60-second guide to financial compensationWhat happens if your financial provider goes bust

13 December 2011

What happens if your financial provider goes bust, will you get your money back? With new rules on ISA allowances and warnings about peer-to-peer lending we take a closer look at financial compensation.

What is financial compensation?

The (FSCS) is the financial equivalent of a safety net, offering security for savers and investors. It protects up to £85,000 of savings per individual, per financial institution. 

If you have savings with a bank or building society authorised by the Financial Services Authority (FSA), and which goes under, you will get back the first £85,000 of your savings through the FSCS. 

Claims for compensation rose 25% in 2010/11, with 39,500 claims going to the FSCS and £525 million paid out, with 20% of claims concerning payment protection insurance (PPI). 

What are the limits to financial compensation?

The £85,000 cap on compensation provided by the FSCS applies to each financial institution, but some popular brands are owned by the same company. For example, most of us would not assume that Birmingham Midshires, the AA, Saga, Intelligent Finance, Bank of Scotland and Halifax are part of the same institution - but they are. 

If you have more than the FSCS limit saved or invested it is crucial to spread your wealth. You can check who owns who in the savings advice section of our site. 

What are the new ISA rules?

New rules announced by the Treasury this week has confirmed that any investors who lose their Isa savings following the collapse of a financial firm can refill their allowance. Under the old rules lost funds would still count towards your annual ISA figure.

Currently savers are entitled to £10,680 tax-free savings in Isas, half of which can be cash savings and half stocks-and-shares. From next year this figure will increase to £11,280. The changes announced by the treasury apply to both cash and stocks-and-shares Isas.

Is peer-to-peer lending covered?

An announcement from the FSCS has warned that ‘peer to peer’ lending sites like Zopa are not covered by their compensation scheme. These money exchange sites allow users to borrow and lend to each other, and have become increasingly popular with an estimated £192 million switched in the last 18 months. However, following the failure of one such firm - Quakle - the FSCS has warned that  compensation is not available. 

Mark Neale, the chief executive of the FSCS said: 'It is understandable consumers want the best rate of interest for their savings in the current climate. and peer-to-peer lending may be the right choice for some people who are looking for a return on their savings or want a competitive loan rate. It is important to remember though the FSCS does not protect the money invested through peer-to-peer lending companies.'

More on this...

The FSCS - Read our guide to the Financial Services Compensation Scheme

Best rate Isas - Find out what the best Isa accounts are for your savings 

Best savings rates - Our guide to the best savings rates