The news of bank runs, and government bailouts have made an unwelcome return to headlines in recent weeks. Understandably, a number of clients have raised concerns about the safety of their money. As such, we wanted to take the opportunity to highlight the compensation protections available to clients when holding cash and investments with UK financial institutions.
In the UK, there is a level of protection provided by the Financial Services Compensation Scheme (FSCS) which was set up under the Financial Services and Markets Act 2000 and exists to protect clients of FCA authorised firms. The Scheme can pay compensation to clients who have lost money as a result of their dealings with FCA authorised firms such as investment companies, insurers, banks, building societies or credit unions, that are unable to pay claims against them, usually because they are insolvent or have stopped trading.
Cash Deposits – The maximum compensation limit is £85,000 per person, per authorised institution or banking group. The compensation limit for joint accounts is £170,000.
It is important to note that where you hold money could affect how much compensation you’re entitled to. If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) the FSCS treats them as one bank. This means that the compensation limit applies to the total amount you hold across all these accounts, not to each separate account. For the compensation limit to apply to each individual account, you would need to hold money with different banks that don’t share a licence. You can check which banks share a license here.
There is also an additional protection available from the FSCS for temporary high cash balances of up to £1million for 6 months. This additional protection would apply in certain circumstances such as divorce or dissolution of a civil partnership, personal injury compensation, real estate transactions, benefits payable under an insurance policy, or an inheritance, to name a few. A full list of the allowable reasons for a temporary high balance can be found here.
Many of our clients have cash invested with National Savings & Investments (NS&I), including in the Direct Saver account and Premium Bonds. These accounts are 100% backed by HM Treasury and therefore there is minimal chance of NS&I defaulting.
With the current rate of inflation far outpacing the rates of interest available, investors should be mindful of the levels of personal cash held as an overall percentage of total wealth.
It is also worth noting that banks are much more robust than they were previously because of new regulations brought in to protect consumers after the global financial crisis in 2007/08. Furthermore, banks are now regularly stress-tested to see how they would manage in a variety of difficult events.
Investments – The maximum level of compensation for claims against firms declared in default on or after 1 April 2019 is £85,000 per person, per authorised institution. Funds held in UK Authorised Unit Trusts or OEICs are ring-fenced. This means that the assets will be held by the appointed custodian and are separate from the fund manager’s own assets. This provides an extra level of protection in the event of insolvency of the external fund manager.
Pensions & Insurance – The maximum level of compensation for claims against firms declared in default on or after 1 April 2019 is 100% of the claim with no upper limit. For Self-Invested Personal Pensions (SIPP) operators the maximum compensation limit is £85,000 per person, per authorised institution.
Further information about the FSCS and compensation limits available can found here.
To discuss any of the above, please get in touch with your our advisers.