If you were a customer of Metro Bank, and you read the recent rumours surrounding the financial health of the company, you wouldn’t be blamed for wanting to withdraw your cash. While the rumours were quickly quashed by the bank, the incident once again reminded savers of the safety net offered by the Financial Services Compensation Scheme (FSCS).
The Scheme aims to provide savers with protection in the event of the failure of a financial services company, but there are limits. It’s worth revisiting the scheme and making sure that you understand the benefits – and the limitations – of the FSCS.
How the Financial Services Compensation Scheme works
Following the financial crisis of 2008, the government increased the protection afforded under the Financial Services Compensation Scheme (FSCS). The scheme is effectively a state-backed safety net for savers to protect them against the failure of a financial institution.
Under the FSCS, the first £85,000 of your cash savings are guaranteed. This limit applies per person, per banking licence (see below). It applies to UK-regulated banks, building societies, and credit unions.
As the limit applies per individual, if you have a joint account your money is protected up to £170,000.
Under the scheme, if your institution fails and you have money in a current account, savings account, or cash-based ISA (including Help to Buy ISA) you’ll get up to £85,000 of your money back in seven days, completely automatically.
Additional protection for ‘life events’
In addition to the £85,000 protection, since July 2015 the FSCS will also protect a temporary high balance in your account of up to £1 million in certain circumstances.
For example, if you’ve sold a property, received a payout under an insurance policy, received an inheritance, or you’ve received a redundancy payment, these are covered up to £1 million for up to six months.
You may need to prove the reason for the temporary high balance. This might include a property sale receipt, a will, insurer’s confirmation of a payout or a letter from a solicitor.
If you can provide the required evidence, the scheme will pay compensation within three months.
What about National Savings and Investments?
Considering that National Savings and Investments (NS&I) are operated by the UK government, you’d perhaps expect NS&I to be covered by the Financial Services Compensation Scheme.
In reality, this is not the case – but there’s a good reason.
NS&I are actually fully backed by the Treasury. This means that all your deposits in NS&I are protected – even if you hold more than £85,000.
Make sure you know who owns your banks and building societies
In an era where mergers and takeovers of financial services companies are commonplace, it’s worth taking an interest in who is the owner of each institution with whom you have savings. This is because the £85,000 limit applies across a ‘banking licence’, not to an individual institution.
Here’s an example. Imagine that you held:
- £100,000 in a Halifax account
- £100,000 in a Birmingham Midshires account, and
- £100,000 in a Bank of Scotland account
Assuming all these accounts were in your sole name, you’d only be covered for the first £85,000 under the FSCS if the HBOS group were to fail. That’s because the HBOS group owns all three of these brands and operates under the same banking licence.
The same situation would apply if you held more than £85,000 with both the Clydesdale and Yorkshire Banks or with HSBC and First Direct. And, you’d only be covered for the first £85,000 of your savings if you held more than that sum with the Nationwide, Derbyshire and Dunfermline Building Societies.
If you have money with multiple institutions, it’s worth making sure that you’re fully protected. Use the online check to make sure you’re not left out of pocket in the event that a large bank fails.
Are foreign banks covered by the scheme?
No. There are several European banks that offer savings products to British customers, but these are not covered by the FSCS.
Instead, some banks from the European Economic Area are covered by the compensation scheme in their home country. Examples include Triodos Bank (Netherlands) and RCI Bank (France) where the first €100,000 of savings are protected.
Other banks from around the world who operate a subsidiary in the UK are covered by the FSCS. So, you’d be covered up to £85,000 if your cash was saved in, for example, Cynergy Bank, Marcus by Goldman Sachs, or Axis Bank UK. And, overseas institutions who are regulated in the UK (such as Santander) are also part of the FSCS.
What about my investments?
If you have any sort of risk-based investment, then different FSCS protection applies. Most investment are covered by the FSCS (but not all) and the firm that gave the advice must have been authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA). There are limitations of the FSCS which can be found on the FSCS website.
You are protected up to £85,000 per person, per authorised firm. For example, if you lost money because an authorised firm gave bad advice or was negligent in the management of your investments, you could be covered for up to £85,000 if the firm fails and is unable to meet its liabilities.
Remember that you’re not protected if a company that you invest in goes bust or if a fund you buy performs poorly. This is considered your ‘investment risk’ and the FSCS does not cover this.
What does the FSCS mean for me?
The limitations of the FSCS mean that you should:
- Think about spreading your cash savings between different institutions. If you have more than £85,000 with one provider, consider saving this amount in different banks or building societies
- If you have cash in a foreign bank, check which compensation scheme applies to your savings
- Remember the six-month limit for temporary high balances. Make a note in your diary of when the money was paid into your account and make sure you move it before the six-month period ends
Finally – beware of FSCS scams
As the FSCS provides security for millions of savers, it’s perhaps not a surprise that it has been used as a cover for scammers.
In early 2019, the FSCS reported a series of phishing emails from individuals purporting to be employees of the FSCS. Email recipients were asked to register a claim for compensation and instructed to deposit money into an account held by a German bank in order to receive compensation.
The FSCS say that they never ‘contact consumers in this way’ and urge anyone who receives an email of this kind ‘not to reply or provide personal information to avoid falling victim to this scam or fraud’.
Need savings or investment advice?
If you’re looking for savings or investment advice, or you’d like further information about the Financial Services Compensation Scheme, get in touch. Email firstname.lastname@example.org or call (0161) 8080200 to find out how we can help you.