Financial Services Compensation Scheme (FSCS)

Definition

The Financial Services Compensation Scheme (FSCS) is a statutory compensation fund of last resort for customers of authorized financial services firms in the UK. Established under the Financial Services and Markets Act 2000, the FSCS is designed to protect investors by offering compensation for losses if a firm fails or defaults. The scheme covers a breadth of financial services, including banking, investments, insurance, mortgages, and more, thereby ensuring a level of financial security for individual investors.

Examples

Bank Savings Protection: If a UK bank or building society goes into insolvency, the FSCS provides compensation up to £85,000 per eligible person, per institution.
Investment Protection: Should an investment firm collapse, the FSCS can compensate clients up to £85,000 for any investment losses incurred as a result of the failure.
Insurance Policy Protection: In the case of an insurance company going bankrupt, the FSCS can arrange for continuing cover, or compensation if the cover ceases, up to 90% of the claim value.

Frequently Asked Questions (FAQs)

What is the purpose of the FSCS?

The FSCS was created to protect consumers when financial firms fail. It compensates customers and encourages trust and stability in the financial services industry.

Which products are covered by the FSCS?

The FSCS covers a wide range of products, including deposit accounts, insurance policies, investments, mortgages, and pensions.

How much compensation might I receive from the FSCS if my bank fails?

If your bank fails, the FSCS provides compensation up to £85,000 per eligible person, per institution.

How do I claim compensation from the FSCS?

If your provider fails, the FSCS will provide details on how to make a claim. This typically involves filing a claim online or via post, providing necessary documentation to support your losses.

Are there any exclusions to the FSCS coverage?

Yes, certain exclusions apply. For example, claims against firms operating illegally or without proper authorization are not covered, nor are losses resulting from poor investment advice as opposed to a firm’s insolvency.

Financial Services and Markets Act 2000 (FSMA): The primary legislative framework governing financial services in the UK, which instituted regulations and protections, including the FSCS.
Insolvency: The inability of a company to pay its debts, often leading to bankruptcy proceedings, during which the FSCS may step in for eligible claims.
Authorized Firms: Financial services firms that have been granted permission to operate by the UK’s Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).

Online Resources

Suggested Books for Further Studies

“Financial Services Law” by Michael Blair QC, George Walker and Stuart Willey
“Modern Banking” by Shelagh Heffernan
“Financial Institutions Management: A Risk Management Approach” by Anthony Saunders, Marcia Cornett

Accounting Basics: “Financial Services Compensation Scheme (FSCS)” Fundamentals Quiz

### What does the Financial Services Compensation Scheme (FSCS) aim to protect? - [ ] The profits of investment firms. - [x] Private investors' funds from default or bankruptcy. - [ ] Government bonds and securities. - [ ] Corporate stock prices. > **Explanation:** The FSCS aims to protect private investors' funds from the default or bankruptcy of financial firms. ### Under which legislation was the FSCS established? - [ ] The Insurance Act 2015 - [ ] The Companies Act 2006 - [ ] The Pension Schemes Act 2021 - [x] The Financial Services and Markets Act 2000 > **Explanation:** The FSCS was established under the Financial Services and Markets Act 2000. ### What is the compensation limit set by FSCS for bank savings in the UK? - [ ] £50,000 - [ ] £100,000 - [x] £85,000 - [ ] £25,000 > **Explanation:** The FSCS covers bank savings up to £85,000 per eligible person, per institution. ### Does the FSCS cover insurance policies? - [x] Yes, it covers up to 90% of the claim value in case the insurer goes bankrupt. - [ ] No, it only covers investments and bank savings. - [ ] Yes, but only life insurance policies. - [ ] No, insurance policies are not covered at all. > **Explanation:** The FSCS covers insurance policies up to 90% of the claim value if the insurer goes bankrupt. ### Which body regulates firms covered by the FSCS? - [ ] HM Treasury - [ ] Financial Ombudsman Service - [x] Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) - [ ] Competition and Markets Authority (CMA) > **Explanation:** The FCA and PRA regulate firms covered by the FSCS. ### Who can claim compensation from the FSCS? - [ ] Only corporate entities - [x] Individual private investors - [ ] Any resident of the UK - [ ] Only businesses > **Explanation:** The FSCS is designed primarily to protect individual private investors. ### What is NOT covered by the FSCS? - [ ] Bank savings - [ ] Pension plans - [ ] Mortgages - [x] Illegal investments > **Explanation:** The FSCS does not cover losses resulting from illegal investments. ### What is the primary role of the FSCS in the financial system? - [x] To compensate customers of failed financial firms - [ ] To regulate financial firms - [ ] To grant loans to struggling firms - [ ] To set interest rates > **Explanation:** The primary role of the FSCS is to compensate customers of failed financial firms. ### When can a claim be made to the FSCS? - [ ] When a firm's profits decrease - [ ] When a firm's stock market value drops - [x] When a firm defaults or goes bankrupt - [ ] When a firm's CEO changes > **Explanation:** Claims can be made to the FSCS when a firm defaults or goes bankrupt. ### What is the significance of the FSCS for the financial market? - [ ] It ensures maximum profits for investment firms. - [ ] It reduces the need for financial regulations. - [x] It promotes trust and stability within the financial services industry. - [ ] It eliminates the risks associated with financial investments. > **Explanation:** The FSCS promotes trust and stability within the financial services industry by offering a safety net for investors.

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