The Financial Services Compensation Scheme (FSCS) is a crucial safety net for consumers in the UK’s financial services sector. Established to protect customers when firms fail, the FSCS ensures that individuals do not lose their savings or investments
The
Financial Services Compensation Scheme (FSCS) acts as a safeguard for UK financial service sector consumers. Established under the Financial Services and Markets Act (2000), its purpose is to protect against the failure of financial firms. This aims to prevent individuals from financial losses caused by the insolvency of banks, building societies, investment firms and insurance companies.
What is the FSCS process?
The process begins when a financial firm is declared in default by regulatory authorities such as the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA). This declaration indicates that the firm cannot meet its financial obligations. Affected customers can submit their claims to the FSCS. Claims can be made online through the FSCS website or by mail. The FSCS provides guidance and support to help customers understand the claims process.
Once a claim is received, the FSCS assesses its validity. This involves verifying the claimant’s details, the type of financial product involved, and the amount of money lost. The assessment process ensures that only eligible claims are compensated. If the claim is deemed valid, the FSCS calculates the compensation amount based on the coverage limits for the specific type of financial product.
The FSCS is funded by levies on authorised financial services firms. These levies are collected annually and are based on the type and size of the firm, ensuring that the cost of compensation is shared across the industry rather than borne by taxpayers.
The role of the Financial Ombudsman Service
The
Financial Ombudsman Service (FOS) is an independent body set up to resolve disputes between consumers and financial services firms. It deals with complaints about a wide range of financial products and services, including banking,
insurance, investments, and pensions.
The FOS deals with complaints while firms are still operational. Its primary role is to ensure fair treatment of consumers by resolving disputes and ensuring firms adhere to good practices. The FSCS steps in when a firm fails. It protects consumers from financial loss by providing compensation when a firm cannot fulfil its obligations.
Together, the FOS and FSCS provide continual consumer protection. The FOS helps resolve issues and improve practices within operating firms, reducing the likelihood of firm failures. The FSCS provides a safety net, ensuring that consumers are not left out of pocket if a firm does fail.
The role of the FCA
The Financial Conduct Authority (FCA) and the Financial Services Compensation Scheme (FSCS) have a closely intertwined relationship, both playing critical roles in maintaining the integrity and stability of the UK's financial services sector. The FCA is the regulatory body responsible for overseeing and regulating financial markets and firms in the UK. Its primary objectives are to protect consumers, ensure the integrity of financial markets, and promote competition.
The FSCS operates within the regulatory framework established by the FCA. The FCA sets the rules and guidelines that the FSCS follows in assessing and compensating claims. This ensures that the FSCS operates fairly and effectively. The FCA is responsible for authorizing and supervising financial firms. When the FCA identifies that a firm is in financial trouble and likely to fail, it can declare the firm in default, which triggers the FSCS to step in and provide compensation to affected consumers.
The FCA and FSCS work closely together to ensure a coordinated response to firm failures. This includes sharing information, resources, and expertise to handle claims efficiently and support consumers effectively. Both the FCA and the FSCS share the common goal of protecting consumers. The FCA's role in regulating firms helps prevent failures, while the FSCS provides a safety net when failures do occur, ensuring consumers do not suffer undue financial harm.
The FSCS in insurance
Policies like motor insurance,
employers’ liability insurance, and third-party motor insurance are covered at 100% of the claim. This ensures that mandatory insurances required by law are fully protected. Other types of insurance, such as
professional indemnity,
public liability, and
product liability insurance, are typically covered up to 90% of the claim.
The FSCS is funded by levies on authorized insurance firms. These levies are collected annually and are proportionate to the size and risk profile of the firms, ensuring a fair distribution of costs across the industry. This funding mechanism enables the FSCS to have the necessary resources to compensate policyholders promptly and effectively.
About the author
Ryan Nevin is an Account Broker at Get Indemnity™ - he is an ambitious professional who is currently studying towards being a Chartered Insurance Broker.
