ISA season is truly upon us now, but our users are thinking about much more than just how to make the most of their allowances. Tax-efficient investments, wills and how to pass pensions on optimally are also top of the agenda.
The Financial Services Compensation Scheme came into being in 2001 under the Financial Services and Markets Act 2000. It affects the customers of retail banks and insurers, and the clients of wealth managers like private banks or investment management institutions.
The FSCS is the UK’s statutory fund of last resort for private clients of financial services firms. This means that it will pay a certain amount of compensation to clients of a financial services firm authorised by the Financial Conduct Authority or Prudential Regulation Authority which becomes unable, or likely to be unable, to pay claims against it. The FSCS covers deposits only up to a certain level, however, which is a crucial factor all high net worth investors should be aware of. The FSCS is free to use, impartial and independent of the government and the financial industry.
There are various maximum levels of compensation available for different types of financial services. Also bear in mind that the rules are a little different if you have a claim related to an institution which became insolvent prior to the FSCS becoming operational.
Deposits: you can claim 100% compensation on deposits of up to £85,000. This is limited to one claim per person per firm, for claims against institutions which went into default from 1 January 2010.
Investments: you can claim 100% compensation for £50,000 of investments. This is limited to one claim per person per firm, for claims against institutions which went into default from 1 January 2010.
The maximum level of compensation for claims against firms declared in default before 1 January 2010 is 100% of the first £30,000 and 90% of the next £20,000, up to £48,000 per person per firm.
Home Finance (such as mortgage advice and arrangement): you can claim 100% of £50,000. This is limited to one claim per person per firm, for claims against institutions which went into default from 1 January 2010.
Whether an investment placed with a private bank or investment manager is covered by the FSCS scheme is a very important consideration. Many clients put great store by diversifying their wealth across several wealth managers to ensure that as much is covered by the FSCS as possible. A significant proportion of the high net worth individuals who come to findaWEALTHMANAGER.com wish to diversify their assets.
If a financial services institution is authorised by the Financial Conduct Authority you will have access to the Financial Ombudsman Service and to the FSCS. You can find out whether a firm is regulated by using the FCA’s Financial Services Register or by calling its Consumer Helpline on 0800 111 6768. You can rest assured, however, that all the wealth managers on the findaWEALTHMANAGER.com panel are regulated by the FCA.
You should also be aware that there are additional rules for people who hold multiple accounts with banks that are subsidiaries of a larger parent group (this can be a very common scenario due to the complex corporate structures behind many seemingly disparate brands).
If each of the banks is separately authorised by the PRA the FSCS would pay compensation up to the limit of £85,000 per person, per authorised institution. If, however, each of the banks is covered by a single authorisation then the FSCS would pay compensation up to a total limit of £85,000 once. This limit would be for the total of all the accounts you have with the various institutions under that authorisation.
The FSCS can provide a good deal of peace of mind, but it is important to understand exactly where you and your investments will stand if something does go wrong. If you are unsure about any part of your financial services provision, you should not hesitate to ask for clarification.
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