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What is the Financial Services Compensation Scheme (FSCS)?

Posted on 05/11/2018, by Joe Jones

Is my money safe? That’s the question on all our minds when it comes to the question of where we put our hard earned money.

The answer is, it depends on how much money, and how and where it is held.

The good news is that the Government provides some level of protection for some savers and investors, in the form of the Financial Services Compensation Scheme (FSCS). It’s a fund that exists to protect consumers in the instance that the institution they have their money with fails, or they lose money on the back of inappropriate advice.

It operates as an independent non-profit that is free to use for those making a claim.

How does it work?

Under the FSCS, money invested or deposited with certain regulated institutions is insured up to a specific level, to protect consumers against the impact of corporate default, bad advice or fraudulent activity.

For example, if your bank collapses the FSCS can refund your deposit or investment up to the value of £85,000. The amount of compensation available depends on the types of financial product in question:

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A short term compensation limit of up to £1m also applies on large balances that are held temporarily, such as the proceeds from a house sale, for up to six months. Also, there’s currently a proposal under consideration that could see the compensation limit on investments raised to £85,000.

It’s worth noting that these limits apply per institution, meaning you can get more than £85,000 FSCS compensation if you keep your money spread across a number of different banks. They also apply per person, so compensation for a joint savings account can extend to £170,000.

What does and doesn’t it cover?

FSCS exists to protect consumers against financial loss, in the circumstances described above. It’s important to note that it does not insure against losses suffered because investments have gone down in value.

Here are some examples:

  • You were given poor investment advice – if you lost money as a result of being mis-sold a product or were given negligent advice, then you can make an FSCS claim. Again, it’s important to remember that the FSCS does not cover you for money lost simply due to fluctuations in the market or your investment losing value – this is the risk you take on when making an investment.

  • You were advised to take out an unsuitable mortgage – in the instance that you lose money as a result of being advised to take out a mortgage not suitable for you, then you could be entitled to make a claim.

  • An insurer cannot meet payment claims – should your insurance company be unable to fulfill a claim against it – for example, because it has gone into administration – then you could be entitled to compensation.

As mentioned above, one of the most prominent roles of the FSCS is to prevent people from losing cash savings if their bank or building society goes under and is unable to meet its obligations.

Is peer-to-peer lending covered by the FSCS?

Peer-to-peer investing is not currently covered under the FSCS. While P2P is a regulated asset class, the cost to the providers of being covered by FSCS was considered to be too high for most to shoulder when the industry was just getting started.

However, with the P2P lending sector now much more well-established, it could only be a matter of time before they’re invited to sign-up, too. And, considering the boost of confidence it could give the sector, it will no doubt be more than welcome.