As a financial firm in the UK, you know that your customers expect their funds to be protected, especially if they hold larger balances with you in the long term. However, regulators also expect firms to be transparent and operationally robust in how they deliver that protection. 

That’s where the Financial Services Compensation Scheme (FSCS) comes in. As the UK’s statutory compensation scheme for customers of UK authorised financial services firms, it offers end-customers additional peace of mind that should a bank, building society or credit union fail, the FSCS protects eligible deposits up to the deposit protection limit of £120,000 per individual per institution, and £240,000 for joint accounts. 

But while FSCS protection is, on the surface, quite straightforward from a customer’s perspective, delivering it is not. Behind the scenes, firms must decide how to structure FSCS-eligible customer funds and manage the operational and regulatory requirements that accompany them. 

In this guide, we’ll break down how FSCS protection works in practice, the main models for delivering FSCS-protected accounts for customers, and what to consider when choosing the right approach for your business. 

• How the Financial Services Compensation Scheme (FSCS) works 
• A brief history of the Financial Services Compensation Scheme (FSCS) 
• How to deliver FSCS-protected accounts for customers 
• Key questions to ask when choosing how to offer FSCS-protected accounts 
• Why partner with ClearBank for FSCS-protected accounts under our embedded banking proposition 

ClearBank is a licenced UK bank purpose-built to support financial firms, including embedded banking services that offer FSCS-protected accounts. To learn how we can help you deliver FSCS protection through our direct deposit model, get in touch. 

At its core, the FSCS protects consumers and businesses if their UK-authorised financial institution collapses, including banks, building societies, credit unions, insurers, and some investment and pension providers.  

• Scope: The scheme covers deposits, insurance policies (with varying limits for different products), pensions, investments, and mortgage advice. Some elements, like compulsory motor insurance, are covered in full; general insurance claims typically have up to 90% coverage. 
• Coverage limits: FSCS currently covers up to £120,000 per individual per institution for eligible deposits (from 1 December 2025). For joint accounts, the limit is doubled. Temporary high balances, for example, following a house sale or an inheritance, can be protected up to £1.4 million for 6 months. Eligible business entities also benefit from FSCS protection, with limits similar to those for individuals, but applied on a per-company and per-institution basis. 
• Deposit compensation: If an authorised firm fails, the FSCS automatically assesses eligibility and aims to pay compensation within 7 days for deposit accounts. 
• Industry funding: The scheme is funded via levies paid by regulated financial firms. FSCS independently administers these funds and seeks to recover costs from failed businesses when possible.

The Financial Services Compensation Scheme (FSCS) was founded in 2001 as an independent body set up by Parliament under the Financial Services and Markets Act 2000 (FSMA). It consolidated eight previous schemes into one integrated national compensation system.  

Its introduction reflected the UK’s commitment to consumer protection in the financial sector. Initial compensation limits started at £31,700 for bank deposits, providing 90% coverage up to £35,000, later rising in 2017 to £85,000, where it remained until December 2025.  

The importance of FSCS was demonstrated during the 2008 financial crisis, as it paid out billions in compensation and secured customer deposits at failed institutions like Bradford & Bingley, by taking loans from the Bank of England.  

In 2024/25, FSCS paid out £327m in compensation to 32,634 customers of failed firms. Since its inception, it has compensated more than 6.5 million people, paying out over £26.5 billion, across cases ranging from bank failures to unsuitable investment schemes.  

In November 2025, the Prudential Regulation Authority (PRA) published its final policy on depositor protection following its consultation (CP4/25). The limit was to be increased from £85,000 to £120,000, effective 1 December 2025. 

The new FSCS limits took effect on 1 December 2025 for firm failures occurring on or after that date. Firms were required to update their single customer view (SCV) systems, which provide information about eligible deposits, to enable the FSCS to quickly compensate depositors in the event of a firm’s failure, reflecting the new limit from that date.  

Deposit takers then had up to six months to make changes to their disclosure materials, which must be completed by 31 May 2026.  

For firms looking to offer FSCS-protected accounts, there are typically two approaches: 

• Using a bare trust model, where customer funds are held on trust across one or more partner banks 
• Partnering with a licenced bank like ClearBank, where customer funds are held in individual accounts directly with the bank 

While both models can deliver FSCS protection, but they differ in how they operate, the responsibilities placed on your business, and the experience delivered to your customers. 

In a bare trust arrangement, you hold customer funds as a trustee on behalf of your customers, who are the beneficiaries. While you have legal ownership of the funds, the beneficial ownership remains with the end customer. 

Customer deposits are typically held in pooled accounts, often distributed across multiple partner banks. These banks are directly responsible for managing the deposits.  

The bare trust model is a well-established and widely used method for holding FSCS-eligible deposits. For firms that want to offer FSCS-protected accounts without becoming a bank, it’s often an easy route to begin with. 

However, there are also important considerations to keep in mind when choosing the bare trust model. Typically, you would need to: 

• Manage the operational complexity of tracking how much each end customer holds at each institution. This introduces additional record-keeping and documentation requirements, as well as multiple data points that need to be checked and reconciled. Managing the process requires significant resources, including people overseeing the work and implementing automation tools to ensure the file is accurate. Even minor inconsistencies, such as formatting errors, can delay FSCS payouts. You would also be reliant on multiple banking partners’ internal processes to maintain accurate and timely FSCS files. 
• Clearly communicate to the customer what they are signing up for, including that they are not holding a bank account directly and that the firm may choose where their funds are held across one or more underlying banks. This is often reflected in lengthy T&Cs and disclaimers, which can make it challenging for customers to grasp how FSCS protection is applied in practice. 
• Minimise FSCS aggregation risk across institutions. If customers have accounts across multiple providers, they may be unaware that deposits held in these arrangements could inadvertently exceed the protection limit and therefore not be protected in the event of a failure. Hence, clear communication is crucial. 
• Potentially deal with longer payout timelines due to the friction caused by multiple intermediaries. In the event of a failure, FSCS payouts depend on accurate and timely data from all parties involved. This could introduce additional delays. 
• Manage significant ongoing regulatory responsibilities. Under a bare trust model, the responsibility for maintaining complete, accurate, and up-to-date records sits largely with you. This includes supporting FSCS payouts, KYC requirements, and broader compliance obligations. These requirements can be complex to manage at scale, which may introduce additional risk and oversight expectations from regulators, particularly under the FCA’s (Financial Conduct Authority) Consumer Duty framework. 

An alternative approach to delivering FSCS-protected accounts for customers is to partner with a provider that has a full banking licence under a direct deposit model.  

At ClearBank, we do this through our embedded banking proposition, where customer funds are held at the Bank of England (rather than being pooled and distributed across multiple institutions that then hold them). This creates a transparent link between the customer, their account, and the institution that holds their deposits. 

• Efficient internal operations: ClearBank manages the ledger and the balances that feed into the FSCS file. This reduces administration for you and enables you to focus on enhancing the customer experience rather than underlying process management and oversight. Data shows ClearBank delivers a 10% reduction in customer queries and the associated costs. 
• A high-quality, single customer view: ClearBank, in collaboration with our Embedded Banking partners, invest time and resources both in terms of teams and automation tools, to ensure the data quality stays extremely high. 
• Deposit visibility for clients: A real bank account offers our clients more transparency into deposit movements, which helps them to model their customers’ underlying behaviours. 
• Balance transparency: Via an API, we can see our clients and their customers’ balances in real time. We currently report them daily. This is important because, in the event of a failure, we must turn that customer file round to the FSCS within 24 hours. 
• Speedy payout timelines: Eligible deposits are paid out within seven days, rather than up to three months, in the event of a failure. 

Both the bare trust model and the direct deposit model are proven ways to offer FSCS protection. What you choose depends on your use cases and roadmap plans. When evaluating the right solution, it’s worth asking: 

• How will customer funds be structured, and where will they ultimately be held? 
• How clearly can we explain this structure to our customers so that FSCS limits aren’t exceeded? 
• What operational resources will be required to maintain accurate FSCS data and reporting? 
• How will our model impact FSCS payout timelines in the event of a failure? 
• What level of visibility and control do we need over customer balances? 
• How does this approach scale as our customer base and deposit volumes grow? 
• How will this model stand up to evolving regulatory expectations? 

ClearBank is a fully licenced UK-authorised bank that was purpose-built to support financial firms aiming to deliver embedded banking solutions such as FSCS-protected accounts.  

This includes: 

• Current accounts 
• Cash ISAs 
• Savings accounts (instant access, joint savings accounts, savings accounts, and U-18s savings accounts) 

Through our embedded banking model, you can offer individual named bank accounts with funds held at the Bank of England, where all client funds are accessible 24/7, year-round. All eligible deposits are protected up to £120,000 under the FSCS scheme. 

Clients like Chip, Coinbase, Capital on Tap, Revolut, Tide, and Wealthify already rely on our API-first infrastructure and in-house expertise. In fact, an analysis by the leading consultancy firm Forrester found that ClearBank’s embedded banking model delivers significant ROI.  

Our clients have achieved: 

• Up to 90% ROI, with payback in as little as 10 months 
• £9.7m in profit through product expansion, new customer acquisition, and cross-selling opportunities 
• Reduced customer queries by 10%, which equates to a cost saving of nearly £63,000 
• Increased customer retention by 3% 

Read the full report here: The Total Economic Impact™ Of ClearBank Embedded Banking 

With ClearBank, you can also: 

• Take part in an interest-sharing arrangement where the end-customer earns a rate, we earn a margin for providing the licence and infrastructure, and you earn a revenue share yourself as an additional stream of revenue 
• Gain indirect payment scheme access to Faster Payments and CHAPS 
• Offer near real-time payment experiences and event notifications to end-customers through our flexible API that delivers scheme-level transaction data  
• Implement a Confirmation of Payee (CoP) function so that your customers can easily verify who they are paying, reducing fraud and support queries 
• Grow with a B2B bank that does not compete for your customer base  

The way you deliver FSCS-protected accounts shapes how your customers understand your product and how much operational complexity your teams need to manage behind the scenes. 

While multiple models can provide access to FSCS protection, the way those models are implemented differ – and for firms evaluating how to move forward, the key is to choose an approach that supports future scale, evolving regulations, and customer expectations. 

If you’re exploring how to deliver FSCS-protected accounts through a direct deposit model, ClearBank’s embedded banking proposition provides a fully licenced, scalable, API-driven solution. To find out more, reach out to us.