The Financial Services Compensation Scheme (FSCS) Deposit Protection Q&A 1
WHAT IS THE DEPOSIT PROTECTION AND COMPENSATION SCHEME The deposit protection and compensation scheme is designed to compensate consumers if a an authorised firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default. For branches of foreign banks whose head office is located in a country of the European Economic Area (EEA), the compensation scheme of the country of origin applies. However, since 1 January 2011, the same compensation limit applies throughout Europe. WHAT IS THE FSCS? The FSCS is the UK's compensation fund of last resort for customers of authorised financial services firms. IMPARTIAL AND INDEPENDENT The FSCS is independent of the government and the financial industry, and was set up under the Financial Services and Markets Act 2000, becoming operational on 1 December 2001 (although claims prior to this date are still covered). The FSCS does not charge individual consumers for using its service. WHAT DOES THE FSCS COVER? The FSCS covers business conducted by firms authorised by the Financial Services Authority (FSA), the independent watchdog set up by government to regulate financial services in the UK and protect the rights of consumers. European firms (authorised by their home state regulator) that operate in the UK may also be covered. 2
The FSCS protects: deposits, insurance policies, insurance broking (for business on or after 14 January 2005), including connected travel insurance where the policy is sold alongside a holiday or other related travel (e.g. by travel firms and holiday providers) (for business on or after 1 January 2009); investment business, and home finance (for business on or after 31 October 2004). WHO IS ELIGIBLE TO BENEFIT FROM THE PROTECTION OF THE FSCS? Only an eligible claimant may benefit from the protection of his or her deposits. Eligible claimant An eligible claimant is either: an individual person, or a small business that is a partnership, a body corporate, unincorporated association or mutual association with an annual turnover of less than 1 million (or its equivalent in any other currency at the relevant time). Definition of a deposit A deposit is defined as any credit balance which results from funds left in an account or from temporary situations deriving from normal banking transactions and which a credit institution must repay under the legal and contractual conditions applicable, and any debt evidenced by a certificate issued by a credit institution. Protected or eligible deposits Deposits made by private individuals and small businesses to any authorised firms are protected by the FSCS and may be referred to as retail deposits. 3
A deposit is a protected deposit only if it was made with: a relevant establishment in the UK a branch of a UK firm which is a credit institution established in another European Economic Area (EEA) State under an EEA right. A deposit is not a protected deposit if it is: a bond issued by a credit institution which is part of the institution s capital a secured deposit a deferred share issued by a credit union a deferred share issued by a building society a non-nominative deposit made without disclosing the depositor s identity. The following is a non-exhaustive list of protected deposits provided by the FSCS for indicative purposes only: Current accounts Savings accounts Deposit accounts Fixed term deposit accounts Notice accounts Cash ISAs TESSA roll over accounts (TOISAs) Child Trust funds (deposits) THERE ARE LIMITS TO THE PROTECTION AVAILABLE As a fund of last resort there are limits to what the FSCS can do, and to the amounts of compensation the Scheme can pay. FSCS rules set out the protection the FSCS can provide. These form part of the FSA Handbook of rules and guidance, and can be found under Redress, Compensation. The FSCS does not cover the Channel Islands or The Isle of Man. 4
COMPENSATION LIMITS The actual level of compensation an individual receives will depend on the basis of his or her claim. The FSCS only pays compensation for financial loss. Compensation limits are per person per firm, and per claim category. Slightly different limits and rules apply if an individual has a claim against an insurer or a bank that was insolvent before the FSCS became operational (1 December 2001), or if the claim is against an investment firm that was declared in default before the FSCS became operational. The maximum levels of compensation for deposits is 85,000 (100% of 85,000) per person per firm (for claims against firms declared in default from 31 December 2010). Product limits The maximum levels of compensation for each person, per authorised firm are: Final Product Compensation limit How it works Deposits 85,000 The deposit compensation limit was increased from 50,000 to 85,000, from 31 December 2010. Investments 50,000 This applies to investments placed in firms declared in default from 1 January 2010. Home finance 50,000 This applies to home finance firms (such as mortgage advice or arranging) declared in default from 1 January 2010. Insurance 90% of the claim with no upper limit This limit is for insurance business, and general insurance advice and arranging. Compulsory insurance is protected in full. 5
Q&A ABOUT DEPOSITS 1. What happens if I am a member of a credit union that fails? 2. How long will it take to process my claim? 3. If I have more than 85,000 in an account, does that mean I will lose money? 4. What is the position for people who have multiple accounts with banks that are subsidiaries of another bank? 5. I have my money in a joint account in a High Street bank. How would FSCS pay compensation if the bank failed? 6. What happens if I owe money to a bank, building society or credit union that fails? 7. Will you compensate me for any interest I have earned on my account? 8. Are offshore deposits covered? 9. Does the Scheme cover deposits made in different currencies? 10. Are deposits held by nominee companies covered? 11. Do you cover deposits made through solicitors and other professionals? 12. Is a business covered if the bank or building society it holds money with fails? 1. What happens if I am a member of a credit union that fails? If the credit union is authorised by the FSA, your savings are protected by the FSCS, and you may be eligible for compensation. The FSCS will not ask members to complete and return an application form to claim compensation. The account information received from the credit union or its administrator will form the basis of an individual's claim. 2. How long will it take to process my claim? The length of time a claim takes to process will depend upon a number of factors, like the type and complexity of a claim, and the level of information we need to gather from other sources. Some of these factors may be entirely outside the control of the FSCS, but general guidelines are provided for each claim type. However, the FSCS aims to pay compensation in the vast majority of cases within seven days of the failure of the company. It also aims to pay the remaining claims, which are likely to be more complex, within 20 working days. 6
3. If I have more than 85,000 in an account, does that mean I will lose money? A depositor whose total deposits with a failed bank exceed the compensation limit will receive compensation for the amount of his or her deposit up to the limit of 85,000. The liquidation process can take a long time to complete. Depositors will have to wait until the liquidator has completed the process to find out how much more they might receive in total. 4. What is the position for people who have multiple accounts with banks that are subsidiaries of another bank? For people who hold multiple accounts in banks that are part of a larger group, if each of the banks is separately authorised by the Financial Services Authority: FSCS would pay compensation up to the limit of 85,000 per person, per authorised institution. If each of the banks is not separately authorised but is covered by the parent company's authorisation: FSCS would pay compensation up to the limit of 85,000 once, irrespective of how many different institutions a person held accounts with. If you have a question about how a bank or building society is authorised, please contact the Financial Services Authority Consumer Contact Centre on 0845 606 1234. 5. I have my money in a joint account in a High Street bank. How would FSCS pay compensation if the bank failed? The compensation limit of 85,000 applies to each depositor for the total of their deposits with an organisation, regardless of how many accounts they hold or whether they are a single or joint account holder. In the case of a joint account, FSCS will assume that the 7
money in that account is split equally between account holders, unless evidence shows otherwise. This applies even if you have recently split up with your partner. This means that each account holder in a joint account would be eligible for compensation up to the maximum limit. 6. What happens if I owe money to a bank, building society or credit union that fails? In the event that your bank, building society or credit union fails, you are obliged to continue making repayments in accordance with the terms and conditions of your mortgage, loan, etc. Further information about how to make repayments will be available from the administrator of your bank / building society / credit union. The FSCS will only consider accounts that have a credit balance for compensation. 7. Will the FSCS compensate me for any interest I have earned on my account? Interest owed to the depositor as at the date the bank is declared in default by the FSCS will be paid as part of the compensation amount. 8. Are offshore deposits covered? The FSCS does not cover deposits outside the European Economic Area (EEA), or in the Channel Islands or Isle of Man. 9. Does the Scheme cover deposits made in different currencies? Yes. Compensation payments will be made in the relevant currency. 10. Are deposits held by nominee companies covered? The FSCS covers deposits held in client accounts, for example by solicitors, and may cover deposits held by nominee companies. The FSCS does not protect non-nominative deposits. 11. Does the FSCS cover deposits made through solicitors and other professionals? 8
The FSCS generally covers client account arrangements (such as pooled accounts), which may be set up by solicitors, stockbrokers, landlords or other professionals, provided the deposit-taker (e.g. bank or building society) is authorised to accept deposits, which would normally be the case. The identities of the underlying clients and details of their respective entitlements to the deposit monies can be provided to the FSCS at the time a claim is made. The Law Society has its own compensation scheme for its members' investment business, that only applies in the case of dishonesty of a solicitor. In those circumstances claims against solicitors in England and Wales should be referred to it. Claims against solicitors in Scotland should be referred to The Law Society of Scotland. However, if the solicitor is holding your money in a client account with an authorised deposit-taker that fails, then your claim is against the deposit-taker and you should ask us to deal with it. The Law Society provides further guidance on this. Claims against some other professionals can be made to FSCS, but only if the claim arises on or after 1 December 2001. If your claim is for activities before this date, look at the FSCS Claiming compensation booklet for details of the organisations to contact. Further guidance for landlords, managing agents, resident management companies and others charged with the collection of service charge monies. 12. Is a business covered if the bank or building society it holds money with fails? FSCS was set up mainly to assist private individuals, although some smaller businesses are also covered. Larger businesses are generally excluded, although there are some exceptions to this (for example for claims in respect of certain compulsory insurances). FSCS rules tell us which claims are eligible and form part of the FSA's Handbook of rules and guidance, under Redress, Compensation. As an indicative guide only, for the purposes of deposit and investment claims, smaller companies are protected. A smaller company must meet two of the following criteria (as set 9
out in section 247 of the Companies Act 1985 or section 382 of the Companies Act 2006 as applicable): Turnover: not more than 6.5 million Balance sheet total: not more than 3.26 million Total number of employees: not more than 50 For claims made under an insurance contract, small businesses are protected. A small business under the COMP rules is one that has an annual turnover of less than 1m. The same levels of compensation apply whether the claimant is a private individual, small business, or a small company. Making a claim under the scheme The way to claim compensation varies, depending on what you are claiming for. Generally, the FSCS will contact you once a provider is declared in default. You will receive an application form for compensation to send back without delay. If you want to make a claim but have not been contacted by the FSCS, you can either visit the FSCS website or contact their customer services team. In most cases, you will need to fill in an application form that is specific to your claim. The FSCS may ask you to complete an Initial Enquiry Form first which will help them determine whether they need to send you an application form. The FSCS aims to process claims within 6 months of a firm going into default but it will seek to pay compensation in the vast majority of cases within seven days of a deposit-taker failing. More complex claims are likely to be paid out within twenty working days. FURTHER INFORMATION The rules covering the Scheme are very detailed and this leaflet summarises the main provisions of the Financial Services Compensation Scheme s deposit protection programme. If you have any queries about the Scheme they may be addressed to: 10
Financial Services Compensation Scheme 5th Floor, Lloyds Chambers 1 Portsoken Street London E1 8BN Tel: 0207 892 7300 Fax: 0207 892 7301/7337 Email: enquiries@fscs.org.uk Further information about the operation of the Scheme is available on the FSCS website: http://www.fscs.org.uk/ 11