FSCS exists to pay compensation to eligible customers. In addition, FSCS also has a duty to pursue recoveries that are “reasonably possible and cost-effective”.
Once we've paid compensation, the customers’ legal rights are transferred to FSCS. This allows us to try and recoup some or all of the costs of compensation. This benefits both our levy payers and those customers we've already paid, but still have uncompensated losses. We do not act for the benefit of other consumers or creditors.
We can pursue recoveries against the firm that's failed, usually by making a claim in the firm’s insolvency.
We can also pursue recoveries against any relevant third parties who may also carry legal responsibility for our customers’ losses. These might include, for example, the professional indemnity insurers of the firm in default.
For further details on FSCS’s policy on recoveries, including the rules that govern how we operate, please see below.
Under COMP 7.4.1R: "If the FSCS takes assignment of rights from the claimant... it must pursue all and only such recoveries as it considers are likely to be both reasonably possible and cost-effective to pursue". Equivalent rules are set out in the PRA Rulebook for recoveries in the context of deposits (Depositor Protection rules 28 and 29) and insurance (Policyholder Protection rule 14).
FSCS's recoveries policy
Our rules require FSCS to examine the chances for recovery after each default, applying the “reasonably possible and cost-effective” test.
In practice, the approach to recoveries varies between sub-schemes, determined by the prospect of recovery opportunities on a case-by-case basis. Following the assignment/transfer of rights from the customer, FSCS enjoys the same rights and status as the customer whom it has compensated. This effectively means that FSCS “stands in the shoes” of the customer when pursuing recoveries opportunities.
In general, claims for recoveries are always pursued with insolvency practitioners (IPs) such as liquidators or administrators where there is a prospect of dividends to creditors. Usually, that means that FSCS ranks as an unsecured, ordinary creditor. There are exceptions - in some investment firm failures, FSCS may be able to assert a trust claim, for example regarding client money/assets. In the case of deposits, FSCS’s claim has a super-preferred status. And in insurance, direct policyholders (including FSCS) have a priority status within the class of unsecured creditors.
FSCS automatically assumes depositors’ rights once it has paid compensation.
While most don't have realistic recovery prospects, there are some opportunities.
Although insolvent, insurance firms often still retain significant assets.
Although claims in a firm’s insolvency are generally cost-effective to pursue, FSCS continually applies a risk/reward analysis. FSCS will do this particularly in relation to claims against third parties. If the likely costs of a recovery are not justified by the merits of the claim, or by the potential return, we may compromise or abandon the claim altogether.
In addition to investigating claims against connected parties, FSCS will investigate if claims can be made against the failed firm’s professional indemnity insurers. Recoveries against insurers are often challenging. This is due to several factors such as:
- no or inadequate notifications by the insured,
- material misrepresentation or breach of warranty; and/or
- non-co-operation by the insured.
Despite this, FSCS continues to pursue recoveries against insurers where it is reasonably possible and cost-effective to do so.
FSCS does not pursue recoveries as a deterrent to any market practice, or as quasi enforcement or punitive action. This is a function for the regulators and other authorities. FSCS does not have any statutory role in enforcement action or market conduct. Rather, our approach to recoveries is a commercial test.
Assignment of rights
FSCS can only make recoveries if it receives by transfer, subrogation or assignment the claimants’ rights against the firms in default and third parties. Rights are taken in nearly all cases and the terms for this are part of our standard application forms. FSCS then "stands in the shoes" of the claimant, we have the same rights to claim as the claimant. FSCS will reassign the claimant’s rights back to them on request if we decide not to pursue any recovery.