Since the easing of pension regulations boosted the retail investment market, more people have lost money set aside for retirement than ever before. This is mainly because it takes experience to make considered investment decisions, which many retail investors don’t have. 

While there are certain measures in place to compensate investors who have lost money in poor investments under the collective umbrella of the Financial Services Compensation Scheme (FSCS), not everyone qualifies. Much depends on whether the investment decision was made with or without the advice of an investment professional. 

Unfortunately, not completely understanding the risks associated with an investment is often the downside of making financial decisions independently. It is therefore the job of a regulated and professional financial adviser to help you make those decisions, although even then, vigilance is required. 

Retail Investment Market Expands on Scams 

The unregulated investment arena is potentially very value-laden although fraught with danger. Navigating the landscape takes a professional eye. Although most of us understand the term ‘due diligence’ we don’t really know where to start with a particular investment which is why many investors rely on the professional advice they are given. 

The sheer volume of unregulated investment products available online is sufficient to conceal an alarming number of scam opportunities. It is really important investors think twice about entering into an unregulated investment without consulting an independent professional. This is mainly because not everyone is eligible for compensation under the government’s scheme. 

To be clear, you are unlikely to be eligible for compensation in the following circumstances: 

  • If there is a fall in the value of an investment you made on your own and without financial advice. You are buying a slice of a company either directly or indirectly when investing, so you share that company’s pain as well as the gain. 
  • If your investee company says it is going to do something but fails to deliver on its promise. 

However, you CAN get compensation if you were mis-sold an investment by your bank or another financial company regulated by the FCA. 

Mis-selling means that you were given unsuitable advice, the risks were not explained to you or you were not given the information you needed, and ended up with a product that isn’t right for you,’ says The Money Advice Service. 

You can also seek compensation if the financial company holding your investments goes bust as long as it was authorised by a UK regulator. 

How the Compensation System Works 

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme for customers of authorised financial services firms. It offers protection for up to £85,000 per person for cash deposits per financial institution. 

Temporary high balances of up to £1 million held for six months or less and resulting from life events like a property transaction, redundancy payment, retirement benefits or inheritance are also covered. 

Investment protection is limited to £50,000 per person, per financial institution. The main exception to this limit is pension assets managed in an insured pension which are fully protected. 

Trust-based pensions are in theory only covered up to £50,000 if the pension company goes bust. In reality, the assets in the pension are ring-fenced as they’re held on trust for you, not by the pension manager. So you’ll still get your pension if the company managing the pension goes out of business. 

This will be the position if you have a self-invested personal pension (SIPP) which is held as a trust, even if the SIPP trust sits on an investment platform. You may suffer some delay in terms of being able to buy and sell any investments if the pension provider goes bust, but you should eventually get the money. 

Commenting on the FSCS, Alison Treharne, a chartered financial planner and principal of Shore Financial Planning says: It covers if you were given bad advice, misrepresented or suffered poor investment management if the authorised firm is unable to pay the claim against it or has gone out of business and cannot return the money. Remember, it’s not protecting you if the investment was a bad investment and its value goes down: that is investment risk and you take that on personally.” 

How Are DIY Investors Protected? 

Investments you make via a stockbroker or fund platform are generally held in a nominee account and if it goes bust, creditors will be unable to touch these to settle any debts of the platform businessAssets held in unit trusts and open-ended investment companies are also ring-fenced away from the financial company. As these are held with an independent custodian, the money is safe even if the fund provider goes under. 

The situation is more complex for investors who hold shares directly (outside a pooled investment fund), including investment trust shares (which are structured in the same way as public limited companies), and individual corporate bonds. 

If a company is declared insolvent, a liquidator or receiver is appointed to realise the failed company’s assets. The liquidation expenses are met first from the proceeds. Then there is a typical hierarchy that determines the order in which investors get paid: corporate bondholders, preference shareholders and then ordinary shareholders. Ironically this is the ‘Capital Stack’ constantly being referred to in marketing materials for dubious real estate investments. 

As bondholders own tranches of corporate debt, they are creditors of the failed company, whereas shareholders own equity and are not automatically owed anything; they may find it difficult to get any money back at all. 


Eligibility for compensation under the FSCS scheme is complex. However, many people who feel they are probably not entitled to compensation are likely to be wrong. CLAIMS DIRECT is here to provide advice to ANY investor who has lost out because of a bad investment, whether it was the consequence of poor financial advice or not. 

To find out if you can get some of your money back from a mis-sold financial product, contact one of our friendly advisers today or request a call-back. 

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