What is FSCS Protection Really Worth?

Ever since the global financial crisis, UK banks have worn their FSCS protection as a badge of honour.

Walk into any High Street bank and you will see prominent posters and pamphlets reminding customers that their deposits are guaranteed up to the value of £85,000.

For investors who have been burned by past investment choices, this provides a major source of reassurance, and a great reason to keep your money in a low-interest cash savings account, where it is protected from harm.

But by limiting your money to FSCS-approved accounts, you could be missing out on some great investment opportunities beyond British banks. Stocks and shares, peer to peer lending, and exchange traded funds all fall beyond the remit of the FSCS.

Yet these investment options offer much more competitive rates than the cash accounts which are ostensibly guaranteed by the FSCS.

Read on for our quick guide to the benefits – and limitations – of the FSCS.

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What does the FSCS do?

Within the financial services community, the FSCS is viewed as a form of insurance policy. Banks, building societies and credit unions all pay into the scheme, in the understanding that their clients will be taken care of should their business go under.

In reality, this is extremely rare.

According to the most recent records of the FSCS, in 2015/16, just six UK-based credit unions collapsed, resulting in a small number of successful compensation claims.

Under what circumstances does the FSCS pay out?

The FSCS guarantee only kicks in if your bank, building society, or credit union falls into administration – a situation which has not occurred since the financial crisis of 2008.

During this time, British customers were affected by bank insolvencies and near-insolvencies in Iceland and the UK. While British banks such as Lloyds and RBS accepted government bail-outs to avoid collapse, the Icelandic banking sector was brought to its knees, leaving account holders with nothing.

Following a lengthy court case, the FSCS agreed to pay compensation to the British account-holders of the defunct Icelandic banks, resulting in billions of pounds being repaid to consumers between 2008 and 2016.

The eight-year lag time between placing a claim and receiving compensation highlights the potential difficulties that claimants can face.

What isn’t covered by FSCS?

Only UK-regulated banks and financial institutions are covered under FSCS protection, so offshore banks and international accounts are exempt.

The scheme is primarily aimed at protecting deposits and savings, although in some instances it will cover insurance and pension funds. It will not cover any losses made from investments.

If your claim is successful, you will be refunded the total value of your money, but you will not receive any additional compensation for expected returns or lost interest.

Who pays for FSCS compensation?

The FSCS is not funded by the taxpayer. Instead, every financial services firm in the UK is expected to pay into the scheme. However, critics have warned that banks are passing these fees onto the customers in the form of lower savings rates.

How much has been paid out to date? 

Last year, the FSCS limit was increased from £75,000 to £85,000, but there is no evidence to date that anyone has been able to claim the full amount.

In fact, in 2015/16, the average value of an FSCS payout was just £7,773, down from £8,885 the previous year; this is despite the fact that the FSCS handled 47,000 new claims in 2015/16.

According to the FSCS’s most recent accounts, a total of £375m was paid out in 2016/17, up from £271m in 2015/16.   

How do you apply for FSCS compensation?

If you think you may have grounds for a claim, you can fill out an online form. The form will tell you instantly whether or not you are eligible to make a claim, and you can track the progress of your application in real time.

You will be asked to upload any relevant documents or paperwork to the site to support your claim, so make sure you have all of this information to hand.

If your bank, building society or credit union has gone out of business, you will receive your money automatically, without having to place a claim.

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.