The UK’s financial services sector is one of the most heavily regulated in the world. While for businesses this can sometimes be burdensome, one key benefit is the protective cloak it offers to savers and investors when things go wrong.

The extent of this protection – and any compensation you might be entitled to – will depend on where your money is held.

This brief guide explains the workings of the Financial Services Compensation Scheme (FSCS) which is the protection scheme for retail investors.

The FSCS provides protection to people with money held in banks, regulated investments and insurance (including pensions). The level of compensation you are entitled to will vary depending on the product you’re claiming on.

CASH IN THE BANK

If you have money saved in a UK-regulated bank or building society, you will qualify for FSCS protection up to £85,000. So if a bank or building society goes bust and you have money in a current account, savings account, cash ISA, Help to Buy ISA or cash Lifetime ISA, you will be covered up to this amount.

Stocks and shares ISAs and Lifetime ISAs are classed as investments and so qualify for a lower level of protection (more on this later).

It’s worth noting that the £85,000 limit only applies per banking licence, and some banks share the same license. For example, HSBC and First Direct fall under the same umbrella and so share combined protection.

If you want to maximise your FSCS protection you should check the licensing of any institutions where you hold more than £85,000 in cash savings, and consider moving at least some of it elsewhere.

INVESTMENTS

If you’ve got a risk-based investment and the investment firm goes under, you will qualify for FSCS protection worth up to £50,000 if you can’t get back the full value of your investment. This applies per person, per authorised firm.

So if an authorised firm gave you bad advice or was negligent in its management of your investments, you would be covered.

However, the FSCS doesn’t protect you if the companies you invest in fail, or if you buy a fund and it performs poorly.

PENSIONS AND ANNUITIES

If you have bought an annuity with an insurance company, the FSCS provides 100% protection in the event the company fails. This is also the case with investment life savings products such as endowment policies or investment bonds.

If you have a SIPP, the cover you receive depends on where your money is invested (this is also the case with ISAs).

So if your money is held in cash you are normally covered by the £85,000 limit, while any stock market funds or other investment vehicles qualify for protection up to £50,000.

The FSCS also covers general insurance, home finance and credit unions – for more information on these visit www.fscs.org.uk

Tom Selby, senior analyst, AJ Bell

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