compensation scheme
Compensation Scheme: the safety net that pays you back, in part or in full, if a bank, broker or insurer you trusted collapses or fails you.
In plain English
What actually happens to my money if this bank suddenly shuts down tomorrow? That question has probably crossed your mind at least once, maybe while reading news about a bank in trouble, maybe while sending money home and wondering if the receiving bank is even solid.
A compensation scheme is the answer to that worry. It is a fund, usually backed by law and fed by contributions from banks or financial firms themselves, that steps in to pay depositors or customers something back when the institution holding their money fails. It will not always make you completely whole, but it stops you losing everything.
In Nigeria, the Nigeria Deposit Insurance Corporation, NDIC, runs this for banks. If a licensed bank goes under, NDIC pays depositors up to a set limit, currently ₦5,000,000 for deposit money banks, straight from the insurance fund that banks pay into every year. It is not charity, it is insurance you never signed up for but already had.
In the United Kingdom, the equivalent is the Financial Services Compensation Scheme, FSCS, which protects up to £85,000 per person per bank if a UK bank, building society or insurer collapses. Someone in London banking with a smaller, less known institution will still sleep fine once they know FSCS has their back up to that limit.
The lesson underneath all this is simple. Spread your money across institutions if you can, know your scheme's limit, and never assume a bank's size means your deposit is automatically safe. The scheme protects you, but only up to a point, and only if the institution was licensed and covered in the first place.
Adaeze has ₦4,000,000 in a Nigerian deposit money bank that later loses its licence. Under NDIC's current coverage limit of ₦5,000,000 per depositor per bank, she receives her full ₦4,000,000 back once the payout process is completed, rather than losing it all.
Questions people ask
Does a compensation scheme cover all types of accounts and losses?
No. It typically covers deposits held with licensed, covered institutions up to a set limit. It usually does not cover investment losses from a stock falling in value or losses from unlicensed lenders and fraudulent schemes outside the regulated system.
Do I need to apply or register to be covered by a compensation scheme?
Generally no. If your money is with a licensed institution that contributes to the scheme, you are automatically covered. What you should actually do is confirm the institution is licensed and check the current coverage limit for your country.
What happens if I have more money in a bank than the scheme's limit covers?
Anything above the limit is not guaranteed and you may lose it, or only recover part of it depending on how the failed institution's remaining assets are shared out. This is why spreading large sums across more than one bank is wise.
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