What happens if you lose money after a financial services firm goes bankrupt? Can you get compensation?
Every month the Financial Services Compensation Scheme sends out a list of firms that have gone belly up with a reminder that it can provide compensation to people who've lost money following the collapse of a financial services firm.
Hundreds of firms are declared in default by the FSCS each year and I tend to skim through the lists in case any of them were big names that are worth writing about. (Independent Insurance was a classic example). But most of them seem to be small credit unions or one-man bands that offered financial advice on the High Street and, for various reasons, failed to deliver.
The scheme only applies if a firm is no longer trading, otherwise any complaints involving loss of money should be made to the Financial Ombudsman. Even more importantly, compensation can only be paid if the firm was originally authorised by the Financial Services Authority.
So if you had been advised to buy an inappropriate investment product, such as an endowment policy, or needed to make a claim on your home insurance policy only to discover that your insurance broker had gone bankrupt without setting up the policy, it's to the FSCS that you would turn to get your money back.
There are, however, limits to the amounts of compensation that can be paid so you may not get back everything you are owed.
If you lose any savings you have with a bank, a building society or a credit union, the maximum you can expect to get back is £31,700 per person (100% of the first £2,000 and 90% of the next £33,000).
The first £2,000 of an insurance claim or policy is covered in full, plus 90% of the balance. Compulsory insurance (e.g. car insurance) is covered in full.
For investments or mortgages that have gone wrong, the maximum pay-out is £48,000 per person (100% of £30,000 and 90% of the next £20,000).
The scheme is expecting to deal with around 28,000 new claims in this financial year and since the average value per claim is currently £24,600 they're not exactly dealing with small change. The important thing is to always check that a financial services firm is on the FSA's register of regulated companies before using them otherwise you won't get any compensation at all in the event of a problem.