Report on Icelandic banks

04 April 2009

The Treasury Committee today releases its first report in a series on the Banking Crisis, examining the consequences of the failure of the Icelandic banks in October 2008.

In the report, the Committee considers three sets of depositors: local authorities, charities and UK citizens who deposited in the Isle of Man and Guernsey subsidiaries of the Icelandic banks. It considers the case for the provision of assistance by the UK Government to each of these depositors.

The Committee does not accept that there is a need to provide assistance to the local authorities. It does however recommend that, on this occasion only, all charities should be compensated for losses incurred as a consequence of the failures of the Icelandic banks. Finally, it agrees that the overarching principle should be that the UK Government cannot provide cover for deposits held by British citizens in jurisdictions outside the direct control of the United Kingdom. As such, while acknowledging the severe distress of those UK citizens suffering due to the Icelandic banking failure, the Committee can only recommend that the UK authorities work with the Isle of Man and Guernsey authorities to resolve these issues.

John McFall, Chairman of the Committee, commented:

"Our inquiry into the Banking Crisis has taken in a vast amount evidence in the last few months. The failure of the Icelandic Banks demonstrated the huge impact the collapse of large banks can have on a country’s economy.

"The Committee came to the unanimous conclusion that it is only possible on this occasion to compensate charities and this is what we have recommended.

"The work undertaken by the charitable sector often provides the most vulnerable elements of society with invaluable support. At a time when more people than ever are faced with difficult economic circumstances, we believe that it is imperative that charities have access to the funds that were provided to them by the public."

The collapse of the Icelandic banks in October 2008

During the collapse of the Landsbanki bank in October 2008, the Chancellor of the Exchequer took steps to safeguard the deposits of UK investors. The Report notes that his comments regarding the intentions of the Icelandic Authorities had a serious impact on the confidence held in the remaining solvent Icelandic bank. However, the Committee saw no evidence that Kaupthing would have survived if the Chancellor had not expressed his views.

The use of the Anti-Terrorism, Crime and Security Act 2001 however, clearly had considerable implications for the Icelandic authorities in their efforts to maintain a functioning financial system. The use of this Act inevitably stigmatises those subject to it and a less blunt instrument would be more appropriate. The Report expresses concern that no appropriate legislation is available and calls on the Treasury to address this matter.

Charities and Local Authorities

The report acknowledges that some local authorities will feel hard done by as a consequence of the limitations of Government support for them. Local authorities are however required to take their own decisions on the level of prudent, affordable capital investment. They have a duty to the taxpayer diligently to protect the money they are investing on their behalf. Some authorities have shown themselves to be better than others in this regard. Under these circumstances, the Report concludes it would seem perverse to reward those authorities who failed to protect their investment with yet more money from the taxpayer.

It recommends that the Government consider the case for providing charities with further statutory guidance relating to the management of a charity’s finances and investments. It also urges the Government to take steps to clarify what protection is available to charities under the Financial Services Compensation Scheme.

Protecting British citizens

The Committee acknowledges the severe distress shared by many individuals as a result of this banking failure. A difficult judgment, though, has to be made in assessing the overall case for assistance. Those involved in the failure of the offshore subsidiaries of the Icelandic banks have suffered losses to date, and many of those affected are British citizens. On the other hand, the Committee also acknowledges the clear validity of the overarching principle that the UK Government cannot cover deposits held in institutions outside its direct regulatory control. The report urges the UK authorities should work with the Isle of Man and Guernsey authorities to resolve these issues, especially given the complexities arising from the take over of the Derbyshire building society.

The Committee further recommends that the UK authorities should seek to work closely with other interested parties such as the Financial Services Commission of the Isle of Man to maximise the transparency of the administration of KSF(UK) in order to facilitate the best outcome for all depositors including those with funds in KSF(IOM).

Lastly, bearing in mind the heavy coverage in the financial press of Iceland’s fragility the Committee was surprised that offshore savers using independent financial advisers were not advised of the changing risk profile of their savings. It hopes to explore further the role of advice to customers in its forthcoming inquiry into consumers and the banking crisis.

John McFall said:

"The Committee has received and is grateful for the hundreds of letters sent by individuals who have been affected as a result of this banking failure. The consequences of the Icelandic banks’ failure are clearly serious and distressing for all concerned. While we have much sympathy for the fate of all depositors, the Committee unanimously agreed that UK taxpayers cannot be expected to cover deposits held in institutions outside the UK’s direct regulatory control. However, we are today strongly urging the UK authorities to work with those of the Isle of Man and Guernsey to resolve these issues.

"This aspect of our Banking Crisis inquiry has also raised many new questions about issues such as consumer advice and cross-border regulation of financial institutions. Considerable taxpayer support has been required to provide rapid compensation to onshore UK depositors in Icelandic banks that were ‘passported’ into the UK regulatory system. This area of European law requires further consideration, and the Committee intends to return to it in a future inquiry onto the banking crisis within its international context."

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