Financial Services Compensation Scheme (FSCS): Explained | TIOmarkets

BY TIO Staff

|July 9, 2024

The Financial Services Compensation Scheme (FSCS) is a UK statutory fund of last resort for customers of authorised financial services firms. This means the FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. The scheme is an independent body, set up under the Financial Services and Markets Act 2000 (FSMA), and funded by a levy on authorised financial services firms. Its mandate is to provide a safety net for customers if a firm fails and cannot pay claims against it.

The FSCS covers business conducted by firms authorised by the Financial Conduct Authority (FCA), the UK's financial services industry regulator. The FCA's role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers. The FSCS is a crucial part of this system of protection.

Scope of the FSCS

The FSCS covers a wide range of financial products and services. This includes deposits, insurance policies, insurance brokering, investments, mortgage advice and arranging. It's important to note that the scheme does not cover all types of financial services, and the level of compensation available will depend on the type of financial product or service.

For example, the FSCS can compensate up to £85,000 for deposits per person per firm, and up to £50,000 for investments per person per firm. It's also worth noting that the scheme covers claims against firms that were authorised by the FCA at the time the advice was given, or when the financial activity was undertaken.

Eligibility for the FSCS

Not everyone is eligible to claim compensation from the FSCS. The scheme covers private individuals and small businesses, but larger businesses are generally not covered. The FSCS also does not cover losses that are a result of normal investment risk. For example, if you invest in a company and the company's share price goes down, you cannot claim compensation from the FSCS.

Furthermore, the FSCS only covers firms that are authorised by the FCA. This means that if you deal with an unauthorised firm, you will not be able to claim compensation from the FSCS. It's therefore very important to check the FCA register to make sure the firm you're dealing with is authorised.

Claiming from the FSCS

If a firm fails and cannot pay claims against it, the FSCS will step in to pay compensation. The process for claiming from the FSCS depends on the type of financial product or service. In some cases, the FSCS will compensate customers directly. In other cases, the FSCS may arrange for another firm to take over the failed firm's business.

It's also important to note that the FSCS will only pay compensation if the firm is unable, or likely to be unable, to pay claims against it. This means that if the firm has enough assets to pay claims, the FSCS will not pay compensation. The FSCS also has the power to recover costs from the failed firm, or from other parties who are legally responsible for the firm's failure.

Role of the FSCS in Trading

In the context of trading, the FSCS plays a crucial role in protecting investors. If a trading firm fails and is unable to return investments or money held in trading accounts, the FSCS can step in to compensate investors. The maximum compensation for investments is £50,000 per person per firm.

However, it's important to note that the FSCS does not cover losses due to market movements or poor investment performance. The scheme only covers losses that are a result of a firm's failure or inability to pay claims against it.

Impact on Traders

The FSCS provides a safety net for traders, giving them confidence to invest in the financial markets. Knowing that their investments are protected up to a certain limit, traders can focus on their trading strategies and decisions, rather than worrying about the financial stability of their trading firm.

However, traders should not rely solely on the FSCS for protection. It's important to conduct due diligence on trading firms, checking their financial stability and regulatory status. Traders should also diversify their investments to reduce risk.

Impact on Trading Firms

For trading firms, the FSCS levy can be a significant cost. However, being part of the scheme can also be a selling point, as it gives customers confidence that their investments are protected. Trading firms can also benefit from the stability that the FSCS brings to the financial markets.

However, trading firms need to manage their risks carefully to avoid triggering a claim on the FSCS. This includes maintaining adequate capital, managing operational risks, and treating customers fairly.

Conclusion

The Financial Services Compensation Scheme plays a crucial role in the UK's financial services industry, providing a safety net for customers and contributing to the stability of the financial markets. For traders, the FSCS provides important protection, but it's also important to conduct due diligence on trading firms and to diversify investments.

For trading firms, the FSCS can be both a cost and a benefit. While the levy can be significant, being part of the scheme can give customers confidence and contribute to the stability of the firm. However, firms need to manage their risks carefully to avoid triggering a claim on the FSCS.

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TIO Staff

Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.