Does FSCS cover unregulated investments?

If an unregulated investment fails, the Financial Services Compensation Scheme (FSCS) will not pay you back for the investment itself. The scheme exists to compensate customers of UK-authorised financial firms that have failed, and it only considers claims against regulated firms. Where the business offering the investment was not regulated by the Financial Conduct Authority (FCA), there is no failed regulated firm to claim against¹.

There is one exception, and it is about advice rather than the product. If a regulated adviser recommended the unregulated investment and has since gone out of business, the FSCS can consider a claim about that advice, up to £85,000⁴. The adviser must have been regulated by the FCA at the time it gave the advice⁵.

The distinction matters because it decides who you complain to. A claim about a product that performed badly goes nowhere. A claim about the advice that put you into it can go to the firm, then to the Financial Ombudsman Service, and then to the FSCS if the firm has failed⁷.

Unregulated investments are not covered by the FSCS

The FSCS covers a range of financial products when a UK-authorised financial firm fails: deposits, insurance, investments, pensions, mortgage advice and certain other regulated services¹. The word doing the work in that sentence is "authorised". Protection applies only where the authorised firm's activity is regulated by the Prudential Regulation Authority or the FCA². An investment can be perfectly legal and still sit outside that boundary.

Unregulated collective investment schemes are the clearest example. The FCA does not regulate them, though it does regulate the firms that advise on and sell them¹³. The FCA's own risk summary for speculative illiquid securities puts the position plainly: where the business offering the investment is not FCA regulated, protection from the FSCS only considers claims against failed regulated firms³. The scheme also does not pay compensation if an investment simply does not perform as well as hoped¹⁴.

That last point catches people out. The FSCS is not a backstop for bad outcomes. It is a backstop for a firm that has failed and cannot pay what it owes. If the company holding your investments goes under, the protection is about the company, not about the value of the investments it held¹⁵. Mini-bonds are a well-known example of an investment that sits outside the scheme¹⁶.

The exception: negligent advice from a regulated adviser

This is the route that does exist, and it is worth understanding precisely. The FSCS can pay up to £85,000 where a UK-regulated adviser gave bad pension advice and has failed⁴. The same £85,000 limit applies to negligent investment advice and fraud, but only if the adviser or firm who gave the advice is unable to meet the claim⁶.

Two conditions have to be met. The adviser must have gone out of business for the FSCS to be able to help, and it must have been regulated by the FCA at the time it gave the advice⁵. If the adviser is still trading, the FSCS is not the right door: you complain to the firm, and if that does not resolve it, to the Financial Ombudsman Service⁷.

The claim is about the advice, not the product. If a regulated adviser recommended an unregulated product and it was held in a self-invested personal pension, you might be covered for up to £85,000⁶. The same logic runs through mortgage advice: if a regulated adviser fails and you lost money because they recommended a mortgage that was not right for you, you could claim compensation¹⁹. In that case the FSCS covers the advice but not the lending or administration costs on the mortgage itself²⁰.

FSCS protection for investment advice depends on the adviser having failed. The scheme can pay up to £85,000 where a UK-regulated adviser gave bad pension advice and has since failed, and the adviser must have gone out of business and been regulated by the FCA at the time it gave the advice⁹. The same £85,000 limit applies to negligent investment advice and fraud, but only if the adviser or firm is unable to meet the claim⁸. On mortgages, FSCS covers the advice but not the lending or administration costs on the mortgage itself⁵. Mini-bonds are excluded⁷, and contracts of reinsurance for insurance firms or brokers are not eligible for FSCS protection¹¹.

Peer-to-peer and council investments sit outside FSCS protection

Peer-to-peer lending is the area where the gap between "regulated firm" and "protected investment" is widest, and where the confusion is most common. The FCA's risk summary for peer-to-peer agreements states that the Financial Services Compensation Scheme, in relation to claims against failed regulated firms, does not cover investments in peer-to-peer loans³. Peer-to-peer platforms are not protected by the scheme should they collapse²¹. Loanpad, a peer-to-peer platform, states the position for its own business in the same terms²².

Abundance, which arranges community municipal investments, says the same about its council investments: the FSCS does not cover investments in peer-to-peer loans like its council investments²³. These are loans to local authorities, and the scheme's protection is built around claims against failed regulated firms, not around a borrower failing to repay or a platform closing.

The narrow exception is advice. The FSCS is restricted to covering losses arising from bad advice, not the platform failing¹⁸. So if a regulated adviser recommended peer-to-peer loans and has since failed, a claim about that advice can be considered. If the platform itself goes under, the scheme does not step in.

Cryptoassets: no FSCS protection

Most cryptoassets are not FSCS protected because they are not regulated, and that includes virtual currencies such as Bitcoin and Litecoin²⁴. The FCA's risk summary for qualifying cryptoassets says the scheme does not protect this type of investment because it is not a "specified investment" under the UK regulatory regime³. The same applies to crypto exchange-traded notes listed on a UK recognised investment exchange: the scheme does not protect them because they are not a type of investment the FSCS can protect³.

The FSCS has said cryptoassets are not FCA regulated and therefore not FSCS protected¹⁰. Age UK's guidance is consistent: the FCA does not regulate most cryptocurrencies, so they are not protected by the UK's Financial Services Compensation Scheme²⁵. Take Five, the national fraud awareness campaign, notes that crypto fraud losses mostly are not covered by the scheme²⁷.

There is a separate point about where crypto sits. The FSCS cannot protect e-money or payment services firms either²⁸. So a firm that looks like a crypto or payments business may be outside the scheme on two counts at once.

What if a financial adviser recommended the unregulated investment to me?

This is the question that decides whether there is any claim at all, and it turns on three things: whether the person who recommended the investment was regulated, whether they have since failed, and whether the loss came from the advice rather than the investment's performance.

If all three line up, the FSCS can consider a claim up to £85,000⁴. If the adviser is still trading, the route is a complaint to the firm, and then to the Financial Ombudsman Service, which can look at complaints about investments where the business is regulated by the FCA⁷. The ombudsman can also look at complaints about unregulated collective investment schemes in some circumstances, which is why the advice route matters even when the product itself is outside the scheme¹³.

If the adviser was never regulated, or the loss came purely from the investment falling in value, there is no FSCS claim. The scheme does not pay compensation for poor performance¹⁴.

How to check whether an investment is regulated

The FSCS sets out a short sequence. Check that your provider is authorised by the FCA². Find out whether the particular activity the authorised firm is carrying out for you is regulated by the PRA or the FCA². Then ask the firm to confirm that the activity it is carrying out for you is a regulated activity, and under what circumstances you would be protected by the FSCS if the firm failed².

You can search the FCA Register to check whether a firm or individual is authorised. If the status shows "authorised", the FSCS may be able to compensate you if the firm fails²⁹. The FCA publishes its own guidance on how to check whether a firm or individual is authorised¹⁷.

The FSCS suggests three questions to put to a provider: is this investment product covered by the FSCS, how much of my money is protected, and what would happen to my money if something happened to the provider's business². It suggests three to put to an adviser: whether the FSCS protects financial advice, what happens if the firm gives bad advice and fails, and whether advised products are FSCS protected if the provider fails².

Where to get help if an unregulated investment fails

The first step depends on whether anyone regulated was involved. If a regulated adviser recommended the investment and is still trading, complain to the firm first, then take it to the Financial Ombudsman Service⁷. The ombudsman can help with a problem with your investment as long as the business you are complaining about is regulated by the FCA⁷.

If the adviser has failed, the claim goes to the FSCS. The scheme pays compensation if your financial services provider fails and cannot pay back your money itself³⁰. For pension transfer advice, the sequence is the same: complain to the adviser if still trading, then the ombudsman, and the FSCS handles claims where the adviser has failed⁷.

If no regulated firm was involved at all, there is no compensation route through the FSCS or the ombudsman. That is the position for peer-to-peer platforms that collapse, for cryptoassets, and for investments sold by businesses that were never FCA regulated³. The FSCS publishes a checker to confirm whether a product or firm is covered²⁸.