FSCS will automatically subrogate to depositors’ rights on the payment of compensation. Rights in relation to covered deposits are super-preferred in the insolvency, meaning that they are paid first. Rights in relation to uncovered deposits of individuals and SMEs are ordinarily preferred, and are paid out second, behind super-preferred rights but still before unsecured creditors. In practice, FSCS will therefore be the majority creditor in most cases and will receive recoveries on a priority basis.
FSCS retains these recoveries up to the amount of the compensation that we have paid in each case and is entitled to retain an amount in relation to our costs of pursuing recoveries. FSCS will pay any excess recoveries over to the relevant depositor.
FSCS pays compensation for deposits on a gross basis, i.e. we do not deduct or ‘set-off’ any liabilities owed by depositors to the deposit-taker, such as personal loans or overdrafts. However, any liabilities owed by depositors to the firm are not “written off”. Where there is a formal insolvency procedure (e.g. a winding up), the insolvency practitioner will seek to recover any outstanding loan repayments that are due to a defaulted deposit-taker.
Where there is no formal insolvency procedure, FSCS may carry out this role. FSCS will identify and consider the pursuit of claims against third parties – although these may also be made by the estate against third parties who caused the firm to fail. For example, FSCS has made claims to recover funds that were intended for depositors under trust arrangements.