What does the Financial Services Compensation Scheme do?

The Financial Services Compensation Scheme (FSCS) is designed to protect consumers when financial firms, such as banks or insurance companies, fail. Specifically, it provides compensation to consumers if a bank becomes insolvent, meaning it cannot meet its financial obligations, and is thus unable to return depositors' savings. This scheme is crucial in maintaining consumer confidence in the financial system, ensuring that individuals can recover their funds, up to a certain limit.

By offering this guarantee, the FSCS helps to protect the interests of depositors and provides a safety net for the public when financial instability occurs. This is essential in preventing broader systemic crises in the financial sector, as it reassures consumers that there is a mechanism in place to safeguard their deposits if a bank experiences severe financial distress.

The other options do not accurately reflect the function of the FSCS. For instance, the scheme does not pay consumers simply because a bank is wealthy, nor does it compensate firms for consumer losses, and it does not facilitate loss recovery for banks themselves. The primary focus is on consumer protection in the event of a financial institution's insolvency.