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, putting clients’ assets and money at risk.

However, there are a number of safety nets — such as the Financial Services Compensation Scheme (FSCS) — which have been put in place by regulators to ensure 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

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 is more widely known.

CASS ensures 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 side-by-side on a shelf, one is for mum and dad, the other is for their child. The two pots of funds are clearly separated and it would be wrong to use the child’s money to pay for household bills — in the case of brokers, dipping into the wrong piggy bank is illegal.

A broker is unlikely to actually keep investments in a piggy bank, so what they do is keep an investor’s assets, for example the shares they own, 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 must keep detailed records of client assets to ensure that they can distinguish client money held for one person from that of another. They must carry out what is known as 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

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 does not have the reserves to do so.

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

In the event that 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.

In theory, your investments are your investments regardless of whether your broker goes bust.

However, while the rules look simple and effective, life is not always so straightforward. That’s where FSCS protection comes into play.

How can the FSCS help an investor?

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

The main reason that a firm will not be able to re-pay a client’s funds is because of fraud — essentially taking that supposedly ring-fenced client money for its own use.

Or, it can 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 cover administration fees and the transfer of client assets and money to a new firm.

Bad or misleading advice

The FSCS can also cover a client if they have received bad advice from a financial adviser which has gone bust. Again, this is up to the limit of £85,000 and the adviser must have been regulated by the FCA when it gave the advice.

There are other avenues that are definitely worth exploring if a client believes they have been given negligent investment advice — but the company responsible is still in operation.

An example of bad advice could be where a client’s assets have been put into a high-risk equity fund when the client’s risk profile was more suited to a lower risk approach.

In such a scenario, it’s actually the Financial Ombudsman Service they will want to get in touch with. The same rules surrounding FCA authorisation still apply.

If the ombudsman finds in the client’s favour, the firm they were wronged by could be ordered to shell out up to £150,000 plus interest.

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 and the products it offered must have been authorised and regulated by the UK’s FCA, or the Prudential Regulation Authority.

If you are unsure about the status of a firm you have 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.

The FSCS will also not cover you if you are invested in assets such as cryptocurrency or mini-bonds. These assets are not regulated and are therefore not eligible for protection.

There is 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 sat 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 eliminate the guesswork surrounding 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.

If you are seeking more information with extra caution, it’s a good idea to go to your investment firm directly to ask whether their activities are regulated, and what protection would be offered by the FSCS if the worst was to happen.

This might not be a fast or straightforward process.

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.

Figures from the scheme say 80% of customers here end up getting a decision within 12 months, so a resolution may not be swift.

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.

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.

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