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FSCS: what you need to know to keep your money safe

The Financial Serivces Compensation Scheme limit has been reduced to £75,000 for bank and building society accounts.


by Michelle McGagh on Jul 06, 2015 at 16:46

FSCS: what you need to know to keep your money safe

A shock change to the financial compensation scheme means £10,000 less of your savings is now secure. Here’s what you need to know.

A fall in the value of the euro has impacted British savers in an unexpected way by reducing the Financial Services Compensation Scheme limit from £85,000 to £75,000.

However, the reduction may come as a shock to many who didn’t even know there was a limit or how the compensation scheme works.

What is the Financial Services Compensation Scheme?

The Financial Services Compensation Scheme, or FSCS, pays out to savers and investors in the event that the organisation they have their money with goes bust.

The FSCS is funded by levies imposed on all regulated financial services companies, from one-man-band financial advisers to the country’s biggest banks and asset managers.

The charges are levied in advance based on predicted payouts. The FSCS looks at the total claims in pensions, savings, insurance, and investments over the past three years and then uses the numbers to estimate what it might pay out in the coming year.

Although the scheme is funded by financial services companies, there was an exception during the financial crisis when the FSCS took at £15.6 billion loan from the government to protect depositors when Bradford & Bingley went bust. The FSCS is still levying the banks and building societies to pay back the interest of the loan but so far none of the £15.6 billion of capital has been paid back. A review is underway to determine how long the FSCS has to pay the loan back.

An FSCS spokeswoman said: ‘We’re in the process of reviewing the payment schedule and will be able to confirm timeframes once the review is complete.’

How much of my savings are covered?

From 1 January 2016, the FSCS limit for deposits in current accounts and savings accounts held with banks and building societies will be £75,000, reduced from £85,000.

For couples using joint accounts the total amount covered will reduce from £170,000 to £150,000.

This means from next year, those with lots of cash in the bank will find they have less protection.

Why has it fallen?

The compensation limit is set by an EU directive – the European Deposit Guarantee Schemes Directive – and currently the limit is €100,000 or its equivalent. However, the eurozone crisis means the value of the euro has fallen against the pound and the equivalent to €100,000 is now £75,000.

Andrew Tyrie, chairman of the Treasury Select Committee, described the changes as ‘absurd’ but the FSCS has said that 95% of savers would still be covered.

What if I have a fixed-term account?

If you have tied up more than £75,000 into a fixed-term bond or savings account issued by a bank or building society then unfortunately the limit still drops. That means if you recently put £85,000 into a two, three or five-year product then £10,000 of your money is at risk.

The Prudential Regulation Authority is looking at how banks and building societies can help those tied into fixed-term savings. It has suggested allowing savers to exit products early without charges but the British Bankers’ Association said it was ‘still looking at how this could work’.

But there is a scenario where the limit increases

Along with the decrease in the limit that was announced last week, the FSCS also announced that it would increase the compensation limit to £1 million temporarily for one-off scenarios.

In the case that a large sum of money temporarily hits someone’s bank account, such as a house sale, inheritance or divorce settlement, the FSCS will cover deposits of up to £1 million for six months from the time the money is accessible in the account. After this the increased protection will drop back down to £75,000.

What if my total savings are more than £75,000?

The FSCS limit doesn’t cover the total amount you have in savings but the total amount saved per bank or building society operating on a separate banking licence.

That means if you have £75,000 saved with, for example, Halifax, and another £75,000 with Santander and both institutions went bust then you would be covered for £150,000 because they both have separate licences.

However, some banks and building societies operate multiple brands under the same licence and this affects the compensation limit. If you had £75,000 with Halifax and another £75,000 with Bank of Scotland – both of which operate under the same licence – and both institutions went bust, you would only get £75,000 back from the FSCS.

It is worth checking with your banks and building societies to make sure they are not connected under the same licence. Building societies, which are smaller and want to keep costs down, often have multiple brands on the same licence – for example, Barnsley building society operates under the Yorkshire building society licence, which also covers Egg and the Chelsea and Norwich & Peterborough building societies.

If you have more than £75,000 in cash you should spread the money between companies operating on different licences to make sure it is all covered.

What about National Savings & Investments?

Savings held with government-backed NS&I do not fall under the compensation scheme as they receive 100% protection from the government.

What about my investments?

Money invested in funds is covered by the FSCS but only up to £50,000 per fund manager. For example, if you have more than £50,000 invested in three Standard Life Investments funds and the company goes bust you will only get £50,000 back. But if you invested three lots of £50,000 with three different fund managers and all three went bust you’d get all your money back.

However, fund groups are required to ring-fence investors’ money with an independent custodian so even if the group went bust you would likely face a delay getting your money back but you would get it back. For you to lose your money the custodian would need to collapse.

The compensation scheme will not payout if the value of your investment falls as this is the risk you take investing your money. It will pay out if you can prove you were mis-sold an investment.

What about my pension?

If you set up a personal pension or stakeholder pension with an insurance company the FSCS will cover 100% of the money in the pension should the insurer go bust. The same applies to other lifetime savings, such as endowment policies or investment bonds.

Self-invested personal pensions (Sipps) are considered a ‘wrapper’ for other investments so the rules around compensation are more complicated. If a Sipp provider fails the compensation limit is £50,000.

However, the compensation limits vary with your investments as you can invest in a number of things via a Sipp, including cash deposits (where the compensation limit is £75,000) and investments (where the compensation limit is £50,000).

What about annuities and drawdown?

From 3 July protection given to annuities has increased from 90% of the income paid out to 100% meaning if your annuity provider goes bust you will still receive your annuity income in full each year.

This brings annuities in line with mandatory insurance products, such as car insurance, which are 100% covered by the FSCS.

If you put your pension into drawdown that is a different matter. Going into drawdown means you will likely buy the drawdown ‘wrapper’ from an insurance company and then invest that money with fund managers to generate an income in retirement.

If the fund manager goes bust the £50,000 investment rule, as above, is enforced.

What isn’t covered by the FSCS?

The FSCS only covers companies that are regulated by the Financial Conduct Authority. There are lots of investment opportunities out there that are not regulated – these are known as Ucis, or ‘unregulated collective investment schemes’.

If you lose your money because a company operating a Ucis goes bust then you won’t get your money back. If the Ucis company is fraudulent then the FSCS won’t pay out either, you will have to try and retrieve your money through lawyers.

However, if a financial adviser advises you to invest in these scheme and that advice is deemed unsuitable then you can go to the Financial Ombudsman Service to try and get your money back from the adviser, or if the adviser goes bust you may be liable for an FSCS payout.

5 comments so far. Why not have your say?

Law Man

Jul 06, 2015 at 18:16

If the EU Directive is "minimum harmonization" there is no need for HMG to do this. If the EU Directive is "minimum and maximum harmonization" then the Directive is flawed and HMG should not have agreed it.

The practical harm is likely to be slight. Deposit placing savers can move money before the end of the year and ensure they have no more than £75,000 with one licence holder.

This leaves 2 problems:

the confusion over which banks are covered by a single licence. Banks should be required to make clear disclosure of who else is covered;

Term deposits which expire after 31/12/15. HMG should extend protection for them.

As regards SIPP pension savings, at first sight a limit of £50,000 is worrying; but surely the shares/ funds/ money are held in trust by the fund manager and (above this) the SIPP administrator. I think I am safe leaving my pension assets with HL.

The real harm is that this foolish measure undermines confidence in banks and financial institutions just when people were beginning to get over the shock of 2008. The fault and blame lie full square with HMG.

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Jul 06, 2015 at 20:12

What happens to ISAs invested online through one broker, also holding a cash account waiting to be invested. There may also be funds, trusts and invidual stocks, they could invidually be above or below £50,000 or even £75,000? Please explain, many thanks.

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Alan Tonks

Jul 06, 2015 at 20:38

What do you do to keep your money safe, basically it is who you can trust?

Banks no, Government no, the FSCS no, in other words you cannot trust any of those three.

Your best cause of action is only to have a small amount in cash to get by on. Then put your hard earned money into tangibles.

Let’s face it, everything today is being manipulated by people! (Crooks) in the know.

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Alan Tonks

Jul 06, 2015 at 21:17

Correction- I meant. Your best course of action!

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Frank Frank

Jul 06, 2015 at 23:03

Why are banks and BS not required to inform their a/c holders by letter, the name of companies operating under the same licence? And if they do not, are they not violating their duty of care?

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