When things go wrong, it’s reassuring to know there’s a safety net in place. This is especially important when it comes to our personal finances, including savings, investments and insurances.
The Financial Services Compensation Scheme (FSCS) is an independent body set up by the UK Government to provide compensation or some other form of resolution for people where their authorised financial services provider gets into financial difficulties. The FSCS operates different levels of compensation for different products and funds selected.
For insured products, the cover is 100% with no upper limit applied. This category of FSCS protection includes workplace pensions (including Additional Voluntary Contributions/AVCs, Group Personal Pensions and Group Money Purchase Plan), Personal Pension Plans, annuities, endowment policies and Investment Bonds.
For investments, the protection level is also 100% of the loss, but with an upper limit of £50,000 per person. Financial products falling into the investment category for FSCS purposes include Unit Trusts, Open Ended Investment Companies and Stocks and Shares ISAs.
There is no upper limit for FSCS protection in respect of general insurance policies, but only 90% of the amount is covered. General insurance includes policies like your car or home insurance.
Finally, and perhaps most discussed in the news media, are bank and building society deposits. These receive FSCS protection of up to £85,000 per person, per authorised deposit group.
It’s also worth noting that, since 3 July 2015, the FSCS provides a £1million protection limit for temporary high balances held with your bank, building society or credit union if it fails. Temporary high balances include things like the proceeds from a house sale or a redundancy payment.
One aspect of FSCS protection which often raises questions from our clients is how it would apply to the assets held within a Self-Invested Personal Pension (SIPP). A SIPP is a type of ‘wrapper’ which can include a mixture of the different products covered by the FSCS. These products can be insurance, investments or deposits. The result being that each ‘sub-element’ of the SIPP (e.g. OEICs, Life Funds, Cash Account) is usually subject to its own FSCS protection up to the relevant product limit. The SIPP wrapper itself is protected under the FSCS up to £50,000 per person, per authorised firm. The investments within the wrapper are protected depending upon the structure of the product i.e. Insured, Investment, General Insurance or a Deposit. This can mean that the products held within a SIPP can be protected up to a maximum of 100% with no upper limit but can also be limited to £50,000, depending on its FSCS category.
What is important to remember is fund managers typically appoint a depositary, custodian or other organisation, the purpose of which is to help ring-fence invested money from that of the fund manager and therefore help protect the invested money in the event the fund manager is insolvent. As a result, if the investment provider managing the investment funds within your SIPP was to get into financial difficulty, the FSCS would cover you up to £50,000 per investment organisation. However, the likelihood of this occurring is extremely remote as the assets are ring fenced from the investment manager. This means that, if the investment provider became insolvent, the administrators should not be able to access client funds to meet any of the parent companies’ obligations. In addition, UK authorised fund managers operate internal risk controls to help ensure that client assets are managed with proper care and diligence and within regulatory rules and guidance.
If you have any questions about FSCS protection levels for the various financial products you hold, please do get in touch.