If a savings provider isn't regulated by the FSA you won't benefit from certain protection - so should you ever take the risk of saving with them? We take a look.
The FSCS (Financial Services Compensation Scheme) is a fund set up by the FSA (Financial Services Authority) with the intention of compensating savers should their bank or building society collapse. After the spate of collapsing financial institutions at the start of the recession in 2008, this fund was increased in size to offer even more protection to customers.
How does the FSA protect my savings?
Under the rules of this Scheme, any money saved with an FSA-regulated institution up to a limit of £50,000 is protected (£100,000 for joint accounts). This means that if the institution were to collapse, your savings would not be lost – they would in fact be returned to you by the FSCS.
It is worth mentioning however that the FSCS covers £50,000 per person, per FSA-regulated institution, not per person, per account. This means that it will pay out up to £50,000 of your savings to you on the basis of the institutions you hold accounts with, and not on the basis of every account you hold.
As a result, if you hold 2 accounts holding £50,000 each with 2 banks who are registered under the same institution with the FSA (for example HSBC and First Direct are part of the same institution), the FSCS will only cover the first £50,000 you have saved. See our guide to find out which institutions are separately registered by the FSA.
Saving with an FSA approved company will also give you other benefits that you won’t have if you save with a provider who isn’t overseen by the FSA.
The FSA set standards for how financial firms should operate in terms of their advertising not being misleading and their customer service being helpful and reasonable. If a firm authorised by the FSA doesn’t live up to these standards they can be fined.
You also have the option of complaining to the Financial Ombudsman when things go wrong with an FSA-regulated company, while if you experience a problem with a provider who isn’t FSA-regulated, you’re on your own.
The result is that saving with an FSA-regulated provider can give you invaluable peace of mind that your money is being kept in a safe place.
What’s the problem?
Many savings providers in the UK are authorised by the FSA, and therefore money held with them up to £50,000 per institution is covered by the FSCS. However there are also companies that offer savings accounts and bonds that aren’t authorised by the FSA, but that offer very attractive returns in terms of the interest they'll pay on your investment.
As such you may be faced with a dilemma whereby you want to maximise the return on your money but aren’t sure if you should run the risk of saving with a provider that promises no compensation in the event of a collapse.
What should I do about it?
If you find a savings provider who offers an account you are interested in and that promises a decent return on your money, you can check if you’ll be covered by the FSCS by searching for the provider on the FSA register. It is worth noting that the vast majority of major UK banks and building societies are FSA-regulated.
As the FSCS is an independent fund overseen by the FSA, if a provider is registered here you can be sure you will be compensated for up to £50,000 saved with that institution if it does collapse. You can also call the FSA Consumer Helpline on 0845 606 1234 to check a provider’s FSA status.
In the event that you find that a provider is not regulated by the FSA there’s nothing to stop you saving your money with them. However, you should be aware of the potential risks involved in handing over your money for safe keeping to a provider that isn’t FSCS-backed and FSA authorised.
Saving up to £50,000 in a financial institution that is backed by the FSCS will mean that money will be returned to you if the institution suffers a similar fate to Northern Rock or Icesave and goes out of business. Saving with an FSCS-backed provider will also mean certain FSA standards are upheld, and you’ll have the option of complaining to the Financial Ombudsman if things go wrong.
However, saving with an institution that isn’t backed by the FSCS means that you won’t be compensated for a penny of your saved money if that institution went under; you wouldn’t be able to claim back any of the money you had saved.
Of course you’re free to save your money with whichever provider you choose, but if you find they aren’t FSA-regulated, just make sure you know the risks before you save unawares.
