That’s why we pay for peace of mind by buying insurance, making sure the costly essentials are covered should the worst happen.
When it comes to our savings and investments, the sums at stake – and the panic that any losses can induce – can be far greater.
So, there was good news this week, when the insurance policy that covers your savings received a big boost. The Financial Services Compensation Scheme (FSCS) is the safety net that protects savers should their bank, building society or credit union go bust, meaning that they can recoup a large chunk of their money if their financial provider collapses.
The maximum you can claim in such an event was increased by £10,000 to restore it to £85,000, to bring it in line with the 100,000 euro limit that applies across the European Union following the fall in the pound after last June’s referendum.
The FSCS limit for savings and bank deposits is relatively straightforward to get your head around. You get £85,000 of cover per person, per financial institution, provided that the company you save with has been authorised by the Financial Conduct Authority. If you’ve got a joint account, that protection doubles to £170,000.
When you try to understand how the FSCS works for investments, however, you’re more likely have your mind frazzled rather than get peace of mind. Which? research recently found that only a third of people realise that their investments may be covered by the financial compensation scheme.
That’s not surprising - the protections in place for investors are fiendishly complex.
There is an underlying principle to FSCS cover for investors, in that it doesn’t cover poor performance. It doesn’t bail you out if you lose money on the markets – that’s the risk you take as an investor in the pursuit of a better return. But there are similarities with the deposit element of the protection. If a company you’ve invested with goes bust and your investment is lost with it, you could claim up to £50,000 in compensation – provided that the firm was authorised by the regulator (meaning it was given the rubber-stamp to provide financial products).
The need for this rubber-stamp is important to remember, because if you’re sold an investment product by a rogue adviser who isn’t regulated or authorised, you’re completely out of luck when it comes to getting your money back.
In practice, you’re most likely to call upon the FSCS when there has been a fraud, rather than an investment provider such as your fund manager simply going bust. That’s because investor money is ring-fenced and held by a third party. The same goes for platforms and fund supermarkets – the websites commonly used by DIY investors – which use nominee accounts to hold your investments that can’t be claimed by creditors should your platform collapse.
But when you’ve received financial advice, things get much murkier – whether or not you qualify for any kind of potential compensation depends on who you’ve taken advice from, what you’ve invested in, and whether or not the adviser is still trading. And the onus is on the consumer to know the distinction between authorised and unauthorised advice and regulated and unregulated products to understand how they’re covered.
If you’ve received negligent advice from an authorised adviser which is still trading, you can complain to the Financial Ombudsman Service (FOS), the service that settles disputes between consumers and financial firms. It won’t judge your complaint on the investment you’ve been sold, but more on whether the advice you were given was appropriate. It can force firms to compensate you for up to £150,000.
If the adviser who sold you a product has gone out of business, however, the FSCS kicks in, and the maximum compensation you could get falls to £50,000.
But, if that adviser flogged you unauthorised investments – such as stamps, wine or property – you get no cover.
There is a caveat to this. If your now-defunct authorised adviser sold you an unauthorised product in a self-invested personal pension, or Sipp, you might qualify for protection, because advice on Sipps falls into the scope of the FSCS. And there’s another – if your authorised adviser sold you something called an unregulated collective investment (or a UCIS), which pools your money in with other investors to buy non-mainstream, risky and often non-traditional investments - you could also be covered by the FSCS.
Still with me? Unless you’re able to distinguish the who, what and where of regulated and unregulated advice and products before you decide to invest, you could be left high and dry if things turn sour.
I saw the inconsistencies of this brought to life recently. A retired couple were recommended high-risk debt investments by an authorised adviser, and were initially compensated to the tune of more than £46,000 when both the investment firm and adviser ceased trading. But the couple were later forced to return the money because the products they were sold – loan notes – did not fall into the scope of the compensation scheme.
They even had to stomach the fact that some other investors in the very same product were awarded compensation, because they were held in a Sipp.
The FSCS is a vital last resort for investors, designed to protect them should the worst occur. And last year, it paid £271 million in response to more than 45,000 claims made against failed financial firms. But consumers shouldn’t have to navigate through a complex web to understand the thing that’s supposed to give them the confidence to invest. There’s much more the regulators, financial firms and the FSCS can do to better inform consumers when they are and aren’t protected.
In the meantime, my advice is to make 100 per cent sure that the financial firms you deal with are legitimate and approved. Search the FCA Register at register.fca.org.uk to check.
Neil Gordon-Henderson is head of media content at Which?