Are my investments protected and will I get compensation if anything goes wrong?
When you save money in a UK bank, building society or credit union, the first £75,000 (£150,000 for joint accounts) deposited is protected by the Financial Services Compensation Scheme (FSCS).
The FSCS is the free compensation body for consumers who are owed money from a UK authorised firm that can’t meet its liabilities to clients.
As well as protecting money in a normal deposit account, the FSCS also covers authorised ‘investment business’. This guide reveals the protection and compensation rights available to investors.
Which investments are protected by the FSCS?
The FSCS only protects ‘Designated Investments’ which typically covers the following:
- Stocks and shares
- Unit trusts
- Futures and options
- personal pension plans and
- long-term investments such as mortgage endowments
It doesn’t cover corporate bonds as these are issued by commercial firms which are not authorised by the Financial Conduct Authority (financial regulator – FCA) or the Prudential Regulation Authority (bank regulator).
However, the FSCS only covers losses arising from bad investment advice, poor investment management or misrepresentation by a firm which goes bust, and where the firm is unable to pay the claims against it should a product provider go bust.
How much is covered?
The FSCS covers investments up to £50,000 per person per firm, a lower amount than for deposits in an ordinary savings account.
This is because the £75,000 limit (approximately €100,000) for deposits is set by the EU’s Deposit Guarantee Scheme Directive (DGSD). This Directive doesn’t allow member states to raise or lower the deposit protection limit, but the exchange rate must be reviewed every five years which is why it was recently cut from £85,000.
The corresponding Directive for investment claims sets a minimum protection limit of €20,000 but member states are free to provide higher cover, which the UK does. At present, the FCA has set the investment claim limit at £50,000.
Is it £50k per investment?
The £50,000 investment compensation limit applies to the total amount invested with a single firm, for claims against a firm declared in default on or after 1 January 2010.
Before this time-frame, the maximum level of compensation for claims is 100% of the first £30,000, and 90% of the next £20,000 up to £48,000 per person per firm.
If you were to make more than one investment with one firm, the FSCS would provide protection for the combined worth of those investments up to £50,000 if the firm were to go into default.
If investments are held in joint names, each investor would be able to claim up to £50,000.
What if I have more than £50k invested?
When you take your claim to the FSCS and it’s found to be valid, it can pay up to £50,000. But as part of you taking your claim to the FSCS, you’re agreeing to transfer your rights to it so it has the power to attempt to get the full value of your investment back from the liquidator, as long as it’s “cost effective to do so.”
If it is successful, the FSCS can pay over the £50,000 threshold to ensure you’re not worse off as a result of claiming the compensation but you’re not able to ‘double recover’ – that is be paid twice for the same amount from the liquidator or other third party as well as the FSCS.
As an example, if your investment totalled £100,000, the FSCS would pay the successful claimant £50,000 initially, and if it were able to recover 60% of the total value of the investment from the liquidator (i.e. £60,000), it may be able to pay over the £10,000 excess. This £10,000 payment would not count as ‘compensation’ but is a ‘recoveries payment’.”
My friend advised me on my investments which are now tanking. What are my rights?
You’re only covered if you receive bad financial advice from an authorised firm which has stopped trading, defaulted or collapsed and can’t give you your money back.
Getting ‘advice’ from a family member or a friend down the pub won’t be covered as the FSCS only provides protection for claims made against authorised financial advisers, and it doesn’t compensate for loss due to “ordinary investment performance that comes with market volatility or corporate bonds.”
What if I receive bad investment advice but the firm’s still operating?
Unfortunately, the FSCS doesn’t protect you if you receive bad advice from a financial adviser or a company that’s still in operation, as it’s deemed to be able to pay any claim lodged against it.
In this scenario, if the firm or its owners won’t respond to your claim, you may want to take legal advice or contact your local Citizens Advice Bureau for help.
You could also consider taking your complaint to the Financial Ombudsman Service (FOS).
I’m a DIY investor going through a platform, what happens in this situation?
Platforms (which allow you to buy and sell shares, funds and assets in one place rather than going through an intermediary) like most financial services firms, are typically subject to the ‘client money and asset rules’ which come under the FCA.
This requires firms to keep client money – that is money received from clients to be invested – completely separate from the firm’s own money so that if the firm were to go bust, the money would not form part of the firm’s estate, but is instead returned to clients.
Platforms carry out ‘regulated activity’ so must be regulated by the FCA and therefore they fall under the scope of the FSCS.
If there is a shortfall in client money when the firm defaults (e.g. the firm had not been complying with the FCA rules), the FSCS may be able to provide compensation to the firm’s customers, though this is “subject to eligibility”.
I invest through a platform but the underlying company has gone bust, what happens here?
As an example, if you invest in Lloyds Bank via a platform such as Hargreaves Lansdown and Lloyds Bank were to go bust, FSCS protection really depends on the legal nature of the investor-platform-provider relationship as to whether you’d receive any compensation.
Where the investment is held in the name of the underlying investor, you’d generally be able to make a claim. Where there is a bare trust or nominee company arrangement, the underlying investor may also be able to make a claim. But it really depends on the legal circumstances in individual cases.
Here, it’s also important to check the T&Cs of the platform before investing and below, we asked three large platforms about how they operate:
Any cash held on your behalf is placed with a range of different banks in designated client bank accounts. As the cash is kept completely separate from Fidelity’s own money, if it became insolvent it would be returned to you under the ‘client money and asset rules’.
When you invest in funds, they are held by Fidelity using a nominee structure. This allows it to administer your investments while ensuring that you are identified as their owner. This means that, in the unlikely event of Fidelity becoming insolvent, your money can’t be touched by any creditors.
Client money is held on trust and is segregated from its own funds in accordance with the FCA’s client money rules so any creditors of Hargreaves Lansdown would have no legal right to it and it cannot use any of this money to cover Hargreaves Lansdown’s obligations.
Any stock you hold with the platform is held in the name of or to the order of Hargreaves Lansdown Nominees Limited, or by an approved third party custodian. Hargreaves Lansdown Nominees Limited is a non-trading company so it can’t run up liabilities of its own and it accepts full liability for any default by the nominee company. It adds that it maintains detailed records of all investments and assets so you remain the beneficial owner.
TD Direct Investing
Carl Howard, commercial director at TD Direct Investing says: “The protection of our customers’ money is very important to us and we make sure it’s clear to both new and existing customers what protection they have as we realise security is an important aspect of investing with a company like ours.
“It’s important to recognise there are different situations that could occur and therefore different protections that apply. If a customer holds shares in a company and those shares become worthless as a result of a company going bust, then this is not something that TD could compensate for.”