It is rare, but insurers can and occasionally do fail, which raises an alarming question: what happens to your policy and claims if your insurer goes bust? The Financial Services Compensation Scheme is the safety net. This guide explains the FSCS in plain English: what it protects, how much, and how it works.
What the FSCS is
The Financial Services Compensation Scheme, or FSCS, is the United Kingdom's statutory safety net for customers of authorised financial services firms that fail. It is free to use and is funded by levies on the financial industry, not by taxpayers. If a regulated insurer becomes insolvent and cannot meet its obligations, the FSCS can step in to protect policyholders, so that the failure of a firm does not simply leave its customers with nothing.
When it applies to insurance
The FSCS applies when an authorised insurer fails and cannot pay valid claims or honour policies. It does not cover you simply because you are unhappy with an insurer, that is what the Ombudsman is for, but specifically where the firm has gone out of business. For the protection to apply, the firm must have been authorised by the regulator, which you can check, so dealing with regulated firms is important.
How much is protected
How much the FSCS protects depends on the type of insurance. Compulsory insurance, such as third-party motor cover or employers' liability, which you are required by law to have, is protected at 100% of the claim. Most other general insurance, such as home, travel and pet cover, is protected at 90%. So for non-compulsory policies you could bear a small share, while compulsory cover is fully protected.
Life and long-term policies
Long-term insurance, such as life insurance, is generally protected at 100%, as are certain other policies including professional indemnity insurance and claims arising from death or incapacity due to injury or illness. This higher level of protection reflects the importance and long-term nature of these policies. So for life and similar long-term cover, the FSCS aims to protect the full value, recognising how much policyholders rely on them.
What happens if your insurer fails
If your insurer fails, the FSCS will often try to arrange for your policy to be transferred to another insurer, so your cover continues, or to provide a replacement, rather than simply paying out. If that is not possible, it can pay compensation, for example returning the unused portion of your premium, or paying a valid claim at the protected level. The aim is to keep you covered and minimise the disruption.
Small businesses and sole traders
FSCS protection is not only for individuals. Small businesses are generally covered, subject to size limits, and sole traders are treated like individuals. This means a small firm whose insurer fails can also turn to the FSCS for protection on its policies and claims. If you run a small business, it is reassuring to know the same safety net applies, within the rules, to the cover your business relies on.
Check your insurer is authorised
Because FSCS protection depends on the firm being authorised by the regulator, it is worth dealing only with regulated insurers, which you can verify on the official register. Buying from an unregulated or overseas firm outside the scheme could leave you without this safety net if it failed. Sticking to authorised firms ensures that, in the unlikely event of a failure, the FSCS protection described here would be available to you.
How a claim to the FSCS works
If your insurer fails and the FSCS becomes involved, it will publicise the failure and explain what policyholders should do. In many cases it works behind the scenes to transfer policies or arrange continuity, so you may not need to do much. Where compensation is due, there is a claims process. Following the official guidance issued at the time, and dealing only with the genuine FSCS, protects you from scams that can follow a high-profile failure.
When a broker or adviser fails
The FSCS can also help in some situations where an insurance broker or adviser, rather than the insurer, fails, for example if money you paid did not reach the insurer, or you were given bad advice. The rules here are more involved, but the principle is that the scheme provides protection across parts of the chain. If a firm you dealt with fails, it is worth checking whether the FSCS can help in your particular circumstances.
What is not covered
The FSCS covers failures of authorised firms, so it does not help if you simply have a dispute with a solvent insurer, which is the Ombudsman's role, or if you dealt with an unauthorised firm outside the scheme. It also operates within set limits and rules. Knowing these boundaries helps you understand when the FSCS applies and reinforces why dealing with authorised firms, and resolving disputes through the right channel, matters.
Why failures are rare
Insurer failures are uncommon, because insurers are regulated and supervised, with rules requiring them to hold enough capital to meet their obligations. The FSCS is a backstop for the rare cases where this is not enough. So while it is reassuring to know the safety net exists, you should not be unduly worried about your insurer failing; the regulation that makes failures rare is working alongside the FSCS that protects you if one does.
How it differs from the Ombudsman
It is worth being clear how the FSCS differs from the Financial Ombudsman, as the two are easily confused. The Ombudsman resolves disputes with firms that are still trading, as our guide to how to complain and the Financial Ombudsman explains, while the FSCS compensates customers of firms that have failed. So you go to the Ombudsman over a disagreement, and the FSCS comes into play only when a firm has actually gone out of business.
Reassurance behind your cover
The FSCS means that, in the rare event your insurer fails, you are not simply left stranded. Compulsory cover is fully protected, most other insurance is protected at ninety per cent, and life and long-term policies at one hundred per cent, with the scheme often arranging to keep your cover going. Dealing with authorised insurers ensures this safety net stands behind your policy, which is one more reason to stick to regulated firms.
In short
The FSCS is the United Kingdom's free, industry-funded safety net for customers of authorised financial firms that fail. If your insurer goes bust, it protects compulsory insurance at 100% and most other general insurance at 90%, with life and certain long-term policies protected at 100%. It often arranges to transfer your policy or pays compensation. Small businesses and sole traders are covered too. Dealing with regulated insurers ensures this protection applies.
Where to get help and next steps
Read our guides to how to complain and the Financial Ombudsman for disputes, and Consumer Duty and fair value. This is general information, not financial advice.