Is it me, or is there a fundamental flaw in the Financial Services Compensation Scheme? As you may know, this provides investors with protection in the event of the default of an investment company, insurance company, bank or intermediary.

In general this probably works very well. The FSCS collects money from all firms regulated by the Financial Services Authority such as insurance companies, IFAs, insurance brokers, investment houses and the banks. Between us, we contribute up to £4.1 billion a year – so that should be fine. Unless, of course, a bank fails.

So what is the problem?
And it is here that the potential problem lies. The FSCS is fine for dealing with individual problems relating to insurance and investments; these tend to be relatively modest in overall size (although we would not wish to underplay the individual trauma faced by any consumer who is affected). But if a bank fails – and several very nearly did last year, as we all know – then £4.1 billion will go nowhere.

I am not saying that there is likely to be a problem in practice. After all, the government has already demonstrated that it will not allow a bank to fail – which is presumably why, awash with our money, they appear to be acting as if they never had to be bailed out by continuing to refuse to lend, and paying themselves massive salaries. The company set up to manage our investment in the banks, UK Financial Investments Ltd, appears to be letting them do what they want. It certainly appears not to want to interfere with what the banks are doing - which is a shame, becasue this is precisely what the rest of us do want it to do, to make borrowing asier for us!

But what if a bank did fail?
The issue is, of course, that the FSCS itself must be investing its money (well the bits that do not go in massive salaries, bonuses, pensions and other benefits) somewhere and it could very well be that the banks it uses fail. Where then would the money come from to compensate investors?

Oh, yes, the taxpayer. Again.

When it comes to looking after our retirement planning and investments, we have to look after ourselves and there can be little doubt that vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE TAKEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.