What Happens if My Financial Provider Goes Bust?

Insurance Providers

British homeowners, drivers and holidaymakers were left in limbo as they waited to find out how they would be affected by the potential demise of American International Group (AIG), one of the world’s largest insurers. The company has a trillion dollars in assets and insures bank loans around the world. Fortunately, US central bank, the Federal Reserve, stepped in with an $85 billion rescue package.

Even if the company had gone bust, however, UK consumers would have been covered by a scheme set up by the Financial Services Authority (FSA). Should the company, or any other regulated insurer fail, UK customers can claim their money back from the Financial Services Compensation Scheme (FSCS).

What is the FSCS?

The FSCS is a fund, provided by financial institutions, designed to compensate consumers affected by the collapse of financial services companies. For customers hit by the collapse of an insurance company, the FSCS refunds the full amount paid out in premiums.

Any claims against an insolvent insurer must initially be submitted to the company’s insolvency practitioners, as the FSCS will only pay compensation if there is not enough money in the company’s accounts to cover its liabilities. Anybody taking out a new policy with an insurer should ensure that it is regulated by the FSA, because unregulated companies are not covered by the FSCS.

The FSCS does not cover the Isle of Man and the Channel Islands. The Isle of Man has its own Deposit Protection Scheme, which protects up to 75% of investor deposits, subject to a maximum of £15,000. In Guernsey no similar fund has yet been put in place.

If deposits are held with an offshore subsidiary of a UK bank or building society (such as Abbey, Northern Rock or Nationwide), the institution might still guarantee the deposits if the offshore subsidiary goes bust – check this with the individual account providers.

Mortgage Providers

If a mortgage has been taken out with a loan company that goes bankrupt, there is seldom cause for either panic, or celebration. In most cases the mortgage loan will be handed over to another company. The only thing that changes from the borrower’s perspective is the name and address of the mortgage provider.

The terms of the loan agreement will not be changed. A loan is a binding contract. If, however, a mortgage loan was in the pipeline when the company goes under, this can be a problem. More than likely the loan will not be funded. In some cases, the lender that is going bust can arrange for the new loan to be passed on to the new loan provider.

Savings Account Providers

Investors with up to £50,000 in savings should not be concerned if their bank or building society goes bust. Any financial provider regulated by the FSA will have savings of £50,000 or less guaranteed by the FSCS,

Savers with more than this amount would not be protected for any extra cash, if the worst case scenario was to arise, and their provider went under. It is prudent for savers with a large amount of cash to spread it around a number of accounts with different providers. It is advisable to ensure that savings are not deposited with both a subsidiary and its parent bank. Both accounts fall within the same group and the money will only receive the £50,000 protection once.

For example a saver with Nat West and its parent company, the Royal Bank of Scotland (RBS) would only receive one payment as these two banks are viewed as the same institution. One of the places savers can safely deposit their money is National Savings & Investments. This is essentially a Government-backed savings provider. It can not go bankrupt.

Investment Providers

If money has been put into stocks and shares, funds that invest in them, and pension funds, then this is classified as “risk based” investment and not savings. If the investment company goes bust, the first £30,000 will be refunded, plus 90% of the next £20,000 (a total of £48,000); while pension and life assurance funds get the first £2,000 refunded, plus 90% of everything else in them.