When it comes to choosing a financial service provider, it’s important to know that your money is safe in case the service provider goes out of business.

If you have money saved in a bank, building society, friendly society or credit union, you want to remain confident that your money is protected if those financial institutions can’t meet their obligations.

Luckily, the UK financial industry is overseen by the FSCS, an independent body that provides compensation to UK consumers in the event a financial institution fails.

In this article, we will be explaining:

• What Is The FSCS?

• Who Oversees The FSCS?

• What Is Protected By The FSCS?

• Is There A Limit To How Much Money Is Protected?

• What Counts As A ‘Financial Institution’?

What Is The FSCS?

FSCS stands for the Financial Services Compensation Scheme.

The FSCS is an independent organisation that the government set up to protect UK savers when financial institutions fail.

It was created in 2001 under the Financial Services and Markets Act 2000 (FSMA)  to pay compensation to customers if their financial firms go out of business.

Who Oversees The FSCS?

The FSCS is an independent organisation with its own board of directors.

However, the FSCS is overseen by two financial bodies: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The PRA is part of the Bank of England, which oversees and regulates how financial businesses in the UK conduct their affairs. They work alongside the FCA, an independent body, to ensure that financial institutions operate fairly and sustainably. 

What Is Protected By The FSCS?

Although the FSCS is designed to help protect consumers in the event of a financial institution's failure, not all types of savings or investments are protected.

For example, the FSCS can protect:

• Current Accounts

• Savings Accounts

• Cash ISAs

• Cash Savings Stored In A Self-Invested Pension Plan

• Insurance Products

• Long-term Insurance Products

However, the FSCS does not cover losses from investments, savings schemes (such as Christmas Hamper saving schemes), Gift Cards, or money held in cash accounts, such as PayPal.

Is There A Limit To How Much Money Is Protected?

For an individual saver, the FSCS can provide compensation up to £120,000.

For a joint account that is used by two people, both people’s protection is applied, meaning that up to £240,000 can be protected if an institution fails.

However, this limit is the sum of all holdings held by both parties at the institution. If a husband and wife both had individual accounts and a joint account at a single institution, and that institution were to fail, the first £240,000 of savings would be covered for both the husband and the wife. Any savings that either partner has at that institution over £240,000 would not be protected.

However, there is an exception to this rule. Savings products that are structured as long-term contracts of insurance, like all of the financial products offered by Sheffield Mutual, are covered for 100% of their value with no upper limit.

What Counts As A ‘Financial Institution’?

When it comes to the protection offered by the FSCS, there is an important distinction between a bank and a ‘financial institution’. Some banks are part of larger financial businesses, meaning that, for FSCS protection, two or more banks may be considered part of one ‘institution’.

For example, Halifax and Bank of Scotland are ‘sister banks’, both of which are owned by Lloyds Banking Group. As a result, both banks share a single banking license, meaning the FSCS limit of £120,000 applies to both. If you had £80,000 saved in the Bank of Scotland and £80,000 saved in Halifax, only the first £120,000 would be covered, and the additional £40,000 may not be compensated.

This is contrasted with, for example, RBS and Natwest. Although Natwest Group owns both banks, each has its own banking license, which means that you could save £120,000 in RBS and £120,000 in Natwest and the full amount would be covered. However, Ulster Bank, which is also part of the Natwest Group, shares Natwest’s license and would not benefit from the additional protection.

Are There Any Steps I Can Take To Protect My Savings?

Although the FSCS protects people’s savings, the £120,000 limit means that a portion of some people’s savings may still be vulnerable if a financial institution fails.

If you have over £120,000 in cash savings, it may be worthwhile to consider saving any excess with a different financial institution. This could help mitigate the impact on your finances if one institution fails, as there is no guarantee that any losses above £120,000 can be compensated.

However, the FSCS doesn’t just protect cash deposits; it also covers a range of financial products, including general insurance, pensions, and mortgages. The level of protection available depends on the type of product involved.

For example, if a firm provides a savings or investment product that is structured as a long-term contract of insurance, such as those offered by Sheffield Mutual, the long-term insurance protection limit would apply. In this case, the FSCS covers 100% of the amount due under the policy.

Because of the distinction between cash savings and other types of savings products, it is important to review all financial product information carefully, so that you understand what is or isn’t protected.

Discover Savings Options With Sheffield Mutual

Our range of products, including the Single Premium Investment ISA, Regular Premium Investment ISA, and Tax Exempt Savings Plan, provides our members with options for building their savings.

If you are interested in becoming a member of Sheffield Mutual, please contact us, and a member of our friendly, helpful team will be happy to answer any questions you may have. Alternatively, if you are interested in our products but aren’t sure which is right for you, try our helpful product selector and find out how Sheffield Mutual can help you achieve your savings goals.

This article provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.