Does FSCS protect financial advice?

Yes, the Financial Services Compensation Scheme (FSCS) covers financial advice, but only in a specific set of circumstances. The advice has to be a regulated activity, the firm that gave it has to have failed and be unable to pay claims itself, and the loss has to come from bad or misleading advice, negligent investment management, misrepresentation or fraud. For investment and pension advice the limit is £85,000 per person per authorised firm¹.

The scheme does not cover advice simply because an investment did badly. The FSCS states plainly that it does not pay compensation if your investment does not perform as well as you hoped⁴. It also does not cover advice from a firm that is still trading: in that case the route is a complaint to the adviser and then to the Financial Ombudsman Service⁵.

Claims about pensions and investment advice are now the most common type the FSCS receives, and often the most complex, according to its own consumer research⁶. That makes it worth knowing exactly where the boundary sits before you act on advice, not after.

FSCS covers bad advice when the adviser fails

The FSCS pays compensation when a financial services provider fails and cannot pay back your money itself¹¹. Applied to advice, that means two things must both be true: the advice was bad, and the firm that gave it has gone under or cannot pay. If the firm is still solvent, the FSCS is not the route.

The scheme covers a range of financial products when a UK-authorised financial firm fails, including deposits, insurance, investments, pensions, mortgage advice and certain other regulated services³. For investment business specifically, the losses it covers are bad or misleading investment or pension advice, negligent investment management, misrepresentation, or fraud¹².

There is a further condition. The particular activity the firm carried out for you must be regulated by the PRA or the FCA¹. A firm can be authorised and still carry out some activities that fall outside the scheme, so authorisation alone is not the whole answer. The FSCS suggests asking the firm to confirm that the activity it is carrying out for you is a regulated activity and under what circumstances protection would apply if the firm failed¹.

If the FCA search results show the adviser's status as "authorised", the FSCS may be able to compensate you if they fail². That check is the starting point, and it is free.

What advice is protected: investments, pensions and mortgages

Three main areas of advice fall inside the scheme.

Investment advice. Bad or misleading investment advice, negligent management of investments, misrepresentation and fraud are all covered where the firm has failed¹². The limit is £85,000 per person per authorised firm³. This is the figure that applies to negligent investment advice and fraud claims, and it applies only if the adviser or firm who gave the advice is unable to meet the claim⁷.

Pension advice. The FSCS states that it protects pension advice, so it can pay compensation if your adviser fails¹⁴. Protection varies depending on the type of pension product, and there are limits to the amount it can compensate¹⁵. The FSCS can only protect you if the FCA authorises your adviser¹⁴. Where a defined contribution pension provider goes bust, you can seek compensation from the FSCS¹⁶.

Mortgage advice. The FSCS protects mortgage advice². The limit is up to £85,000 per person per authorised firm¹⁰. It covers the advice, not the lending or administration costs on the mortgage itself¹⁰. Where a financial adviser recommended a mortgage endowment policy, that is usually treated as an investment claim, which the FSCS has protected since 28 August 1988⁹.

Advice on unregulated investments: the loss comes from the advice, not the platform

This is the distinction that catches people out. When an investment is unregulated, the FSCS cannot step in because the product failed. But it may still be able to step in because the advice was bad.

The FSCS is restricted to covering losses arising from bad advice, not the platform failing⁷. So if a peer-to-peer platform collapses, that is not an FSCS matter. If, on the other hand, a financial adviser recommended an unregulated investment to you and that advice was unsuitable, you may still be able to claim¹⁸.

The FCA's own risk warnings make the same point from the other direction. For investments in non-readily realisable securities arranged by an online platform, protection from the FSCS in relation to claims against failed regulated firms does not cover poor investment performance¹⁹. Where the business offering a speculative illiquid security is not regulated by the FCA, protection only considers claims against failed regulated firms¹⁹.

Unregulated investments more broadly are not covered by the rules of the Financial Conduct Authority, and the consumer body Which? advises watching out for them²⁰. The practical consequence is that the safety net, where it exists at all, hangs on the advice rather than the product.

Where FSCS does not apply: crypto and credit insurance claims

Several categories sit outside the scheme entirely, and it is worth knowing them before you rely on protection that is not there.

Cryptoassets. Most cryptoassets are not FSCS protected because they are not regulated, including virtual currencies such as Bitcoin and Litecoin²¹. Crypto exchange traded notes are not protected because they are not a type of investment the FSCS can protect¹⁹. Qualifying cryptoassets are outside protection because they are not a "specified investment" under the UK regulatory regime¹⁹. Cryptoassets are virtual currencies and not FCA regulated, which means they are not FSCS protected²². A Treasury Committee report noted there is no collective deposit insurance scheme to compensate investors in the event of a hack²³.

Credit insurance. Credit insurance claims are not eligible for FSCS protection⁸. Goods in transit, marine, aviation and contracts of reinsurance for insurance firms or brokers are also excluded⁸.

Payment protection insurance. This is the exception in the credit insurance family. You may be eligible to claim compensation with the FSCS if you bought a PPI policy, the information you were given was misleading or insufficient, and the firm that gave you that advice has since failed²⁴. You would claim against the firm that advised you to take out the policy, not the firm you had the policy with²⁴.

Peer-to-peer platforms. Peer-to-peer platforms are not protected by the FSCS should they collapse²⁵.

E-money and payment services firms. The FSCS cannot protect e-money or payment services firms²⁶. Where such a firm fails, customers are told their money is safeguarded, but FSCS protection does not apply²⁷.

Can I claim FSCS compensation for bad advice if the firm is still trading?

No. The FSCS is a compensation scheme of last resort, and it exists for the case where the firm cannot pay. If the adviser is still trading, you can complain to the Financial Ombudsman Service⁵.

The order matters. If you think you might have received unsuitable advice, for example to transfer your pension, and the adviser is still trading, you would complain to the adviser first and then contact the Financial Ombudsman Service. The FSCS handles claims where the adviser has failed²⁸.

That sequence gives the ombudsman the chance to order a firm that is still in business to put things right, which is usually a better outcome than compensation from a scheme with a cap. The FSCS route opens only when the firm has failed and cannot meet the claim⁷.

Questions to ask an adviser before you rely on their advice

The FSCS publishes a set of questions designed to be asked before money changes hands. It says it is really important to know how much of your money the FSCS can protect before you sign up to anything²⁹.

If you are talking to your financial adviser, the FSCS suggests asking²⁹:

• Are you an FCA authorised financial adviser?
• Does FSCS protect the advice you give about my pension if it turns out to be bad advice?
• How much of my pension pot is protected if I lose money because of the advice you give?
• What would happen if something happened to your business, and I lose money because of the advice you gave me?

If you are getting a pension, or thinking of changing it, the FSCS suggests asking the provider²⁹:

• Does FSCS protect my pension?
• How much of my pension pot is protected?
• Other than FSCS, are there any other protections available for this pension?
• Am I still protected if I buy an annuity?
• What if I buy other products with my pension pot?
• What would happen to your pension if something happened to your business?
• If I transfer money across from an existing pension, will that also be protected?

For investment advice more generally, the FSCS suggests asking whether it protects financial advice, what happens if the firm gives bad advice and fails, and whether all the products the firm recommends are FSCS protected if the provider fails¹.

Where the protection stops

The £85,000 limit is per person per authorised firm, and it is a cap rather than a guarantee of full recovery³. Where a loss exceeds it, the excess is not covered by the scheme.

Deposit protection works differently and is worth separating out, because people often assume the two are the same. The FSCS can pay back money held with a failed bank or building society up to a compensation limit of £120,000 per person³⁰. If your bank goes bust, you will automatically get your money back³¹. That £120,000 figure applies to deposits, not to advice claims, which sit at £85,000.

There are also structural limits. Joint account holders acting as business partners are entitled to a single claim of £120,000, not one claim per business partner³². Where money is held in a trust, protection depends on the type of trust²⁶. And the FSCS cannot protect you if an e-money firm or payment services firm fails³³.

The scheme's own research found that claims involving pensions and investment advice are now the most common ones it receives, and often the most complex⁶. That is a reason to check the position before acting, not after.

If you are unsure whether a firm or product is covered, the FSCS publishes a protection checker and a guide to what it covers²⁶. Free, impartial guidance on pensions and retirement options is available from MoneyHelper, and free debt advice is available from the debt advice charities if a loss has left you struggling.