S1E10: How to keep your money safe | FSCS’s Emma Barrow
Financial institutions like banks have sometimes failed, so we want to know what happens to your money if they do. It’s a legitimate fear so we’re sitting down with Emma Barrow from the Financial Services Compensation Scheme (FSCS).
The FSCS are the ‘last resort’ who will pay you back your money if your bank fails, up to £85,000 per person per bank - but it’s a bit more complicated than that. Your bank has to be regulated in the UK and a bank is defined by the organisation that has a banking license which can cause problems. The FSCS don’t just cover banks though and there are plenty of important nuances, so let’s get to the bottom of it - when is your money protected?
Key things to think about from this episode
FSCS offer ‘deposit’ protection in the UK. This means they protect the money you hold (deposit) at a bank in the event the bank fails, but it’s a bit more complicated than that.
The limit is £85k per person per bank (not per account) - but a bank is defined by their banking license, e.g. HSBC and First Direct share a banking license so if you bank at both, you’d only get £85k if they went bankrupt, not £170k.
Use the FSCS bank and saving protection checker to see how you’re covered.
The limit of £85k stemmed from when the UK was in the EU, when the EU set the limit of 100k Euros so there’s now an opportunity to change that post Brexit. The FCA have said they’ll review the limits this year.
The FSCS also covers financial products like insurance (e.g. if the insurer goes out of business), financial advice, debt management plans, pensions, home finance advice etc. - basically if it’s a regulated activity.
Their cover is free to use as the consumer. The scheme is funded by the industry. Each year they look at what they might pay out and bill firms across the industry.
The limit they can charge the industry to protect bank deposits is £1.5b a year, plus they’ve got a £1.5b credit facility. Beyond that, they can borrow from The Treasury, e.g. when they paid out about £20b after the financial crisis. That money was borrowed then recouped over the following years.
When a bank or building society fails, it doesn’t mean all the money has gone, it means they’re insolvent as a business (they can’t cover their costs) - and FSCS can access the money that’s remaining to pay out depositors.
Since the financial crisis of 08/09, they’ve only seen small credit unions go bust - they’ve not seen a bank failure.
FSCS are the scheme of last resort. Before FSCS gets involved, the Bank of England really has two options to deal with a failing bank - declaring insolvency (which basically means the bank has failed and is when FSCS steps in) or ‘resolution’ which is when they try to solve the bank’s problems. The concept of ‘too big to fail’ really means resolving the problem (e.g. finding a buyer) rather than letting the bank fail.
How and where you keep your money (if you have more than £85k) is a very personal decision.
FSCS has a provision which allows for temporary high balances (up to £1 million) for things like selling your house.
In the case of a bank failure, they will typically send money to customers through cheques within 7 days.
FSCS deals with about 100 companies a year - and it’s mostly financial advisors who’ve given advice that’s not suitable for their clients.
The typical chain of events in this scenario is someone gets advice that’s not right for them, they only realise the advice isn’t suitable X years later because investing is for the long term. They go back to the financial advisor to complain but the advisor doesn’t exist any more - maybe they’ve gone into liquidation, insolvency or retired. If the advisor doesn’t exist, the customer has nowhere else to go except FSCS.
They can’t cover poor performance from an advisor - that happens - they cover inappropriate advice.
Financial advice and pensions in particular are the most complex claims they see.
The test is the civil liability test, if you took them to court, do they think the court would’ve ruled in your favour?
Crypto isn’t a regulated activity so FSCS don’t cover it. But if you were advised by a financial advisor to get into crypto, they could get involved because financial advice is a regulated activity.
If a scammer was pretending to be an advisor, the FSCS can’t step in because it’s not actually regulated - they’re pretending to be regulated.
Scammers steal the FSCS logo and put it on their websites, so check the FCA or FSCS websites to make sure you’re dealing with legit companies.
A common misconception is people don’t know they can make a claim themselves with FSCS - you don’t need a 3rd party to claim on your behalf.
It can be really difficult to say whether you’re covered until an investigation.
FSCS can’t investigate every firm that’s gone out of business. They rely on customers getting in touch with them, which you can do via their website.
They only need one valid claim against a firm to pay out.
Consider your personal risk appetite and what will allow you to sleep at night.
Next episode - Kerry Katona on going bankrupt twice
Yup, it’s the one and only Kerry Katona who has a fascinating relationship with money. She’s been bankrupt twice and a millionaire thrice.
