Wealth

Is your money safe if a firm goes bust?

If a bank or insurance provider goes bust, how much of your money are you guaranteed to get back?

In February Santander was fined £1.5 million by the Financial Services Authority because it hadn’t been clear about the amount of protection that was available to customers who bought complex structured products (designed to protect investors against a falling stock market, but they can be a bit of a minefield). The rules around how your money is protected if a company were to go bust aren’t straightforward, but it’s well worth understanding them

The Financial Services Compensation Scheme (FSCS)

The FSCS is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading they may be able to pay compensation to its customers

The FSCS can cover eligible individuals who are or were customers of an authorised financial services firm that has been declared in default

However, the FSCS also covers some small businesses and anyone with a compulsory insurance policy. You can find out more about this on the FSCS website or by watching this video

The FSCS considers a firm to be ‘in default’ if it is unable, or likely to be unable, to pay claims against it

Bank and building society savings

Your savings in a bank or building society are protected up to a limit of £85,000 per authorised institution. Apologies for the consumer-unfriendly language, but an ‘authorised institution’ isn’t necessarily the same as a bank or building society. It all depends on how they are licensed or regulated

Note that each bank or building society that shares authorisation with others has an umbrella limit of £85,000. So, for example, Halifax, Bank of Scotland, Birmingham Midshires, IF, Saga and AA savings products are all under the Bank of Scotland’s authorisation and share an £85,000 compensation limit, but NatWest and RBS (both part of the same banking group) each have a separate banking licence, so you could have up to £85,000 of savings in each and still be protected. You can see which banks or building societies are linked on the FSA’s website

Note that if you have a joint account for deposits you can each claim up to £85,000, for a combined total of £170,000

Note that this also means that if you hold multiple deposit accounts in one authorised firm (or across several firms that come under the same authorisation – see below), you will only be covered up to a total £85,000

Most banks based in the EU are directly authorised by the FSA. Some have chosen to ‘passport’ their authorisation, which means they may be members of their home country’s compensation scheme. In this case, the limit is roughly the same at €100,000 but you wouldn’t be protected by the FSCS as well. For example, ING Direct is covered by the Dutch compensation scheme and  Bank of Cyprus is covered by the Cyprus deposit scheme

Be warned - Peer to peer lenders and most Christmas savings clubs aren’t protected by the Financial Services Compensation Scheme. National Savings & Investments products aren’t protected by this scheme either, but they are backed by the UK Treasury and that covers 100% of the money

Investments

The FSCS can only compensate for financial loss; this means individuals would need to have lost money by dealing with an authorised firm. The FSCS will try and ensure people are in the same financial position they would have been in had they not invested. However the FSCS can’t compensate consumers for poor market performance

If you have money invested in something like an investment bond, for example, you’d be covered for up to £50,000 per person per firm if the product was mis-sold and the firm couldn’t pay compensation because it had gone bust if it was a pooled fund

Note that there are different types of investment bond and some may be classed as long term insurance products. If that’s the case, they’ll have different compensation limits (of 90% of the full amount with no upper limit). It’s well worth making sure you are clear about what type of bond you’re investing in and how much of your money is protected

Structured products are a bit of a law unto themselves. There’s no simple way to explain how they may be covered by the compensation scheme. It will depend on who is issuing the structured product (for example National Savings & Investments guaranteed equity bonds are backed by the Treasury so 100% of your money should be safe, but they’re not covered by the FSCS)

Be warned - With other providers, such as high street or investment banks, the FSCS may be able to compensate consumers if the products have been mis-sold or if there is fraud involved. But if the counterparty (the company backing the product) fails, and that means the value of your investment is affected, the FSCS is unlikely to be able to pay claims

Pensions

If you’ve invested in a pension, the amount of compensation you could receive will depend on what type of fund your money is invested in

Note that Final salary (or salary-related) workplace pensions are protected differently. They come under the Pension Protection Fund. If you’ve retired you’ll receive 100% of your pension, but if you’ve not you’ll receive 90% of it up to a cap (which changes every year and depends on your age - currently it’s £29,872 for someone aged 65)

Pooled funds: (e.g. such as unit trusts or open ended investment companies). Money you invest in a pension in one of these funds is held in trust on behalf of those who’ve invested in the fund. That means that if the investment firm managing your money went bust, the assets should be ring-fenced

With profits funds: It will depend on what is included in the with profits funds, but if it is classed as an insurance product (which most with-profits funds are), you could claim 90% of the value of the fund (with no upper limit)

Cash: If you have a self invested personal pension (SIPP) and had some of your pension money in cash in an account under your name, the cash element would be protected up to £85,000 compensation. The remainder of the SIPP would be covered by the insurance limit - 90% of the value of the fund (with no upper limit)

Be warned - The cash held in a SIPP ought to be attributable to named individuals so it should be possible for each person to receive a maximum of £85,000. However, if it was held in such a way that makes it unclear how much was owed to each person, then the FSCS payment procedure may be different

Annuities

Annuities are defined as long term insurance contracts and that means if you take out an annuity and the provider goes bust, you’d be able to claim 90% of its value, with no upper limit

Note that all annuity providers are regulated by the FSA and have to meet stringent requirements on their ‘reserves’. Ratings firms such as Standard and Poor’s and specialist actuaries AKG rate annuity providers. If an insurere went bust other insurers may take over the annuity payments. For example, when Equitable Life went bust, all its annuity payments were met in full. An annuity provider that went bust would be able to sell its ‘book’ of annuity business to another insurer

Mortgages

If you were mis-sold a mortgage and want to make a claim for compensation against a mortgage adviser, you’d be eligible to claim up to £50,000

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April 25, 2012

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