How does financial services compensation work?
15 July 2021
Question by Emma
Financial services compensation: I have a SIPP and an ISA with AJ Bell Youinvest. Currently across them I have a portfolio of approx £123,000 of which £90,000 is in investments and the rest is in cash, which I am drip feeding into investments. I am already therefore over the £85,000 financial services compensation limit. Should I be worried? I am also about to inherit a sizeable sum and have a cash ISA of £70,000 to transfer to a Stocks and Shares ISA. Should I be setting up accounts with multiple platforms to be covered by the compensation scheme or is this not necessary? It would mean I would need 8 different providers if all were to be under £85,000 limit! Many thanks. Emma
Answered by Anna Sofat
Your SIPP and ISA are protected by the Financial Services Compensation scheme, and you have to think about the following...
Cash compensation vs funds compensation
First thing to be mindful of, is that you have different protection for your cash in the bank, and for the funds you invest in. For cash in the bank, you are protected up to £85,000 per bank.
The £90,000 you have invested has separate protection, and is protected up to £85,000 per investment firm you have investment with – please note that this is not per investment fund you might be invested in, but the underlying investment firm.
The £85,000 protection is applicable if the investment firm (and fund) is based (sometimes referred to as 'domicile') in the UK.
If the investment fund (and firm) is Irish based, then the compensation you would receive is €20,000.
What does this all mean?
So for example if you are invested in Vanguard FTSE All Share Index Acc (UK based fund) and Vanguard Emerging Markets Stock Index Acc (Irish based fund) then you would be protected by the UK £85,000 scheme as well as the €20,000 Irish scheme.
The fact that you are investing via AJ Bell Youinvest has no material impact on your potential compensation, as you will not have any investment with the firm – they are just providing administration services.
So my advice would be to spread your investment between different investment firms if you are really concerned, but it's better to understand what you are investing in and undertake reasonable due diligence on the funds you are investing in.
However, it's never a good idea to let emotion dictate where you invest – all the mainstream funds are highly regulated, here and in Europe. The investor funds are ring fenced and separated from the investment firm’s own funds. The firm also has to appoint independent custodians, administrators and auditors whose job it is to ensure funds are ring fenced for the investors.
In the past, where there have been problems with mainstream funds, its been down to liquidity issues (such as the Woodford funds) or mismanagement (i.e. bad investment decisions). You would not be covered by the compensation scheme for either of these issues. So its better to do good due diligence as to the investment strategy followed by the fund manager and to understand who the custodians and trustees are.
Anna is a multi-award winning financial planner and has been advising enterprising women and their families for nearly twenty years. She is highly regarded as ‘the Voice of Women’s Wealth’ and is the founder of the ‘Are You In?’ movement, which seeks to transform the financial sector towards diversity, inclusivity and greater democracy.