Can you explain the Financial Services Compensation Scheme’s (FSCS) protection limit in relation to fund platforms? I am a little confused. I believe the limit on a unit trust or OEIC (open-ended investment company) with one company – for example, Fidelity – is £50,000. But if I hold £50,000 with Fidelity, £50,000 with Liontrust and £50,000 with Threadneedle inside a Hargreaves Lansdown Vantage account and Hargreaves Lansdown goes bust, would I still get full compensation from each investment house? Or would I just get £50,000 from Hargreaves Lansdown?
The FSCS is the UK’s compensation scheme for customers of authorised financial services firms. It pays compensation if the firm is unable, or likely to be unable, to pay claims against it. This is usually because the firm has failed and has stopped trading.
The amount of compensation it pays depends upon the type of claim which is made. For example, cash deposits are covered up to £85,000 per person whereas, as you point out, investment funds are covered up to £50,000 per person. However, the compensation limit for investment companies will be increasing to £85,000 from April 2019.
Platforms, such as the Hargreaves Lansdown Vantage platform, are treated as investment companies and so the FSCS compensation limit is £50,000 per person. However, Hargreaves Lansdown isn’t able to access the money you hold in investment funds on its platform, such as that with Fidelity, Liontrust and Threadneedle, so even if Hargreaves Lansdown goes bust, your money in funds is ring-fenced.
Provided your underlying funds are authorised by the Financial Conduct Authority (FCA), the industry regulator, they should each be protected for up to £50,000 per person per provider.
It’s also worth noting that your investments will also be ring-fenced from your fund manager, so should be secure even if your fund manager were to go bust.
You are not, however. protected from general investment risk – for example, if the underlying stocks in your fund go bust or perform poorly.
The FSCS in action
Savers in Swansea experienced the Financial Services Compensation Scheme in action when My Community Bank Wales, a local credit union also known as Loans and Savings Abertawe, collapsed at the end of August.
Using the firm’s records, the FSCS immediately started returning money to savers, paying out close to £500,000 to more than 3,000 customers.
The process was automatic with customers who held up to £1,000 in their account receiving a letter allowing them to withdraw their cash from their local post office. Anyone who had more than £1,000 in their account received a cheque in the post from the FSCS for their balance.
“FSCS is here to protect members of Loans and Savings Abertawe,” says Alex Kuczynski, director of corporate affairs at the FSCS. “You should get your money back within seven days. The process is automatic too, so you won’t have to apply for compensation.”
The FSCS protects deposits with banks, building societies and credit unions that are regulated by the Financial Conduct Authority in the event that the business goes bust. Individual savings are protected up to £85,000 per institution, with joint accounts covered for £170,000. Investments are protected up to a value of £50,000 per provider.