.

Perhaps the most significant was in Autumn 2008, when five financial institutions collapsed, affecting over 4.08 million retail bank accounts in the UK. The two biggest were Bradford & Bingley and Icesave. The FSCS made payments totalling nearly £20 billion to consumers, of which £15.65 billion alone was to cover Bradford & Bingley’s failure.

In Summary

The Financial Services Compensation Scheme (FSCS) maintains consumer confidence in the UK financial system. By offering a level of protection across a range of financial products and services, it ensures that individuals can recover their funds if an authorised financial institution fails.

Key Points

• What the FSCS Covers: Deposits, investments, insurance policies, mortgages, and ISAs.
• What the FSCS Does Not Cover: Poor investment performance, peer-to-peer lending, money on prepaid cards, electronic payments services and savings clubs.
• Compensation Limits: For deposits and investments, up to £85,000 per person, per firm, with varying levels for insurance claims. Limits and criteria apply.

Understanding the scope and limitations of the FSCS can help you make informed decisions about where to place your money and how to manage your financial affairs. For more information, it’s always best to check on the FSCS website what is and is not covered or ask your financial service provider.

Enjoyed this guide? Please hit the like icon below!