How does FSCS protection cover investments?

The risk of a broker or platform going bust – although relatively rare – is real.

According to the FSCS annual report in 2023/24, a total of 51 financial services firms declared in default, meaning they didn't have enough money to pay back what they owed their customers.

Reassuringly, though, there are a number of safety nets that have been put in place by regulators so that – even if the worst does happen – investors won't be left out of pocket.

The FSCS acts as the last resort if you are struggling to get your money back from a broker or investment platform which has gone bust, or if you received bad advice from a financial adviser.

But that doesn't mean all of your investments are covered.

Let's explore where, when and how you'll be protected – and importantly, when you won't.

CASS rules: keeping your money separate

First of all, financial firms regulated by the Financial Conduct Authority (FCA) must comply with a set of rules called the Client Assets Sourcebook, or CASS, as it's more widely known.

CASS makes sure that financial providers (such as investment brokers) keep the assets and funds of their clients separate from their own assets.

This is known as "ring-fencing".

Ring-fencing means that even if a financial firm is in dire straits and needs funds to survive or pay its bills, it can't – under any circumstances – touch clients' money.

This also prevents client assets from being used to pay back creditors if the firm goes into administration.

It's a bit like having two piggy banks on the kitchen shelf: one labelled "household bills" and the other covered in glitter, stickers, and a stern warning in felt tip saying "HANDS OFF" (courtesy of a resident six-year-old).

The two pots are totally separate, and even if the electricity gets cut off, mum and dad can’t raid the child's stash for a tenner.

While brokers don't use piggy banks, they do keep the assets of investors separate in a non-trading subsidiary called a nominee company.

These nominee companies have trust status which, again, means the broker can't touch those assets.

Likewise, client money – the cash deposited with a broker but not invested – must also be ring-fenced in trust accounts in regulated UK banks.

Financial firms also have to keep detailed records of client assets to ensure that they can distinguish client money held for one person from that of another, and carry out an "internal client money reconciliation" every business day – essentially checking that the money they hold on behalf of a client matches their records.

Capital adequacy: the financial cushion if a firm fails

Another protection in place for investors is that financial firms must hold enough money in reserve to cover the costs of administration when they wind down or become insolvent. This is known as the Capital Requirements Directive.

Providers must also regularly assess their business to make sure they have enough cash in reserve.

This is important because, although client money is ring-fenced from creditors during an administration process, administrators can access those funds to pay their fees if the failed company doesn't have enough to do so.

It's often the case that a failed broker is bought out of administration by a competitor. In these cases, a client's assets are transferred over to that new provider.

If a buyer isn't found, a Special Administrator from the Special Administration Regime should be appointed to take control of client assets and money, with the priority being to return these to clients or transfer them to other brokers.

So, in effect, your investments are your investments regardless of whether your broker goes bust.

While the rules look simple and effective, though, life isn't always so straightforward. That's where FSCS protection comes into play.

How can the FSCS help investors?

If the failed financial firm or broker doesn't have the funds to pay a client back the money it should have stored away safely for them, the FSCS steps in to ensure they get all or at least some of that cash back.

One of the main reasons this happens is because of fraud – essentially, taking that supposedly ring-fenced client money for its own use.

Or, it might be because of poor record-keeping, bad processes and administrative errors. A firm might not know how much cash individuals are owed, or who is the beneficial owner of which shares.

If a failed firm can't give a client their money or assets back because it's disappeared or lost, then the FSCS can step in to compensate clients with up to £85,000 in compensation, per firm.

So, if two financial firms go bust at the same time, then a client can make separate claims for up to £85,000 against each – £170,000 in total.

There have been calls for this limit to rise in line with inflation, given that it has remained flat since 2019, but to no effect to date.

The FSCS can also step in to cover administration fees and the transfer of client assets and money to a new broker or firm.

Bad or misleading advice

FSCS protection also applies if you've received bad advice from a financial adviser who has since gone bust. Again, this is up to the limit of £85,000, and the adviser must have been regulated by the FCA when the advice was given.

"Bad advice" might involve being encouraged to invest in assets not suited to your risk level, or being recommended financial products that don't match your timeframes. Incredibly, 78% of all FSCS claims involve some element of poor professional advice.

If an adviser is still in business, it's the Financial Ombudsman Service that's best placed to help – and the same rules surrounding FCA authorisation still apply.

What FSCS doesn't cover

Of course, as with everything in the financial world, there are a number of caveats involved to make a successful claim via the FSCS.

Firstly, the failed firm or broker and the products it offered must have been authorised and regulated by the UK's FCA, or the Prudential Regulation Authority.

If you're not sure about the status of a firm you've used, are using (or are thinking about using), then check out the small print on its website or use this handy tool on the FCA's website.

Crucially, you won't be eligible for a payout simply because an investment hasn't performed as well as you hoped or if a company within a fund or trust in your portfolio has gone bust and its share price has dwindled to zero.

That is just how the stock market works – it goes down as well as up. There is risk as well as reward. All is fair in love and war.

The FSCS also won't cover you if you're invested in assets such as cryptocurrency or mini-bonds. These assets aren't regulated, and therefore not eligible for protection.

There's no limit to the amount of firms investors can claim against, but they must be separate firms. For example, if you had £50,000 in cash sitting in five different broker accounts, but they all used the same bank as each other, and then that bank went bust, you would only be covered up to the total of £85,000.

Making a claim (and how long it takes)

To remove the guesswork of whether you're covered or not, the FSCS offers an Investment Protection Checker where you can get an answer in a couple of clicks.

All you need to do is select the type of investment you have from the dropdown menu provided, and confirm whether you were advised to purchase it or not.

Whenever a bank, building society or credit union goes under, the FSCS automatically makes payments within seven working days – with a cheque sent to the client's registered address.

Unfortunately though, more investigation is often required with investment claims, and you'll likely need to go through the FSCS online claims service.

Figures from the scheme say 80% of custom here end up getting a decision within 12 months, so a resolution may not be as swift as you'd like.

The Financial Services Compensation Scheme is a completely free service – meaning you'd keep 100% of any payout you receive. It's funded by the industry itself.

But as we said at the start of this guide, there are measures in place that will hopefully protect you before the FSCS even needs to step in.

Protecting yourself as an investor: practical steps to take

A few simple steps really can make all the difference between a safe nest egg and an expensive headache.

• Stick to regulated firms

Only use brokers, platforms, and advisers authorised by the FCA. Check the FCA Register if you’re not sure, and be wary – some shady companies have been known to set up "clone" businesses with similar names to an authorised one.

• Understand FSCS limits

Remember that FSCS compensation only covers up to £85,000 per firm, so you might choose not to keep more than that invested in one place.

• Be mindful of unregulated products

Investments in things like crypto, mini-bonds or peer-to-peer loans usually aren’t covered by the FSCS.

• Know what to do if a firm goes bust

If a bank, building society or credit union fails, the FSCS will automatically make a payment to you within seven working days. With investments, it can be more complex, and you'll likely need to follow the steps laid out by the FCA here.

Bottom line

Broker or platform failures are rare, but they do happen – and the fallout can be stressful. Thankfully, strong protections like CASS rules and capital reserve requirements mean your assets should be ring-fenced and secure, even if your provider runs into trouble. 

And if all else fails, the FSCS is the relief cavalry riding in when a battle seems lost, or mum coming round with a packet of biscuits when the cupboard is bare. Just remember: not every product is covered, so always check a firm’s regulatory status, be aware of FSCS limits, and steer clear of unregulated investments if you want the best chance of keeping your money safe.

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