Financial Services Compensation Scheme (FSCS)

The Financial Services Compensation Scheme (FSCS) is the United Kingdom's knight in shining armour for consumers of financial services. Think of it as the ultimate safety net, a fund of last resort designed to protect your money if an authorised financial firm you've used goes bust. Established under the Financial Services and Markets Act 2000, the FSCS is an independent body that steps in when a company is unable, or likely to be unable, to pay claims against it. This could be a bank, building society, credit union, or even an investment firm or insurance broker. The scheme is a cornerstone of consumer confidence in the UK financial system, ensuring that a firm's failure doesn't automatically mean a customer's financial ruin. It’s funded by levies on the very firms it protects—a collective insurance policy paid for by the industry itself, not the British taxpayer. For savers and investors, understanding how the FSCS works is a fundamental part of managing risk.

The process is straightforward and designed to be as painless as possible for the consumer. When a UK-authorised financial firm fails, the FSCS, often working with regulators like the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), will declare it in 'default'. Once a firm is in default, the FSCS can trigger its compensation process. For most bank and building society failures, the FSCS automatically pays compensation to eligible customers, usually within 7 days. You typically don't even need to submit a claim. For more complex cases, such as those involving bad investment advice, you may need to apply to the FSCS directly. They will investigate your claim and, if it's valid, pay you compensation up to the scheme's limits. It’s a powerful backstop that ensures the system has a shock absorber for when things go wrong.

The FSCS covers a wide range of financial products, but the protection limits vary. It’s vital to know what’s covered and for how much.

This is the most well-known area of FSCS protection. If your bank, building society, or credit union fails, the FSCS protects your cash deposits up to a certain limit.

• The Limit: £85,000 per person, per authorised firm.
• Joint Accounts: The protection is doubled. A joint account with two eligible people is protected up to £170,000 (£85,000 each).
• Important Note: The limit applies per firm, not per brand. Some banks that look separate (e.g., Halifax and Bank of Scotland) operate under a single Banking License and therefore share one £85,000 limit. Always check the FCA register to see which firm authorises your bank.

For investors, the FSCS provides a crucial, though often misunderstood, layer of security.

• The Limit: Up to £85,000 per person, per firm.
• What's Covered: The scheme can pay compensation if you lose money due to a firm's failure, for reasons such as:
  1. Bad or negligent investment advice.
  2. Fraud or mismanagement by the firm.
  3. An investment platform or provider going out of business and there is a shortfall in the client assets they were holding for you.

This is the golden rule every investor must understand: The FSCS does not cover poor investment performance. If you invest in a stock and its price plummets because the company performed badly, that's your investment risk. You can't claim from the FSCS. The scheme only protects you from losses caused by the failure or malpractice of the authorised firm that provided the investment service, not the investment itself. It’s a shield against shoddy advisors and collapsed brokers, not a helmet against market downturns.

A true value investor looks beyond the balance sheet of a company; they consider the entire ecosystem of their investments, including the partners they trust with their capital.

The FSCS is a fantastic backstop, but it should never be your first line of defence. That role belongs to your own due diligence. Before placing your money with any bank, broker, or advisor, investigate their financial health, reputation, and regulatory standing. A value investing mindset means preferring robust, well-managed, and ethical firms in the first place, reducing the chance you'll ever need to call on the FSCS.

The £85,000 limit is a hard ceiling. If you have cash or investments exceeding this amount with a single firm, you are taking on unnecessary counterparty risk.

• Actionable Insight: Spread your cash and investments across multiple, non-affiliated firms. Having £200,000 in cash? Keep it in three separate, fully-licensed banking institutions. The same logic applies to investment platforms. This simple diversification of your financial partners ensures your capital remains fully protected.

While the FSCS is a UK-specific scheme, it's not unique in its mission. Most developed economies have similar investor protection frameworks.

• In the United States: The Securities Investor Protection Corporation (SIPC) protects investors if a brokerage firm fails, covering up to $500,000 in securities and cash (with a $250,000 cash limit). Bank deposits are separately protected by the Federal Deposit Insurance Corporation (FDIC).
• In the European Union: A directive mandates that all member states have Deposit Guarantee Schemes (DGS) to protect deposits up to €100,000. Investor compensation schemes are also in place across the EU, though the specifics can vary by country.

The key takeaway is universal: wherever you are investing, find out what protection scheme exists, understand its limits, and use it as one part of a wider risk management strategy.