Investor Protection

The FSCS - Financial Services Compensation Scheme and the Financial Conduct Authority (FCA)

The FCA is an independent organisation responsible for regulating financial services in the UK. Along with the Prudential Regulation Authority or PRA, the FCA inherited the responsibilities of the FSA (Financial Services Authority) in April 2013. The FCA regulates most financial services markets, exchanges and firms. It sets the standards that they must meet and can take action against firms if they fail to meet the required standards.

The Financial Services Compensation Scheme (FSCS) is the compensation fund of last resort for customers of authorised financial services firms. If a firm is in default or ceases trading the FSCS may be able to pay compensation to its customers.

The FSCS is independent of the government and the financial industry, and was set up under the Financial Services and Markets Act 2000 (FSMA), becoming operational on 1 December 2001 (although it can still cover claims from before this date). The costs of the scheme are covered by the financial services industry - there is no charge to individual consumers for using the service.

Compensation levels and eligibility to claim

The scheme covers deposits, investments, general and life insurance, and arranging and giving advice on mortgages. The limits are as follows:

  • Deposits - covers deposits up to £85,000 for each eligible claim per banking group
  • Contracts of insurance - covers long-term policies such as life assurance and pension policies up to 90% without limit
  • Compulsory insurance - for example, car insurance, 100% without limit
  • Investment business (such as mutual funds) - covers up to £50,000
  • Mortgage advice - covers up to £50,000

The FSCS can pay compensation when an eligible claim has been identified. The main points are:

  • Only when an authorised firm is in default, i.e. it is unable, or likely to be unable, to pay claims against it. An investigation will be carried out to establish whether or not this is the case
  • The FSCS was set up mainly to assist private individuals, although smaller companies and partnerships are also covered
  • Larger businesses are generally excluded from claiming, although there are some exceptions to this for deposit and insurance claims. In particular FSCS coverage will not apply if the investor is regarded by the FSCS as a large company. This could happen where you invest in an External Fund (EFL) via an insured product such as a Personal Pension Plan. In those circumstances the EFL is held in the name of the product provider rather than in your name, and the product provider is not eligible to make a claim
  • The FSCS does not cover the Channel Islands or The Isle of Man.

For more information on the FSCS please read our Investor Protection Guide (PDF, 1.5MB), see http://www.fscs.org.uk/ or call
0800 678 1100
or
020 7741 4100

 

What would happen if an insurance company were to default?

If an authorised financial services firm defaults, the FSCS will work with the FCA to seek continuity by finding another provider to take on parts of the defaulting firm's business.

If this isn't possible then there are specific rules which apply to the winding-up of an authorised insurance company.

The FSCS is the compensation fund of last resort. Only when other avenues have been exhausted will the FSCS be called upon.

There are specific EU rules which apply to insurance companies on winding up - The Insurers (Reorganisation and Winding-Up) Directive 2001.

The content of this Directive means that claims of policyholders against an authorised insurance company take precedence over most other claims.

It is only if meeting these other claims means that the remaining assets are insufficient to meet the policyholder’s claims that a policyholder would need to turn to the FSCS.

FSCS coverage will not apply if the investor is regarded by the FSCS as a large company. This could happen where you invest in an External Fund (EFL) via an insured product such as a Personal Pension Plan. In those circumstances the EFL is held in the name of the product provider rather than in your name, and the product provider is not eligible to make a claim.

What would happen if a mutual fund manager were to default?

A fund manager is required to appoint a depository and custodian. One of the primary functions of the custodian is the safekeeping of securities and cash in deposit accounts, held in the name of the depository. This has the effect of segregating the funds from the fund manager’s own monies and effectively protects the client’s investments should the fund manager become insolvent.

From the client's perspective this means that the only time they should need to look to the FSCS for compensation would be in the event of the fund manager acting dishonestly, fraudulently or negligently.

The maximum level of compensation available for mutual fund investments is £50,000

Again, FSCS coverage will not apply if the investor is regarded by the FSCS as a large company. This could happen where you invest in an External Fund (EFL) via an insured product such as an investment bond. In those circumstances the EFL is held in the name of the product provider rather than in your name, and the product provider is not eligible to make a claim.

This could also happen if you invested using the services of a Discretionary Investment Manager. However the Discretionary Investment Manager is bound by strict regulatory and legal obligations to keep client assets ring-fenced from its own assets.

What would happen if a deposit-taker were to default?

The maximum level of compensation available is £85,000 per banking group. For people who hold multiple accounts in banks that are part of a larger group then the level available will depend on the authorisation basis. If each of the banks is separately authorised by the FCA then the limit of £85,000 would apply per person per authorised institution. If each of the banks is not separately authorised then only one limit of £85,000 would apply, irrespective of how many different subsidiaries a person held accounts with.

List of authorised banks and their subsidiaries

List of authorised building societies and their subsidiaries

As mentioned previously, FSCS coverage will not apply if the investor is regarded by the FSCS as a large company. This could happen where you invest in deposit accounts via an insured product such as an International Bond. In those circumstances the pooled deposit account is held in the name of the product provider rather than in your name, and the product provider is not eligible to make a claim.

This could also happen if you invested using the services of a Discretionary Investment Manager. However the Discretionary Investment Manager is bound by strict regulatory and legal obligations to keep client assets ring-fenced, including money held on deposit, from its own assets.

Example:

  • Denise has £110,000 deposited in a failed bank where the administrator could pay depositor creditors 60p in the £1
  • She will get £85,000 from the FSCS in a reasonably short time after the bank was declared 'in default'
  • Her full rights are assigned to the FSCS
  • The FSCS will eventually get £66,000 from the administrator (60% of £110,000)
  • Denise will then get part of her remaining loss at the recovery rate of 60% of the excess over the protected limit, i.e. 60% of £25,000 = £15,000
  • So, Denise will receive payments totalling £100,000 from the FSCS
 

Other UK compensation schemes

This is not intended to be an exhaustive list of compensation schemes, but to highlight the schemes that may apply to customers of Standard Life.

Financial Assistance Scheme

This is available to members of defined benefit (also known as final salary) schemes that started to wind up between 1 January 1997 and 5 April 2005, where the employer has become insolvent and the scheme is not able to pay out the full pension entitlement.

For further information please go to the Financial Assistance Scheme website

Pension Protection Fund

This is available to members of defined benefit schemes where the employer has become insolvent after 5 April 2005 and the scheme is not able to pay out the full pension entitlement.

For further information please go to the Pension Protection Fund website

Overseas compensation schemes

This is not intended to be an exhaustive list of overseas compensation schemes, but to highlight the schemes that may apply to customers of Standard Life. If a deposit account is based offshore then there is no compensation available from the FSCS - policyholders may need to look at a local scheme to see whether there is any protection available to them.

Ireland

Deposit accounts held with Irish banks and building societies may be covered by the Irish government’s guarantee.

For further information please go to the Central Bank of Ireland website

Jersey

Jersey has a Depositors Compensation Scheme which provides protection per person, per Jersey banking group.

For further information please go to the States of Jersey website

Guernsey

Guernsey has a Depositors Compensation Scheme which provides protection per person, per licensed bank.

For further information please go to the Guernsey Banking Deposit Compensation Scheme website

Isle of Man

The Isle of Man has a Depositors Compensation Scheme which provides protection per person, per licensed deposit taker.

For further information please go to the Isle of Man Financial Supervision Commission website