FSCS Limit Increase Is Coming. Here’s Why Operational Risks Could Matter More.

Paul McCluskey
Nov 21, 2025
3 min read

The Prudential Regulation Authority (PRA) has confirmed that the Financial Services Compensation Scheme (FSCS) deposit protection limits will increase from 1 December 2025. While most firms will focus on updating client documentation, there are wider operational matters that deserve closer attention.

What is the FSCS?

The Financial Services Compensation Scheme (FSCS) protects consumers authorised financial institutions fail. Established in 2001, the FSCS has paid out over £20 billion in compensation and is funded by a levy on regulated firms, making it free for consumers.

What is Changing?

From 1 December 2025:

The standard deposit protection limit increases from £85,000 to £120,000 per individual.
For joint accounts, the limit rises from £170,000 to £240,000.
Temporary High Balances , protected for up to six months (such as funds arising from a property sale, insurance pay out, or inheritance) will increase from £1 million to £1.4 million.

Implications for Law Firms

Law firms holding client money should update:

a) Client interest policies

b) Terms of Business documents

c) Internal risk and compliance manuals

Suggested Policy Wording

Other versions are available and can be tailored to your firm.

"The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme for customers of deposit providers. The FSCS can pay compensation of up to £120,000 if a deposit provider becomes unable to meet its obligations. Temporary High Balances of up to £1,400,000 are also protected for up to six months for specific life events, including property transactions, inheritances, or personal injury settlements. Further details are available at www.fscs.org.uk or by calling 0800 678 1100."

Additional Operational Considerations

While the FSCS provides an additional layer of protection for clients, no UK banking institution has, to date, required FSCS intervention to compensate depositors. Given the rigorous financial stability requirements placed on UK banks, future claims on the FSCS also appear unlikely - though not impossible.

Operational considerations such as service outages and persistently low interest rates may, in fact, present more immediate risks.

Banking service outages are more common than you may think. With outages ranging from a few moments to days, it is important for firms to consider how best to continue operations in the event that the firm’s office or client account becomes unavailable.

For example, A conveyancing practice may shudder at the thought of a Friday-afternoon service outage. Imagine being unable to complete a client’s house move because of a bank service outage. It’s the kind of situation that leaves clients frustrated, reflects poorly on the firm, and certainly doesn’t make for a restful night’s sleep.

For business continuity purposes, the situation can be avoided by having more than one banking connection.

In selecting another banking partner consideration must be given to whether the prospective banking partner operates independently from your primary bank.

It is important to remember that compensation under the FSCS is limited per banking licence, rather than per account.
A number of bank and building society brands are actually owned by the same banking group and operate under the same UK banking licence.
Moneyfacts has produced a very helpful table which reveals which banks and savings account providers operate under which banking license, helping deposit holders work out to what degree their funds are protected by the FSCS.

Impact of Lower Interest Rates

Despite what some benchmarking surveys may imply, law firms are now earning significantly less interest on client accounts. Major banks have come under government scrutiny for underpaying, and the numbers tell the story: advertised reference-margin pricing from the big four banks is currently up to 58% lower than it was before 2008. Rates that once sat at just 1% below base have dropped to as much as 3.45% below base.

This decline highlights the importance for law firms to proactively negotiate more competitive rates with their banking partners.

Conclusion

While updating FSCS references is mandatory, the wider strategic focus for law firms should be to strengthen operational resilience and ensure banking arrangements provide both protection and value. Firms can safeguard operations and enhance financial stability by

establishing secondary banking providers under different licences and
negotiating improved interest terms.

Need Help Updating Your Policies /Review your banking arrangements?

Gemstone Legal can review your client interest policy, FSCS wording, and operational banking arrangements. Book a time that suits you: https://calendly.com/gemstonelegal/letstalk

About the Author

Paul McCluskey is the Managing Director of Gemstone Legal, who specialise in client money management and offer finance and risk management support to UK law firms. As a Law Society approved Lexcel assessor, he helps firms to perfect their approach to operational excellence.