With headlines of government bank bailouts and financial institutions collapsing, it's no wonder many people are worried about the safety of their finances. But the Financial Services Compensation Scheme (FSCS) offers reassurance, aiming to cover you if a financial firm that was looking after your eligible investments, savings or insurance goes under.
If your provider ceases to trade, then as long as it is authorised by the Financial Services Authority (FSA), you are entitled to apply for compensation from the FSCS. Read on to find out more about the process.
Investments
In 2006, retired policeman Michael Gaul invested in oil and gas shares with Mansion House Securities Limited. "At the time it seemed like a decent investment with good prospects as oil prices were rocketing," he recalls. Three years later, Gaul was shocked to receive a letter from the FSCS informing him that Mansion House Securities had gone into administration. But upon completion of an FSCS claims form, he was compensated for the money he had lost.
"The application process meant I could relax without worrying, especially as it was handled in a swift manner. I wasn't expecting to get anything back and was very surprised when I received compensation."
Placing your savings into an investment fund of stocks and shares is a risk which most investors enter into knowingly. But in the event your risk fails to pay off because your investment provider goes bust, don't panic.
In some situations the FSCS will send you a compensation claims form as soon as it has declared the provider to be in default (that is, if the company is no longer able to make any payments itself, or the FSCS has reason to believe the provider will not be able to meet any compensation claims that have been made against it).
But if you first receive a letter from the administrators informing you that your investment provider has gone under, then you should make contact with the FSCS (fscs.org.uk/contact-us/) to explain what you have been told by the administrators. A compensation form will then be sent out to you, and, once it has been returned and reviewed, you will receive your payment.
Provided the declaration of default was made after 1 January 2010, then you can claim for 100% of the first £50,000 invested. However, compensation is only offered for investments made after August 1988.
Protecting your savings
Should a bank collapse, taking your savings with it, the FSCS will help you to reclaim up to 100% of the first £85,000 held with the bank. (The limit is doubled for joint accounts to £170,000.) However, you will only be able to claim up to the limit for the total you hold with each bank or building society that holds its own banking licence.
What does this mean? Each bank usually has its own licence, but some providers share licences, such as HSBC and First Direct, or Santander and Alliance and Leicester. Therefore, if you had £50,000 invested in separate accounts with two or more banks sharing one licence, you would still only be eligible for one lot of compensation.
One way to protect yourself is to spread your money between different providers with different banking licences, but check which banks share licences before you start opening accounts.
How to claim for savings compensation
The FSCS aims to make the process of compensation as stress-free as possible. So, should your bank go under, it will not be you chasing around to find out what's going on with your cash.
Instead, the FSCS will get the information it needs to pay you compensation directly from your bank, building society or credit union. It will use this information to send you compensation without you filling in an application.
The FSCS will seek to pay compensation in the vast majority of cases within seven days of a deposit taker failing. It will aim to pay any remaining claims which are likely to be more complex within 20 working days. The latter may include Trust accounts and beneficiary accounts.
Insurance
If you have taken out car, travel, home, employers' liability or loan insurance or have a life insurance policy and your provider goes into default, then you are also entitled to FSCS compensation.
If your insurance provider goes under, liquidators should contact you to explain what has happened to your policy. You should then contact the FSCS for an application form for compensation. The FSCS will consider compensation for premiums you have already paid and, helpfully, will also assist you in transferring your policy over to another provider as swiftly as possible.
Claims for compulsory insurance, such as third-party motor cover, are fully protected. But for non-compulsory insurance, such as home insurance or travel insurance, you will be able to claim for 90% of the money you have paid (for providers which are declared in default after 1 January, 2010) or 100% of the first £2,000 of premiums you have lost, plus 90% of the remainder of the claim (for providers declared in default before 1 January 2010).
Contact the FSCS on 020 7741 4100 or visit fscs.org.uk
