Author Topic: Compensation if a financial institution goes bust  (Read 492 times)

Chicothecat

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Compensation if a financial institution goes bust
« on: January 17, 2023, 03:43:58 PM »
I have a question about putting over the £85k in finances that we (the public) would be compensated for if a bank/organisation went bust. Do people worry about this or not? I ask as a pension plus Isa in one institution would be well over that value but I also like the idea of ease of administration and the cheaper costs of the platform. Should I pay more elsewhere for a platform and see it as an insurance against the risk? Do people stick to the £85k or ignore it?

GuitarStv

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Re: Compensation if a financial institution goes bust
« Reply #1 on: January 17, 2023, 04:03:56 PM »
I have a question about putting over the £85k in finances that we (the public) would be compensated for if a bank/organisation went bust. Do people worry about this or not? I ask as a pension plus Isa in one institution would be well over that value but I also like the idea of ease of administration and the cheaper costs of the platform. Should I pay more elsewhere for a platform and see it as an insurance against the risk? Do people stick to the £85k or ignore it?

If you have your 85k sitting in a bank account it would be a problem.

My understanding is that if you keep your money invested in mutual funds/stocks then this doesn't apply.  The mutual fund/stock that you've purchased continues to hold value and belong to you even if the bank/brokerage that purchased it goes out of business.

Affable Bear

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Re: Compensation if a financial institution goes bust
« Reply #2 on: January 18, 2023, 02:40:54 AM »
Any company that holds or manages money is required to keep client money/assets seperately in case they go bankrupt or withdraw from the market, any client assets would either being returned or transfered to a different fund/platform/company.

The main risk is if the company is less than reputable there is a risk they donít do this, you can see this in the various Ponzi schemes over the years, most recently FTX is good example of a company comingling funds/assets. It is fraud and carries a heavy penalty for those who orchestrate it, I think its unlikely you would be affected by this if you are using a well known brokerage/firm/fund but I guess there is always that risk. Fingers crossed Vanguard isnít a massive Ponzi!!!! >.<

But yes provided the company has followed correct regulations customer money is protected and separate from the company, the company doesnít own their clients shares or assets therefore any bankruptcy shouldnt hit your pot. (although there is always risk of fraud), a good check is to ensure they are registered with the Financial Conduct Authority, but also do a little research on how established the company is, how new to the market etc.. You can always split your pot up amongst 2-3 different companies if needed as well: https://www.fca.org.uk/firms/client-money-assets

I dont think any pensions or investments are covered by the £85k protection anyway regardless of whether they sit with a bank, in an ISA or anywhere else, I think the 85k only covers cash accounts like savings/current accounts.

In short I dont worry about it at all, I think if I had significant amounts built up (still early in journey) I might consider splitting it between 2 platforms but its not something I actively think about.

(fyi this is based on not having more than £85k of cash sitting around, if I wanted/needed more than that in cash I would definitely split it between different banks)
« Last Edit: January 18, 2023, 02:43:50 AM by Affable Bear »

Chicothecat

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Re: Compensation if a financial institution goes bust
« Reply #3 on: January 18, 2023, 04:18:57 AM »
Thanks to you both for the clarification. I was confused about when investing whether the money was in your name or the company that you used so that certainly helps me worry less about putting an ISA and a pension with the same company.

Affable Bear

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Re: Compensation if a financial institution goes bust
« Reply #4 on: January 18, 2023, 04:38:29 AM »
Have just read up a bit more about it, FSCS may cover investment funds under certain circumstances. They have a handy checker tool here: https://www.fscs.org.uk/what-we-cover/investments/


MisterA

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Re: Compensation if a financial institution goes bust
« Reply #5 on: January 18, 2023, 06:02:52 AM »
I think that the original poster has been answered fairly comprehensively.

In 2008, we moved house into a rented place whilst looking for our next purchase property. We put the money released by the sale into the highest interest bank account that we could find, which at the time was the Icelandic bank Icesave.

A few months later we purchased our current house, and used the money in Icesave for the purchase. A couple of weeks later, Icesave collapsed. Eventually, people were reimbursed up to the £85k, but it took a while. Fortunately our money was out of the account before it collapsed.

https://www.theguardian.com/business/2016/jan/13/britain-has-been-fully-reimbursed-for-icesave-bank-collapse-iceland-says

Now, I have pension funds totalling more that £85k in 3 places (major institutions like Vanguard, and my employers pension scheme). I have thought about what might happen if one or more collapsed, but I don't dwell on it. Maybe I'm being naive.

RecklessSaving

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Re: Compensation if a financial institution goes bust
« Reply #6 on: January 19, 2023, 04:45:23 PM »
A couple of weeks later, Icesave collapsed. Eventually, people were reimbursed up to the £85k, but it took a while.

I was a customer at the time, we were reimbursed very quickly including all outstanding interest at the high rate, process was efficient and pain free.  The UK treasury put up the money under the instruction of the UK government at the time with the government separately pursuing the Icelandic government to honour of original agreement.