Like all financial services, investing attracts its unfair share of bad actors and inept shysters. So it’s comforting to think that if the worst happens and your investments disappear in a puff of fraud, then the UK Financial Services Compensation Scheme (FSCS) will swing into action and bail you out.
But that ain’t necessarily so.
The FSCS protection scheme may come to your aid. But eligible claims have more strings attached than a puppet show.
How can you know if your investments are actually covered by the FSCS? And what further steps can you take to maximise your protection level?
Fancy hearing about a route to 100% FSCS compensation coverage with no cap?
The FSCS compensation limit
The first knot to unpick is that FSCS compensation is limited to £85,000 for investments.
The formula is £85,000 per person, per firm.
Hence £85,000 is the maximum amount of compensation you can personally claim per firm you invest with. (Assuming all the other eligibility criteria are met. We’ll get to that funfest shortly).
The per person element means that you’re covered for up to £170,000 in a joint account.
Per firm means that if, in some future dystopia, two or more of your investing platforms collapsed, then you could make a separate claim for up to £85,000 to cover assets lost in each implosion.
For example, if you had £30,000 lodged with Ee-z-eeMoney Broker$ Ltd then you could put in a claim for the full amount owed.
Meanwhile, you’ve also got £200,000 stashed with the Hard4Profits Company. Their directors were last seen boarding a flight to Panama so you can claim back £85,000 for that mess, too.
You’re not covered for the remaining £125,000. The FSCS compensation limit maxes out at £85,000 per firm, no matter the value of your accounts with that firm.
Which firms are covered by FSCS compensation?
You’re only protected if the firm that pops its clogs is authorised by the UK’s Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).
Note, the word you’re looking for is authorised by the FCA or PRA.
The next step is to ensure that the authorised firm is actually regulated (by the FCA or PRA) to undertake the particular service you’re using them for.
For example, is your broker regulated for ‘Arranging investments’ (translation: executing trades) in the particular security you wish to invest in? Such as ETFs or shares?
The FCA’s Financial Services Register theoretically enables you to check these details for every firm on their books.
But in reality it’s a minefield. A fact the FSCS acknowledges by shifting the responsibility for keeping tabs to you.
The FSCS says:
Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.
I thoroughly recommend you do that. Then double-check your broker’s claims are verified on the firm’s Financial Services Register page.
There was a time when I felt confident in checking a broker’s status purely through the Financial Services Register.
However, a firm’s status on the register is nowadays defined by specific, technical terms. I cannot be certain my interpretation of those terms is correct.
Plus the FSCS’s “Ask your firm to confirm…” edict is plastered everywhere on the site – which suggests we cannot solely rely on the register.
Multiple brand names, one firm
If you decide to diversify your money between brokers, then check they are not part of the same financial group.
For example, iWeb, Lloyds Bank Share Dealing, and Halifax / Bank Of Scotland Share Dealing are all in the same group.
This means they all count as being part of the same firm, from an FSCS perspective. So you’d only be eligible for a maximum £85,000 payout, even if you diligently split your assets across them all.
You can quite easily check whether your broker is part of a wider group on the Financial Services Register page.
Just search for its name, then check the Trading names section of its particular entry for other aliases.
FSCS protection for fund providers
FSCS protection does not cover you for investment risk. If your meme stocks go to zero then there’s no backstop.
Rather, the £85,000 compensation limit is there to cover your investments from fraud, negligence, mismanagement, and mis-selling.
And those vices can affect the companies that manage your funds, too. (What a wonderful world!)
However the FSCS scheme only covers a narrow sliver of fund manager firm situations.
The headlines are:
FSCS protection applies to UK domiciled OEICs and Unit Trusts.
It does not apply to funds domiciled overseas. For example, in Ireland.
Nor will you be compensated if you hold ETFs or Investment Trusts with a fund provider that runs into trouble.
The same goes for individual securities like shares or bonds. Never mind crypto.
Use this tool to check your investment type’s FSCS protection status.
If you do invest in UK-domiciled funds then your maximum payout remains £85,000 per person, per firm.1
This is separate to the FSCS protection you’d be eligible for if a broker broke.
However, there is a way to invest with 100% protection…
100% FSCS protection for insured personal pensions and annuities
Some personal pensions qualify for 100% FSCS protection. (That is, the maximum compensation level is not capped at £85,000.)
The FSCS describe eligible pension schemes like this:
The FSCS protects 100% of a pension directly managed under a life insurance contract.
Essentially that refers to some personal pensions and stakeholder pensions that are offered by large insurance firms.
The firms must be regulated by the PRA. And the particular scheme must be classed as a contract of long-term insurance to qualify for FSCS protection.
100% FSCS protection seems to be woefully advertised, given that many people would value it highly.
Rather than plastering it all over their brochures, I’ve found pension providers typically relegate any references to a couple of paragraphs that are sometimes found in their Key Features documents.
Here’s the kind of thing to look out for, courtesy of a Standard Life Stakeholder Pension document (bolding is mine):
Your plan is classed as a long term contract of insurance. You will be eligible for compensation under the FSCS if Standard Life Assurance Limited becomes unable to meet its claims and the cover is 100% of the value of your claim.
Watch out for clauses that warn you lose FSCS compensation if you invest in certain funds available through the pension. These funds are usually managed by another investment firm but, bizarrely, they may also include own-brand funds provided by the firm that is actually running your pension.
Talk to your pension plan provider if you’d like to know more and maintaining 100% FSCS protection is important to you.
Bear in mind that – along with annuities – these types of pension qualify for compensation under the FSCS insurance claim category.
In other words, pension assets like this don’t interfere with your £85,000 investment category claim should you hold a brokerage account, or other funds, with the same firm.
FSCS protection for Master Trust pension schemes
If a Master Trust workplace pension scheme runs into problems then its trustees can invoke FSCS protection on behalf of its stakeholders. You wouldn’t claim yourself.
However, here again, beware of warnings in the documentation about choosing certain funds that aren’t eligible for FSCS compensation.
Defined benefit pensions
Defined benefit pensions should be covered by The Pension Protection Fund (PPF) rules. Double check that yours is.
The top-line is:
100% compensation if you’ve reached the scheme’s pension age.
90% compensation if you’re below the scheme’s pension age.
Public sector pensions are funded by the taxpayer, so you’re fine as long as we have a functioning government (place your bets) and the Bank of England money printer doesn’t run out of ink.
What about cash in an investment account?
Your £85,000 FSCS investment compensation limit doesn’t reduce the £85,000 you can claim for lost cash deposits.
Most brokers lodge client money with one or more big-name banks.
If a bank fails while holding your cash on behalf of your broker, then you can claim £85,000 back, while still claiming £85,000 elsewhere for missing investments.
However, if your broker money was stashed with a single institution – say Lloyds – and you also had a personal account with those self-same black horsie people, then you could only claim up to £85,000 for the two losses combined.
That’s because the limits apply per person, per firm, per claim category. (Cash is one category and investments another).
Some brokers park your money with multiple banks. They say that means your cash is equally divided between them all.
So, if your broker uses four banks for client cash, then you wouldn’t have to worry about exceeding the compensation limit until there was more than £340,000 sitting in your account.
(If you’re – cough – an absolute baller with more than £340,000 in cash at your brokers, then I hope you’ve already ponied up for Monevator membership…)
How likely are you to need FSCS protection?
Of course, the worse shouldn’t come to worst.
There are regulations in place that require fund managers and brokers to segregate your assets from their own.
If the mother company explodes, your money should be safely ring-fenced in a separate pot. You’ll get it back once the smoke has cleared. The company’s creditors have no legal right to your piece of the pie.
That’s what is meant to happen. But any system can fail. You will find a warning to that effect in the terms and conditions of any reputable UK broker.
As Cofunds puts it:
As with any FCA regulated investment firm in the UK, while it is highly unlikely that Cofunds were to become insolvent, or cease trading and have insufficient assets to meet claims, we can’t provide a 100% guarantee that your money is fully protected.
So FSCS compensation provides a last resort backstop – just in case the next Bernie Madoff happens to be running your brokerage, while the cast of Dad’s Army is in charge of administration and oversight.
If your investment platform went pop, shouldn’t the bulk of your assets actually be held elsewhere, though? Shouldn’t your money be invested in ETFs and funds with other companies that are still in perfectly good nick?
Yes, that’s true. Indeed, most claims that require FSCS intervention seem to involve mis-selling, where consumers took advice from a so-called investment professional.
However, the FSCS did step in to assist customers of Beaufort Securities and SVS Securities – two UK brokers that collapsed in 2018 and 2019 respectively.
In both cases, the FSCS made good customers who would otherwise have taken a haircut because client assets were earmarked to pay the fees of the insolvency administrator.
It turns out that administrators are not creditors. So they can dip into the pool of supposedly segregated customer assets, at the discretion of the FCA, if there’s no other way to meet the bill.
During the wind-up of Beaufort Securities, the FCA used the FSCS scheme to ensure that most but not all customers avoided a hit.
In this case, people didn’t lose everything. But clients with a very large account balance took a haircut that exceeded the FSCS compensation limit. Whereas most customers took a percentage loss on a relatively small total account balance, meaning their share of the shortfall was inside the FSCS cap.
So you may decide that you don’t need to fret when your account balance reaches £85,000. That you’ll only need the FSCS to cover you for a percentage of whatever amount you’re owed.
On the other hand, my biggest fear is the (admittedly small) chance of being caught up in a massive financial fraud.
It’s not hard to picture a scenario in which a firm tells you, “Don’t worry your cash is safely tucked away in Vanguard funds,” when it’s actually been spent on a fleet of supercars and crypto bets.
For a full picture of why your brokerage account may not be as ironclad as you’d like, please read this piece on the weaknesses of industry-default nominee accounts.
What should you do?
We’ve had many discussions in the Monevator comment threads about how far to go for peace-of-mind.
Most people accept that their chance of needing FSCS compensation is acceptably low. Hence few of us open a new brokerage account for every £85,000 worth of investment assets we own.
But anyone with a large holding would be well-advised to diversify.
I personally operate across two different, reputable brokers. The Investor uses at least four that I know of.
Even if it all ends happily ever after, broker insolvencies can take many months to clean up. During that time your funds will be inaccessible.
If liquidity is important to you, then you’d be wise to spread your assets across multiple platforms, regardless of the FSCS.
Managing broker risk
No guarantees but here’s some tips if peace of mind is extremely important to you. Choose at least one broker that is:
Big not small
Listed rather than private (greater scrutiny)
Profitable (check their annual report)
High credit rating rather than low or no rating
Doesn’t offer margin, loan out stocks, or run their own trading desk
Brokers can buy ‘Excess of FSCS cover’. This is an insurance scheme that apparently “protects investors for deposits above the level that the FSCS will reimburse.”
I haven’t seen any online broker advertise it as a USP, but it’d certainly offer some comfort if you find a platform that does.
Getting the answers you want about FSCS protection
As discussed, the FSCS expects you to contact your broker for reassurance that they are properly protected by the compensation scheme.
However, investment platform support staff are often inadequately trained in this area.
You may get a vague, confusing, or inaccurate reply. Ask two different people at the firm and their responses can be worryingly inconsistent.
Moreover, while some brokers clearly explain their level of FSCS protection on their website, others do not. Even when their coverage is perfectly fine!
So you might have to persevere.
A line like this may do the trick:
“Is my investment account covered by FSCS protection up to £85,000 if your firm becomes insolvent?”
Then make sure they specifically answer that question without fobbing you off with talk about cash protection, client money, or segregated assets.
The answer you need is that your investment holdings are covered by the FSCS.
Take it steady,
Think BlackRock, Vanguard, or L&G, for example.
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The Financial Services Compensation Scheme is meant to protect UK investors should the worst happen…
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