How savings are protected by the FSCS

Under the Financial Services Compensation Scheme (FSCS), customers are covered if their provider is regulated by the FCA or PRA.

It means that, if they go bust, all money up to the value of £85,000 will be refunded, with temporary high balances sometimes protected too.

To ensure money is protected, customers should spread the risk between different institutions and banking groups.

Credit: Krakenimages.com/Shutterstock.com

What is the FSCS?

The Financial Services Compensation Scheme (FSCS) is a failsafe for customers of authorised financial firms.

If a bank or other financial provider collapses, customers are covered up to losses of £85,000 per individual per account.

The FSCS is a fund set up by several financial bodies and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to protect people's finances in the face of a crisis.

The scheme promises to automatically repay any savings lost through fault of the bank, usually within seven days, although there may be a small delay while the compensation is being found.

How much is protected under the FSCS?

In the event of emergency, the Government will protect most UK savings accounts and some other accounts, ensuring compensation of up to £85,000.

This coverage level is a return to the amount of coverage we saw before 2016 when the deposit guarantee dropped by £10,000 to £75,000 to comply with European regulations.

The sum of £85,000 includes any accumulated interest, and represents the limit per person, per PRA authorised firm.

So, for example, from January 2017, joint account holders have been entitled to a total of £170,000 compensation: £85,000 for each named holder.

We've seen a marked increase in deposit protection over the last 15 years since the financial crisis.

The UK moved in line with the European Union to raise the protection limit to £50,000 then £85,000 in 2010. Now the UK has left the EU, deposit protection is still in place and customers are still covered in the event of a firm's collapse.

Temporary high balances

The usual cap for the FSCS is £85,000 but temporary high balances (THBs) are protected under certain circumstances for up to six months.

This means that it's possible to keep money in an account if it's caused by a temporary life event such as:

• Buying or selling property
• Receiving an insurance policy pay out
• Receiving retirement or death benefits
• Receiving a redundancy payment
• Inheritance

Money is only classed as a temporary high balance for six months, and it's good practice to move money to another protected account as soon as possible anyway.

In the event a collapse happens when a temporary high balance is held in the account, the FSCS will ask for proof the money was held in that account and why (i.e., a dated agreement to buy or sell a property).

The FSCS warn they will not be able to confirm the eligibility of a THB unless a bank or service provider actually fails. This is because they need to perform adequate checks to see if the life event that caused the money to be in the account was relevant and sufficient.

So, a THB should not be taken as a guarantee in the same way the standard deposit protection is and customers should strive to keep balances below £85,000.

What isn't covered under FSCS?

The FSCS is a last resort and it's rare that it will be used to protect customers.

Here are some circumstances where the FSCS would not protect a deposit:

• If the firm was not regulated by either the FCA or the PRA.
• If the company is still in business, the customer cannot claim FSCS protection and would have to proceed through the usual complaints procedure with their financial provider and then the Financial Ombudsman Service.
• If the firm wasn't responsible for the loss, such as an underlying investment going bust.
• If the company is a non-bank payment provider like an electronic money institution (EMI), authorised payment institution (API) or small payment institution (SPI).

On this last point, EMIs and APIs might not be covered by the FSCS, but they required to safeguard properly by placing money in a separate safeguarding account with a bank or protect it via an insurance policy or guarantee.

We saw this kind of safeguarding kick in when Loot went into administration in 2019 and the money was backed by Wirecard and therefore protected.

Which accounts are protected under FSCS?

Most savings account types and the vast majority of financial institutions fall under FSCS protection.

However, not everything is covered so it's always safest to check for exclusions.

Account types

Customers with basic current and savings accounts from banks, building societies, or credit unions will almost always be protected. Tax free savings accounts are also protected under the scheme.

In addition, Guaranteed Equity Bonds are covered. They count as deposit accounts because the interest is determined by the stock market's performance.

Anyone worried about cash stored in the form of pension savings should bear in mind that a Self Invested Personal Pension (SIPP) is another money store protected under FSCS.

However, people will need to check with their SIPP provider which bank their cash is being held in. Should it be the same bank as they use for other accounts, the limit will be spread between them as we explain below.

Note that other pension schemes may fall under the category of investments, so it's worth checking with the specific financial firm what, if any, protection is available.

We've got more on pension protections and ensuring your provider is regulated in this guide.

Bank types

Banks must be PRA regulated to qualify for this protection, so they must be regulated in the UK.

Most banks, even foreign owned ones such as Santander, are covered but there are a few EU banks that are regulated elsewhere.

People who have accounts with one of these will find their money should be covered under a "passport scheme", relying on protection from the foreign government in question, not the FSCS.

This situation will change when the temporary permissions regime expires at the end of 2023, so be sure to keep an eye on changes to protections closer to the time.

We also see banks obtaining their banking licences and becoming covered under FSCS. For instance, Zopa obtained their licence in 2020 and Revolut is in the process of applying for theirs at the time of writing.

One final cautionary point: although peer-to-peer lenders and e-money firms may ringfence their cash in the event of a problem, this isn't the same as FSCS protection and we can't apply for a refund in the same way.

Multiple accounts and spreading cash

Things get a bit trickier when it comes to multiple accounts.

As we've already noted, the FSCS limit applies to savings per person, per registered financial institution, not per account.

This means that if someone holds a number of accounts with the same bank, the guarantee will be spread across all of those accounts.

"Per registered financial institution" means that banks with different names and brands but that have the same parent company and share a banking licence, count as the same financial institution.

For example, here are the brands owned by two of the biggest UK banking groups:

If a saver has £60,000 in a Halifax account and £60,000 at the Bank of Scotland, that's £120,000 saved in one PRA registered institution - more than is covered by the FSCS guarantee.

The saver would be fine, however, if they moved one account to, say, NatWest. Each account would be protected in full as the two banks have separate licences.

For this reason, it's always worth checking which financial institutions all of our accounts fall under and if any of them coincide, especially if the bank or building society has recently bought out another company.

There's a full and up to date list of the banks and the institutions they're licensed under towards the bottom of the PRA website.

It also possible to check if savings will be protected on the FSCS website here - although some banks have multiple entries so it's worth comparing it against the PRA website information above for clarity.

Also remember that when spreading savings over several financial institutions, accumulated interest could push accounts close to the protection limit over the edge.

A good rule of thumb is not to save more than £83,000 with one institution: the extra £2,000 will leave room for any accumulated interest.

It's impractical, however, to spread money over more than, say, nine or 10 accounts.

It's partly the impracticality that gives rise to another general rule: those with savings of more than £185,000 should keep to less than 10 accounts.

The savings may not be fully safeguarded in this case, but the risk will be significantly minimised.

Are there alternatives to FSCS?

The FSCS is a unique scheme that offers backing for deposits up to £85,000 per account per institution.

It's a last resort and is rarely used, even if the protection is nice to have.

As we've discussed above, non-banks are required to safeguard money properly in order to trade in the UK, adding another layer of protection in case a firm isn't covered under the FSCS.

Many companies in this situation will make their money safeguarding policies clear, and it's up to the customer to decide whether there is any risk from putting money in that location.

The case of Loot going into administration earlier has a cautionary warning attached.

While Loot customers were protected when that company went into administration because of Wirecard's backing, Wirecard themselves collapsed into insolvency and the UK-based element was sold to another company.

This demonstrates how things can change in the financial sector and why using FSCS-backed accounts for significant sums of money like savings is a good idea.

Summary: Spread the risk

Thanks to the FSCS, we're protected up to £85,000 per individual account per institution - and up to £170,000 if we hold a joint account.

It's a powerful failsafe but we have to remember to do our part to ensure we're covered:

1. Check the financial provider is regulated by the FCA or PRA
2. Check which banking group the provider is part of and whether we hold other deposits in that group
3. Ensure we keep less than £85,000 per individual in each account
4. Understand that temporary high balances may not be covered even for the six-month temporary period

FSCS protection is an important safeguard to be aware of, especially as mobile only banking becomes more popular and it's easier to transfer money at the touch of a few buttons.