Are my investments protected? Your rights if an investment firm goes bust

Karl 3rd Aug 2023 No Comments

Reading Time: 4 minutes

When you invest, there’s a chance the value of your portfolio will fall. Because the stock market rises and falls, this ‘risk’ is simply part and parcel of investing…

But what happens if your investment provider goes bust? Do you lose everything? Or are you entitled to your money back?

In this article we’re going to explore these questions, and more. So if you’re a safety-conscious investor read on to discover what you need to know…

What are the risks when investing?

First things first, investing carries risk. There’s always a chance your investments will fall in value, and you can’t really escape this fact.

Of course, in the very worst case scenario, your portfolio could become completely worthless.

Yet while the risk of your investments falling to zero is probably quite low – especially if you’ve a diversified portfolio, a long-term mindset and you invest in ordinary assets – no sensible investor should completely rule out this scenario.

So to summarise… if your investments fall in value due to poor market performance, then there’s very little you can do about it. In other words, under normal circumstances, you’ve no right to your money back.

When might your investments be protected?

While we’ve explained that investors cannot expect any help should their portfolio suffer in a stuttering stock market, there are two scenarios where investments might be protected: if your investment provider goes bust, or you were given ‘bad advice’ and mis-sold investments.

Let’s explore these scenarios in more detail…

Scenario 1. Your investment provider goes bust

If your investment product provider goes bust, the Financial Services Compensation Scheme (FSCS) may be able cover up to £85,000 of your investments, (per person, per eligible firm) as long as it’s UK-registered and isn’t considered an ‘unregulated investment’.

Unregulated investments include cryptocurrency, peer-to-peer investments, mini-bonds, and luxury investments – the FSCS website has more information about this.

Do note that if your provider went bust between January 1, 2010, and March 31, 2019, then a lower £50,000 compensation limit applies.

An example for the real world: Say you bought shares in Amazon using a UK-registered investment platform – let’s call it ‘Platform A.’ If ‘Platform A’ went bust then you should be liable for compensation, up to £85,000, under FSCS rules.

However, if Amazon went bust, then you wouldn’t be liable for compensation under the FCSCS. That’s because the failure of your investment would be down to stock market performance, and not the health of your chosen investment platform.

Scenario 2. You were mis-sold investments

Another way your investments might be protected is if you were mis-sold an investment product. On this point, it’s worth knowing while an ‘investment product’ could mean a run-of-the-mill stock market investment, the term may also apply to other types of investments, such as a private pension.

If you feel you’ve lost out due to ‘bad advice’ from an authorised firm, then you may wish to seek compensation by contacting the firm directly. If you’re unhappy with their response, or your case remains unresolved after eight weeks, then you’ve the right to take your case to the free Financial Ombudsman Service (FOS), as long as the firm in question is based in the UK

The FOS will look at your case independently and it has the power to determine whether you should be awarded compensation.

If you believe a firm has given you bad advice but they’ve since gone bust, then you can turn to the FSCS for compensation instead of the FOS.

An example for the real world: On its website, the FSCS highlights how a chef was advised to transfer his final salary, defined benefit pension to a new self-invested personal pension (SIPP) by a failed firm.

As the transfer left the individual £120,000 out of pocket it was ultimately determined that they were given ‘bad advice.’ The FSCS awarded £85,000 in compensation.

A quick side note… Because ‘defined benefit’ pensions pay a guaranteed income in retirement, they’re typically far more generous than ‘defined contribution’ schemes. As a result, DB pensions, especially ‘final salary’ ones, are like gold dust today.

Therefore, the conclusion that this individual was given bad advice is hardly surprising! For more on this, see all you need to know about pensions.

What are the chances of your investment provider going bust?

While you may think it’s unlikely your investment provider will go bust, the unexpected can happen. As the saying goes: no company is ever ‘too big to fail’.

This applies not just to investment firms, but to companies involved in other sectors too.

The FSCS website has a page on its website which lists firms that have already failed, as well as firms that are currently ‘under investigation’.

The FSCS also issues regular press releases detailing which firms have recently gone under. Its most recent release highlights how four investment firms were in default between April 1, 2023, and May 31, 2023, which is actually quite a low figure compared to previous months.

Got savings? The FSCS applies here too, though the process works differently. Take a look at our article that explains protecting your money under FSCS rules.

How do you make a claim for compensation?

If you want to make a claim because your investment provider has gone out of business, you can visit the online claims portal on the FSCS website.

For a speedier process you may wish to create an online account so you can upload documents and statements to support your claim.

Alternatively you can call 0800 678 1100, or 020 7741 4100. You can also contact the FSCS by post: Financial Services Compensation Scheme, PO Box 300, Mitcheldean, GL17 1DY.

If you want to make a claim about poor financial advice received from a firm that is still in business then you can visit the Financial Ombudsman Service website to see the process for raising a complaint.

Disclaimer & Investing newsletter:

MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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