What does the FSCS cover?
It’s not just your savings that are protected by the Financial Services Compensation Scheme – it also covers investments, mortgages and insurance. The compensation limits are different to the amount of protection you get for savings, and vary depending on the type of product you own.
Current limits for each product area are:
- Investments: 100% of the first £50,000 (£85,000 from April 2019);
- Mortgage advice and arranging: 100% of the first £50,000;
- Long-term insurance (eg life assurance): 100% of the claim;
- Compulsory general insurance (eg third-party motor insurance): 100% of the claim;
- Non-compulsory general insurance (eg home insurance): 90% of the claim;
- General insurance advice and arranging: 90% of the claim. Advice for compulsory insurance is also protected up to 90% of the claim.
Each product type is treated independently under FSCS rules, so if you choose to bank and invest with the same provider you would be entitled to compensation for each of the products you hold, up to the relevant FSCS limits.
Investments and the FSCS in detail
The compensation rules for investments are more complicated than for savings deposits. The FSCS covers losses if an authorised financial services company is unable to pay claims against it.
The first thing to remember is that investing is inherently risky, so there is no safeguard against funds falling in value, or the company in which you hold shares goes bust.
However, there are a few ways that you are protected when you invest.
Negligent advice or fraud
You have £50,000 FSCS protection for negligent investment advice and fraud. The FSCS can cover losses up to £50,000, but only if the adviser or firm who gave you the advice is unable to meet the claim.
In April 2019, this will increase to £85,000, bringing it in line with deposit protection.
However, if the adviser or company is still operating and gave you poor advice, you could be compensated to a maximum of £150,000. You would need to make a claim to the Financial Ombudsman Service, rather than the FSCS.
It will investigate your complaint, and force the company to compensate you up to £150,000 plus interest.
It’s important to note that both the FSCS and the Financial Ombudsman Service only cover advice given by companies or individuals that are authorised by the Financial Conduct Authority. If you use an adviser that is unauthorised, you cannot make a claim.
If your investment company goes bust
You have £50,000 FSCS protection if an authorised investment firm goes out of business and cannot return your money. An example could be the fund management company you’ve invested with going bust.
In practice, you’re most likely to call upon the FSCS in cases of fraud or mismanagement of your investment, rather than a firm simply going bust. This is because investor money is ring-fenced and held by a third party (like a global bank), which means that if your investment provider goes bust, your money should be unaffected.
If you’ve invested in using a platform or fund supermarket, the same applies. Platforms use nominee accounts to hold investor money, which means it can’t be claimed by creditors if the company collapsed.
Unregulated financial products
Some financial products are not regulated by the Financial Conduct Authority – stamps, wine, art, overseas property, for example - and therefore never qualify for either the FSCS or the Financial Ombudsman Service.
There are some exceptions - a number of investments are eligible for compensation at if you were advised to buy them, even though they are not normally protected if you'd invested in them on your own steam.
One such product is known as an 'unregulated collective investment' or UCIS. These see your money pooled in with other investors to buy often exotic assets which are typically hard to value, such as fine wine or overseas property.
The key here is that your investment need to be pooled in together with others. If a regulated financial adviser has recommended you invest in UCIS, the Financial Ombudsman could help with a complaint.
This is because the advice you’ve received is regulated, even if the product is not.
The individual or company that gave you advice must still be operating for you to raise a complaint. If they are no longer trading, the FSCS will consider claims in relation to bad advice to invest in these schemes, because it is considered ‘designated investment business’.
A similar exception is advice to invest in peer-to-peer loans. Again, the FSCS is restricted to cover losses arising from bad advice, not the platform failing.
To add to the confusion, however, you might be covered for up to £50,000 if you were recommended an unregulated product by an adviser and it was held in a self-invested personal pension (Sipp).
This is because advice on a personal pension is protected, regardless of the investments that sit in that pension.
If you find this confusing, you’re not alone. But there is a way to check how you might be protected.
You can use the FCA Register to check if a product, company or individual adviser is regulated and authorised. Before investing any sum of money, it’s always worth using this register to ensure you have the maximum protection.