Safety and security are fundamental aspects of life, whether it’s protecting our homes from intruders or protecting ourselves. The inherent need for protection permeates various facets of our existence and extends to our personal finances, where having a reliable safety net becomes paramount.
Within the intricate landscape of savings and investments, concerns about the security of hard-earned money take centre stage. Conventional bank and savings accounts enjoy protection via the Financial Services Compensation Scheme (FSCS), but investments held within Individual Savings Accounts (Isa) and pensions are subject to different regulations and protections.
What is the FSCS?
The Financial Services Compensation Scheme (FSCS) is a financial safety net funded by a levy on financial services firms such as banks, insurance companies and finance advisers. It compensates account holders if a company, such as a bank or building society, collapses taking deposits with it. It exists because banks use your savings to lend to other customers, so if a bank runs out of cash, the FSCS compensates customers.
The schene differentiates between protection for 'cash deposits' and the protection extended to 'investments’.' 'Cash deposits' are what is held in current accounts, savings accounts, and cash Isas. If a firm fails, the FSCS provides compensation of up to £85,000.
Those with stocks and shares Isas and pensions may be eligible for protection up to £85,000 if their provider is authorised by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA). However, investors must verify whether their Isa provider falls under the purview of the FSCS.
It's important to note that the FSCS does not cover losses incurred due to market fluctuations. Also, any money that is invested in shares, funds and bonds will be protected if a provider fails, as they do not hold the money themselves as it held wherever the investment is made.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, emphasises the importance of diligent research when selecting a provider: "As well as looking at the range of savings and investment options on offer when choosing a provider for your pension and Isa, it’s hugely important that you check they are trusted, financially sound, and covered by the FSCS in the unlikely event that they were to run into difficulties. The FSCS provides important protections for your hard-earned savings and will offer you extra peace of mind as you continue to build your financial health and wealth."
What happens if your provider goes bust?
Vanguard
Vanguard clients are covered by the FSCS if they hold cash within the Vanguard General Account, Vanguard Isa, and Vanguard Pension. Therefore, if Vanguard Asset Management faces financial difficulties, investments and cash held in these accounts would be covered up to the applicable FSCS limit.
The firm said: “Vanguard adheres to the Financial Conduct Authority's (FCA) regulations to hold client money and assets, ensuring that clients' investments remain separate from Vanguard's assets. Moreover, clients benefit from FSCS coverage, which provides compensation if Vanguard cannot fulfil its financial obligations to them.”
Interactive Investor
Investment platform customers' assets are held with 'trust status,' ensuring that clients' investments are protected from the firm's creditors in the event of insolvency.
Additionally, any cash held in client accounts is treated as 'client money' per the FCA's definition, providing trust status and protection. Interactive Investor maintains rigorous procedures and daily reconciliations to allocate assets and funds to individual customers properly. Due diligence is carried out on banks where client money is deposited, and only institutions covered by the FSCS deposit protection scheme are chosen.
