If you are an investor who has a complaint about or a claim against a financial services company, it is wise to know something about how the Financial Services Compensation Scheme works.

Known in City argot as the FSCS, the body was set up six years ago to pay compensation if firms cannot meet the costs of compensation claims. Investors should see it as a fund of last resort.

Managers at the FSCS report that currently most of its investment claims work is dedicated to paying money owed to people who bought mortgage endowment policies. These policies were sold extensively in the 1980s and 1990s as cheap, “surefire” ways of paying off home loans. But it has since emerged that many endowment policies will fail to meet repayment targets.

When last tallied in March, the FSCS was dealing with 10,800 claims related to mis-sold mortgage endowment policies. It expects to receive around 26,000 new endowment claims this year.

What does the FSCS cover?

All firms authorised by the Financial Services Authority fall under its purview. If you have a claim against a firm that has stopped trading or has insufficient assets to pay out, contact the FSCS. The FSCS protects deposits, insurance policies, insurance broking, investment business and mortgage advice.

What are the limits on paying claims?

The FSCS only covers compensation for financial loss and the amount of compensation it covers is limited. It was set up to assist individuals, but smaller businesses are also covered. The rules on when it pays out are strict. It will pay compensation only when a firm is in a state of “default”, which means it cannot pay claims. Investigations are conducted to establish the financial position of the firm.

The maximum amounts the scheme will pay are as follows:

■The FSCS will cover up to £31,700 per person for a claim on a deposit. Claims on deposits come about when banks, building societies and credit unions are unable to repay their depositors. Joint account holders are each entitled to claim compensation.

■The limit on a loss arising from bad advice on an investment or poor management of an investment is £48,000 and the limit on a loss for mortgage advice and arranging is the same. The scheme will only pay claims related to mortgage advice, conducted on or after October 31 2004, the date when the FSA began regulating mortgage business.

■The FSCS’s payments for insurance are more generous. For most types of insurance, including life and home and general, and also for general insurance advice and arranging, it covers 100 per cent of the first £2,000 on a claim plus 90 per cent of the remainder; it covers 100 per cent of claims for so-called compulsory insurance such as motor insurance. In many cases, these claims occur when insurers are placed in administration.

What are common claims related to mortgages?

One situation that may spark a claim relates to whether advice given by a mortgage provider was suitable. If you were not advised about the different types of mortgages available and lost money as a result, you might want to consider filing a claim. If details about the mortgages you chose were incorrect and you lost money as a result, you might also want to examine ways to gain retribution. If you were advised to switch mortgages, but were never given an explanation about why you should and lost money, that could also be a violation.

How is the FSCS funded?

The FSCS is funded by levies on authorised firms. In the last year, the FSCS has paid out roughly £200m. About £93m of this concerned general insurance claims and about £69.8m involved pensions-related claims.

The FSA is reviewing the scheme’s funding structure. Currently, firms pay levies for compensation claims relating to the type of business they do. Efforts are being made to promote a system that would spread the cost of funding over a bigger number of firms and offer ‘catastrophe’ cover in case of a scandal in the financial services sector.

The FSA is expected to decide on how future funding should proceed by next year.

How should I go about submitting a complaint?

If a firm is still trading, you need to contact it directly at first to get reimbursement. If not, get in touch with the scheme’s initial inquiries team (020 7892 7300) and say you want to make a claim. The FSCS’s representatives will assess whether a claim is eligible for compensation. Losses cannot have been suffered before August 1988.

Another avenue of advice for those seeking counsel on how to deal with dodgy financial products or advice is the Financial Ombudsman Service, which handles disputes between consumers and financial firms. Its number is 020 7964 1000 and its web address is www.financial-ombudsman.org.uk.

Have you some tips on avoiding being bamboozled by providers?

Make sure the firm you are conducting business with is regulated by the Financial Services Authority. You can check by calling the FSA on 0845 606 1234 or by using its internet checking service at www.fsa.gov.uk/consumer.