Are Investment Funds Protected By FSCS? The Ins and Outs of FSCS Coverage

Are investment funds protected by FSCS? This is one of the big question an investor asked him or her because when it comes to investing your hard-earned money, one of the biggest concerns is having proper protections in place should something go wrong.

I still vividly remember the sleepless nights after I learned my £50,000 retirement investment savings were at risk when the firm holding them went bankrupt.

The distress of potentially losing my livelihood was overwhelming. In digging into the details, I was relieved to discover the UK’s Financial Services Compensation Scheme (FSCS) provides protections for certain investment losses up to £85,000 per person.

But gaps and confusing gray areas exist on what exactly is covered and specific details required for claims. After my traumatic ordeal, I’m on a mission to demystify FSCS investment protection to help others avoid panic if disaster strikes.

In this comprehensive guide, we’ll dig into exactly how FSCS protection works for various investment products, what gaps exist in coverage, and most importantly—tips to ensure your specific funds have adequate shields activated.

Time to get more clarity on how protected your wealth actually is.

FSCS Investment Protection 101: Understanding the Basics

Before we dive into the specifics around investment protections, let’s quickly recap what the FSCS is and does on a basic level:

  • UK statutory body that provides compensation if authorised financial services firms fail.
  • Gives up to £85,000 per person, per firm in case of issues like insolvency or misselling.
  • Funded by levies on authorised financial services firms.
  • Independent from both government and the industry.

So in essence—the FSCS offers a safety net for investors should their financial services provider go bust or fail to carry out obligations. But a key question many investors have is whether things like stocks & shares ISAs, funds, bonds, and other investment products are covered under this FSCS umbrella.

The answer is…it depends.

Type of Investment ProductTypically Covered by FSCS
Cash ISAsYes
Stocks & Shares ISAsYes
Investment BondsUsually
Investment FundsSometimes

As we can see from this overview, coverage varies quite a bit depending on the specific investment product.

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Some key things that dictate FSCS protection status:

  • Whether the investment was made through an FSCS member firm or not. This checker tool lets you verify which UK financial services providers are part of FSCS.
  • The legal structure and regulations around the investment product.
  • The specific situation and context if claims need to be made.

With investment protections, the devil is often in the details—so in the next section we’ll break down exactly how FSCS coverage applicability is determined.

Digging Into the Details: Understanding Gray Areas of Investment Protection

While the FSCS does offer protections for certain investment losses, it does not mean every single pound you invest is 100% protected should issues arise.

Far from it in fact.

To truly understand how to evaluate risks, we need to explore common gray areas and exclusions even within FSCS coverage.

SIPPs & OEICs – It’s Complicated

Some types of investment plans like Self Invested Personal Pensions (SIPPs) and Open Ended Investment Companies (OEICs) represent excellent examples of coverage complexity:

  • If you lost money because the investment fund itself performed poorly—FSCS protection would not apply. Just normal investment risk!
  • However, if you lost money because the firm failed (e.g. administrator goes bust) then FSCS could provide compensation for financial loss.

So it hinges on whether it was pure investment loss vs. operational firm failure driving losses. This shows why blanket statements around whether SIPPs or OEICs are “protected” requires far more nuance.

The Messy World of Fraud & Misselling

Over £2 billion in compensation has been paid out by FSCS over the past decade to investors who were victims of misselling or fraud. This includes high-risk investments, unsuitable pension transfers, opaque fee structures and more.

However, people are often surprised to discover:

  • Compensation depends greatly on context and details of the misselling/fraud.
  • FSCS has a high evidence bar around appropriate due diligence done by the investor too.
  • Certain types of alternative higher risk investments won’t qualify for protection based on their underlying structure.

The waters here can get muddy quickly—so working with a financial advisor to understand FSCS stance is key.

Exclusions: Where FSCS Investment Protection Stops

Beyond gray areas, FSCS clearly calls out certain exclusions where they will not pay out compensation even if consumers lose money including:

  • Pure investment performance related losses
  • Issues stemming from product structure itself vs. firm failures
  • Unauthorized firms (always check FCA register!)
  • Normal \”ware and tear\” of markets causing loss
  • Inadequate due diligence done by consumers themselves

This list summarizes scenarios where even if disaster strikes and money is lost—FSCS will not have your back as an investor here unfortunately.

How to Safeguard Your Money and Verify Coverage

Are Investment Funds Protected By FSCS? The Ins and Outs of FSCS Coverage
Are Investment Funds Protected By FSCS? The Ins and Outs of FSCS Coverage

Image: Credit Istock

While FSCS investment protection has many intricacies and exclusions, the good news is some solid steps can be taken to maximize coverage applicability should worst case scenarios arise:

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1. Check Investment Protection with Providers

  • When starting a new investment account, have clear written communication confirming types of products protected by FSCS.
  • Ask specifically about how compensation would work for different loss scenarios. Get specifics!

2. Spread Investments Across Firms

  • Never put all your eggs in one basket. Diversifying across providers enhances protection.
  • Remember FSCS protects up to £85k per financial firm.

3. Watch for FSCS Membership Status

  • Use FSCS membership checker to validate firms.
  • Avoid assumed blanket coverage—always verify.

Following these tips will empower investors to maximize clarity on how protected specific investment accounts really are if things head south. Let’s next look at what to do when the worst does happen.

Making Claims If Your Provider Goes Bust

Even when performing due diligence, financial firms can occasionally fail, necessitating FSCS protection kicking into place. When this nightmare scenario strikes, here is the process:

FSCS claims process

Some key steps in navigating the FSCS claims process:

Gather Evidence

Compile documents proving validity of your claim:

  • Investment statements
  • Written communications
  • Previous complaints

Check Eligibility

Submit Claim

  • Start claim formally on FSCS website
  • Provide requested info/evidence through process
  • Get advice from financial advisor as needed

The claims process can feel daunting but FSCS has supported millions through it. Stay organized and you’ll get through it.

Key Takeaways around FSCS Investment Protections

Let’s wrap up with top-level takeaways for investors on FSCS investment protection:

📝It varies greatly – no blanket coverage
⚠️Numerous exclusions and edge cases exist
🤝Check with each provider for specifics
📈Diversify accounts across multiple firms

While not perfect, FSCS does offer a crucial layer of protection against firm failure or fraud/misselling for UK investors. But consumers carrying the burden of due diligence around gaps that exist.

Hopefully this guide has armed you to better understand specifics around your investment protections. Stay vigilant and verify often.


How Does FSCS Work With Investments?

The FSCS protects up to £85,000 per eligible person, per authorized financial services firm if that firm fails or carries out poor investment advice. So it can compensate certain investment losses, but has limits and exclusions. Generally speaking, the FSCS covers:

  • Losses if an FSCS-member investment firm goes completely bust.
  • In cases of investment fraud or mis-selling by advisors.

But it does NOT cover losses just from normal investment performance. And compensation depends on specifics of each claim.

What Is Not Covered By FSCS?

Some major examples of investment losses NOT covered, even with FSCS member firms:

  • General investment performance – can’t claim just because your fund lost money.
  • Issues stemming from the investment product itself – must be firm failure.
  • Failure of unauthorized, unregulated firms.
  • Inadequate due diligence by the investor themselves.
  • Specified exclusions like crypto or very high-risk products.
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So FSCS does not act as overall investment insurance – just for firm operational issues or advice complaints.

What Happens If An Investment Platform Goes Bust UK?

If an FSCS-protected UK investment platform fails, eligible consumers would file a claim with FSCS documentation proving assets/losses. If approved, FSCS protects up to £85,000 per person, and will compensate the rest via the firm’s administrators. But investment performance losses alone don’t qualify.

Does FSCS Cover Stocks And Shares?

It’s complex – FSCS would cover losses if the investment firm holding the stocks/shares fails. But NOT if the stocks simply lost market value. And stocks on foreign exchanges may not be covered. So while useful as a backstop, FSCS does not equal blanket coverage for stocks.

How Are My Investments Protected?

4 tips to maximize FSCS investment protection:

  1. Diversify accounts across multiple FSCS-member firms
  2. Formally check protection specifics with each provider
  3. Watch FSCS coverage limits per firm
  4. Verify unauthorized firms not used

This balances risk exposure. But losses can still happen!

Does The FSCS Cover Crypto?

No – FSCS explicitly excludes all cryptocurrencies and digital assets from compensation eligibility. Even with regulated crypto firms, FSCS does not apply protection based on crypto’s high volatility. Investors bear full risk on crypto value changes.

Can You Lose Your Investments?

Yes – investment carries inherent risk, so losses can absolutely happen due to market factors. FSCS aims to compensate certain losses from firm failure, but does not prevent investment losses overall. Consumers must weigh risks vs. potential rewards with any investment product.

Does FSCS Cover Non-UK Residents?

FSCS eligibility is based primarily on where the financial services company is located, not the residency of the consumer. So if a UK-based FSCS member fails, non-UK residents using that firm may also receive compensation if eligible and they file a valid claim.

Does The FSCS Cover Mortgages?

Yes – mortgage advisers who provide recommendations and equity release schemes fall under FSCS protection policies. So eligible claims could be covered if misselling by an FSCS member is proven. But the underlying mortgage loan itself not covered.

Does FSCS Cover Equity Release?

Potentially yes – equity release mortgages and schemes from FSCS members can be covered in cases of proven misselling or bad advice.

But the performance of the underlying equity release plan itself would not qualify for FSCS protection if no firm issues existed.

Final Thoughts on Investing Safely with FSCS

Understanding ins and outs of FSCS investment protection lets you balance risks and plan accordingly. Never assume all losses 100% covered.

That being said, FSCS fills an important role as an impartial protector of last resort for consumers if disaster strikes.

Over decades, many people who felt hopeless after fraud or firm failure have found FSCS throw them a lifeline when they needed it most.

Our recommendation boils down to this simple wisdom:

  • Hope for the best but prepare for the worst.

Performing due diligence around FSCS nuances equips you to invest safer over the long run. We wish you profitable investing ahead.

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