Financial Services Compensation Scheme

To protect the public’s investments and savings the Policyholders Protection Act (PPA) was passed in 1975 and
this set up the Policyholders Protection Board (PPB) as a statutory board to administer a compensation scheme for compensating investors when their insurance or investment companies get into financial difficulty. The Act was extended in 1997 and has subsequently evolved to include the
Financial Services Compensation Scheme.

The scheme covers business conducted by FSA authorised firms and is funded by
levies, raised as necessary, from insurance or investment companies. In effect, if a firm becomes insolvent and cannot pay the claims of its policyholders the scheme acts as a compensatory fund of last resort.

As of 01 April 2008 a new funding system came into place to fund the compensation scheme and this determined how much each ‘class’ of business will pay into the levy,
the ‘classes’ have been split into the following categories:

• Deposits

• Life and Pensions

• General Insurance

• Home Finance

Each of these classes is then split according to whether the firm in question is a product provider or an intermediary as determined by their FSA permissions.

For an individual to qualify for compensation various criteria need to be met but once
these have been fulfilled the individual should be entitled to compensation, however it needs to be remembered that there are limits to the total value of the claims that can
be made:

• Investments - £48,000 per person (100% of the first £30,000 and 90% of the
next £20,000)

• Long Term Insurance (Pensions / Life Assurance) – 100% of the first £2,000
plus 90% of the remainder of the claim.

• Mortgage Advice and Arranging - £48,000 per person (for business conducted
after 31 October 2004) 100% of the first £30,000 and 90% of the next £20,000.

• General Insurance – 100% claim for compulsory insurance (e.g. 3rd party motor insurance), non-compulsory insurance (e.g. home insurance) 100% of the first £2,000
plus 90% of the remainder of the claim.

• General Insurance Advice and Arranging – (for business conducted on or after
14 January 2005) 100% of the first £2000 plus 90% of the remainder of the claim,
compulsory insurance is protected in full.

• Deposits - £50,000 per individual (£100,000 for a joint account) for claims against
firms declared in default from 07 October 2008 onwards.

The £50,000 guarantee is per investor per authorised account in the UK and so an individual can have more than £50,000 protected by ensuring that their savings are split between a number of differently authorised providers.

For example, Cahoot and Abbey are both owned by Banco Santander and so an investor would only be entitled to a total of £50,000 protection across both accounts, whereas holding two accounts with Lloyds and Abbey would entitle the investor to the full
£100,000 worth of protection.

Many British investors have accounts with foreign banks and recent problems with the likes of Ice Save and Kaupthing Edge have highlighted the dangers of holding savings in foreign institutions. The good news is that the majority of foreign banks who operate in
the UK are regulated by the FSA and so all savings with them are again covered by the £50,000 limit and this has been the case with onshore Kaupthing Edge accounts.

However, a number of banks such as Ice Save work under a ‘passport’ system, which
gives them European Economic Area (EEA) authority as opposed to FSA authority. The difference is that should the bank go bust the investor would still be entitled to up to £50,000 worth of compensation but would receive the money in two stages.

The first tranche would come from the bank’s home state’s compensation scheme and then the second tranche would be a top up by the FSCS up to the £50,000 limit. In theory this should ensure the safety of the investor’s money but in reality the two stage
payments could cause a significant delay in the individual getting their money back and unfortunately this is currently proving to be the case for UK investors attempting to get their money back from Ice Save.

The amounts protected by banks working under the ‘passport’ system varies from
country to country, but of particular note to many investors in the UK is that the Irish Government has guaranteed 100% of all investors’ savings, so anyone who holds money with the Post Office or the various Irish banks that operate in the UK should be safe.

Web Financial Services will be happy to review the status of your savings accounts to ensure that they are entitled to the maximum protection. This will involve checking both
the individual authorisation of each savings institution and where geographically the
funds are held. The location of the accounts is key as funds held offshore on the Isle of Man and the Channel Islands may not be entitled to the same protection as those held on the mainland (as has been proven by the Kaupthing Edge collapse) and so it is something we believe we should check carefully for each of our clients.

To discuss this, or any other matter, please call one of our advisers on:

T: 01483 205890