When someone saves money with their bank or has investments, there will be a time when they wonder what would happen if the firm they are saving or invested with were to go bust. The greatest protection people will call to mind in this scenario is the Financial Services Compensation Scheme (FSCS).

In this article we look at the FSCS in relation to personal investments, how much it will pay out in the event of insolvency and what other protections are in place for investors.

What is the FSCS?

The FSCS is the UK's compensation fund of last resort for clients of authorised financial services firms. Authorisation in this context can be by the FCA or PRA as outlined below.

The FSCS may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default. Limits differ dependant on the type of investments held by an investor.

The FSCS will not pay compensation if your investment performs poorly as a result of market conditions. This is because market - or investment - risk is an inherent part of investing. The reason we invest is because we hope to be able to achieve a greater return than if we kept that money under the mattress or in a bank account. However, generally speaking, there are no guarantees of making money with investments. If you cannot tolerate a potential or actual loss of your money you should not invest it.

What is an ‘authorised firm’?

Authorisation in the UK is granted by the two financial regulators:

The Financial Conduct Authority (FCA) – the FCA has a strategic objective of ensuring that relevant markets function well. It regulates the conduct of nearly 60,000 businesses, as well as being the prudential supervisor for 49,000 firms and setting specific standards for 19,000 firms. The FCA typically regulates Financial Advisers, platforms, investment/fund managers, and Mortgage Advisers/Brokers.
The Prudential Regulation Authority (PRA) – the PRA has a general objective to promote the safety and soundness of the firms it regulates. It is the prudential regulator of around 1,500 banks, building societies, credit unions, insurers and major investment firms.

Some firms can be sole regulated (either by the FCA or the PRA) or dual regulated (by both).

However, not all firms are regulated – most protections offered to consumers are derived from the fact they are dealing with a regulated firm. Essentially, if a firm is not regulated, you are not protected.

How much will the FSCS pay out?

The table below sets out our understanding of the position in relation to some common investment-types, if any of the companies operating them became insolvent.

Summary of investor protection under the FSCS:

What happens if the investment platform goes bust?

If you are invested in any of the above via an investment platform and the platform provider itself became insolvent, losses incurred due to the provider’s insolvency would be protected under the FSCS up to £85,000 per individual investor.

Further information about the FSCS.

As shown here, there are limits to the protection the FSCS can provide, including eligibility and time period/dates – further details on these matters can be found on their website.

Additionally, as outlined above, there are limits to the level of compensation the FSCS will pay – further details on this topic can be found on their website.

What other protections are there?

The FSCS is typically well-known (if not fully understood) by savers and investors. What is perhaps less well-known is that there is a system of protections in the background governed by regulator rules which is arguably more extensive than the protections afforded by the FSCS.

Primarily, the FCA has rules in place which ensure all client money held on a platform, with a provider or directly with an investment/fund manager, is held by that firm on trust and is segregated from their own funds. These are known as CASS or client money rules. This is to ensure that any creditors of the firm would have no legal right to a client’s money and the firm cannot use any of their client’s money to cover their obligations.

Summary

We would never normally claim that an investor can fully secure 100% of their investments – although this is theoretically possible in certain scenarios, such as investing in insured funds (but whether this is suitable for you will depend on numerous factors including your aims, objectives, value of assets, diversification of existing assets and portfolio, risk tolerance and capacity for loss).

So while certain protections are in place in the event of an authorised firm failing, what we believe is of primary importance is ensuring, to the best of our ability, that the firms used for savings and investments are unlikely to fail in the first place. We do this by assessing a firm’s financial strength – you can read more about this in our article on the security of your investments.

What next?

If you would like to discuss investing, the FSCS, or for us to assess how secure your investments are, get in touch for a free initial chat with one of our Chartered Financial Planners.

Please note this article offers information about financial planning and should not be taken as personal advice. The value of pensions and investments can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.

What is the Financial Services Compensation Scheme (FSCS) and how much will it pay out?