What is the Financial Services Compensation Scheme? (FSCS)

The Financial Services Compensation Scheme (FSCS) is a fund of last resort available to compensate consumers if an authorised financial services provider cannot meet claims against it. This will generally be because a firm has stopped trading and has insufficient assets to meet claims or is insolvent.

Whilst it’s highly unlikely that the safety systems set in place by the regulator would allow most strong household names in the industry to fail, the FSCS came to the rescue of investors in the 2008 market crash, when Lehmans Brothers, Bear Sterns, Northern Rock and Ice Save all went bankrupt; the FSCS covered the investors up to the FSCS limits but not money held above the limits. However, banks like Merrill Lynch, AIG, Freddie Mac, Fannie Mae, Lloyds Bank, Royal Bank of Scotland, Bradford & Bingley and Alliance & Leicester, all came within a whisker of bankruptcy. It was only because the government put in rescue packages, which included backing the banks so that they wouldn’t fail and nationalising some of them that they remain in business today.
To put this in context, at that time Bear Stearns was the fifth-largest investment bank, with $18 billion in assets and it still went bankrupt; therefore, no institution today should be considered too big to fail.

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The Financial Services Compensation Scheme pays out:
– Bank deposits: up to £85,000
– Investments: up to £85,000

The amount is per customer and per bank or provider, so the maximum you can claim is up to £85,000 per provider. UK-based fund managers are authorised by the UK Regulator – The Financial Conduct Authority (FCA) – therefore, if a bank or a fund management company failed today, the £85,000 FSCS limit would be the maximum covered per investor, per failed company.
If an investor has all their money invested in units managed by the same fund manager, then only one £85,000 compensation limit would be available to cover all the holdings.
If an investor’s money is split between two fund managers, say Henderson and Jupiter, and both Henderson and Jupiter were to collapse, you are likely to be able to claim up to £85,000 from each fund provider.

Funds (including ETFs) which are domiciled outside the UK are unlikely to be covered by the FSCS, although, there may be a compensation scheme in that jurisdiction.

It is, therefore, important to consider when selecting an investment provider, whether the platform is an open architecture structure, which means it offers a wide variety of funds run by different firms, each with its own FSCS limit or whether the platform is a vertical firm with a closed architecture and which only offers its own funds to its clients, where the FSCS limit can only apply to that single firm.

If a fund simply fails to perform and ends up with liabilities greater than its assets, there is no formal recourse for compensation. This is an investment risk which sits with the investor. The same applies for the failure of listed companies which means that individual company shares are not covered by the FSCS and this includes Investment Trusts.

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Woody Snapper

Woody works with individuals and business' looking for corporate finance, high net worth mortgages, complex loans, bridging loans and development finance.

To contact Woody.

Tel: 07922 413586


Email: woody@veracityfp.co.uk