Unregulated savings schemes

Unregulated saving scheme is a broad term used to describe a range of savings products which are not regulated by the Financial Conduct Authority (FCA) and aren’t covered by the Financial Services Compensation Scheme (FSCS).

This means, if the scheme you’re with goes out of business, or your money is lost, you may not get any of your savings back.

Unregulated savings schemes are available informally and commercially. 

Informal schemes are savings clubs which bring people together who live in the same area, work in a similar profession, or share a social bond.

Commercial schemes take the form of savings clubs, which can be available from supermarkets. For example, there are many such commercial schemes which give their members access to their savings through vouchers in the run-up to Christmas.

Informal schemes exist under many different names depending on where in the world they were originally based. For example, pardna (from the Caribbean), susu (from Africa), chit (south Asia) and kou (Japan).

Regardless of the name, they are all types of Rotating Savings and Credit Associations (ROSCAs).

ROSCAs bring together a group of people who might share something in common. This is usually a geographic connection or a social bond.

You contribute a fixed amount of money regularly (usually every month) into a pot, over a specific period of time (usually 6 months to a year).

At the end of the fixed period during which each pot is built up, the entire pot goes to one of the participants. The recipient is decided according to the rules of individual schemes.

This can involve each person in the scheme taking it in turns, through a lottery or by a bidding system.

Accumulating Savings and Credit Associations (ASCAs) are rarer but share many of the same characteristics as ROSCAs.

The key difference is the accumulated pot is used to make loans to group members or trusted third parties. When the loans are paid back with interest, the entire amount goes back in the pot and shared among members.

Savings clubs offer members the opportunity to save as much and as often as they like. The most common example are Christmas savings clubs, where you put money in through the year and can access the money a month or two before Christmas. 

In most cases, you will receive paper or electronic vouchers which can be spent at specific retailers, or through the club’s catalogue. 

Some savings clubs are signed up to a voluntary code of conduct and might offer a conciliation service.

The main risk of putting money into a ROSCA, ASCA or savings club is that the scheme isn’t governed by the FCA, and your money is not protected by the FSCS.

This means if the scheme goes out of business, or your money is lost, you may not be able to get any of it back.

In most cases, these schemes will also not earn you any interest on your money. It can also be difficult or impossible to access your money in the case of emergencies; even if you can access your money, there might be penalties. 

Savings clubs might mean you’re committed to spending what you’ve saved with a specific retailer and there is no opportunity to take advantage of other competing offers and deals. You might also have to spend your savings and any bonus within a specified timeframe – again, it might be impossible to spend your vouchers during a sales period. 

There are a number of alternatives to unregulated schemes. Many of these pay interest, allow you to access your money when you want and protect your savings.

The most obvious of these are current and savings accounts from a bank or building society. Your money will be protected through the FSCS and you might earn interest on your money, or if you choose to save in a prize-linked account - with a bit of luck - you could earn even more.

Credit unions are another alternative, also protected under FSCS. These are member-run organisations where members pool their savings so they can lend to one another.

Mainstream banking and saving options also allow you to build up a financial profile and credit history. A good credit record and score allows you to access a wider range of more affordable products (including loans, credit cards and mortgages) in the future.