FSCS Deposit v Investment

nickyhellard

I am thinking of investing in a fixed term bond with one of a number of companies that are all covered by the FSCS (e.g. post office, Aldemore). I understand that deposits with e.g. a bank (current account, savings account etc) are all covered per person per firm up to £75000. The FSCS site refers to INVESTMENTS that are only covered up to £50000 per firm per person. So would my fixed term bonds be classified as deposits or investments? Would I be covered to £75K or only to £50K?

ColdIron

Your fixed term 'bond' is cash savings in a cash deposit account, nothing to do with investments so the £75,000 protection applies

dunstonh

I am thinking of investing in a fixed term bond

You mean deposit rather than bond and save rather than invest.

Bond is a heavily misused term. If you were to "invest" in a "bond" in the correct sense, you would have no FSCS protection at all as that type of asset is not a retail investment product but a direct unregulated investment. Fixed term deposits often use the term bond in their marketing as do a number of other products that are not bonds because it makes them sound better. It can lead to confusion though.

Deposits are covered under the FSCS deposit protection.

jimjames

Would it help to define a deposit as something where you are paying cash into an account that remains as cash in that account, £1 paid in is always £1? An investment is something where you are using your cash to buy units or shares of something ("the investment") that can vary in value so a unit of £1 may be worth 95p or £1.05 in future.

eskbanker

jimjames wrote: »

An investment is something where you are using your cash to buy units or shares of something ("the investment") that can vary in value so a unit of £1 may be worth 95p or £1.05 in future.

....or (crucially) nothing at all for individual shares rather than reasonably diversified investments!

bowlhead99

Old copy-pasta:

A depositary account is analogous to depositing coins in a bucket and giving it to someone for safekeeping. They must ensure they give you back that bucketful of money, together with any agreed interest. The financial services industry funds a protection scheme for if the person holding the bucket drops it and your money spills out everywhere and goes down a sewer. So if you didn't overfill the bucket, you will still get back your coins.

With an investment you don't just deposit coins in the bucket and leave them there. You use the coins to buy items to put in the bucket instead of coins. So you have share certificates, loan notes from companies or governments, perhaps ownership slices of collective investment schemes which own shares, bonds, bricks n mortar etc.

In that situation you very definitely do not have a bucket of coins any more so nobody has to give you back the coins. The items in the bucket might be a piece of paper representing some sort of "promise to pay you back if we can afford it" or something more or less tangible - but can up being worth more than the coins, or less.

As you know you can lose money with such an "investment" (the exchange of coins for other assets over a period of time), FSCS does not guarantee the coins that you used to buy the assets in the first place will still be there, because the risk of the value changing is all on you.

However, certain players in the "investment" game are regulated to provide services around the bucket. So if the bucket has a hole in it through which your assets are fraudulently sucked out, or the person holding the bucket drops it and the contents can't be found and the dropper goes bust, or someone sells you terrible advice on what to buy for the bucket and then they go bust before paying you the compensation you're owed - the FSCS can step in with investment protection up to the allowed limit.

But critically if the handle falls off the bucket and the assets spill onto the floor, the assets on the floor are still yours (e.g. 1000 share certificates for ABCco and 2 loan notes from XYZco in your name). So even in a worst case scenario of the person holding the bucket dying on the job, it is merely an administrative inconvenience and FSCS doesn't need to pay you out because the 1000 shares in ABCco are still yours and you can pick them up and have someone else step in and put them in a new bucket.

Of course if the directors of ABCco screw up, you might not find anyone who wants to pay you a single coin for the 1000 shares. And the XYZ guys might not have a profitable enough business to every repay the coins you loaned them that it says on the loan note certificate. No FSCS coverage for that sort of thing.

eskbanker

bowlhead99 wrote: »

Old copy-pasta

Look after the penne and the pounds look after themselves?