The Financial Services Compensation Scheme (FSCS) is to pay out £210,000 on behalf of North East Lincolnshire Credit Union, which defaulted on 28 November.
The firm had 612 members with account balances of up to £5,000, the FSCS said, and the payments will be made within seven days for the majority of the union's members.
FSCS head of communications Mark Oakes said: "We are protecting members of North East Lincolnshire Credit Union Limited. You should get your money back within the week. The process is automatic too, so you won't have to apply for compensation."
Since 2001 the FSCS has come to the aid of more than 4.5 million people, paying out about £26bn in compensation. The body compensates members of regulated financial services firms, including advisers and providers, after the firms are officially declared unable to cover the costs.
Currently deposit savers receive a maximum of £75,000 from the FSCS but the banking regulator proposed this month to restore the limit to £85,000, following a dramatic fall in the value of the pound after Brexit.
The FSCS is industry-funded, with advisers typically contributing to the cost of pension and investment-related pay-outs, which carry an upper limit of £50,000 for investments and no upper limit for long-term insurance benefits, such as annuities.
The body is currently preparing for a review of its funding structure, with details of the work expected to be published by the Financial Conduct Authority by the end of this year.
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