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Banking: Iceland

Volume 716: debated on Wednesday 27 January 2010


Asked by

To ask Her Majesty’s Government further to the Written Answer by Lord Myners on 13 January (WA 154), what were the criteria used to decide that all Icesave retail depositors with the United Kingdom branch of Landsbanki should have their deposits returned in full; what was the cost of doing so; what legal powers were used to do so; and whether they are likely to recover that money. [HL1417]

Under the EU banking consolidation directive, firms with permission in their home EEA states to perform deposit-taking activities may establish branches in the UK. However, in order to exercise this passport right, a firm must have satisfied the conditions set out in Schedule 3 to the Financial Services and Markets Act 2000. These conditions include the requirement for the FSA to have received a consent notice from the firm’s home regulator that it has given consent for the firm to establish a branch in the UK. Landsbanki satisfied these conditions and exercised its passport right to establish a branch in the UK, where it carried on deposit-taking business.

The EC deposit guarantee schemes directive (94/19/EC) sets the minimum terms on which depositors are protected throughout the European Union and European Economic Area (EEA). All EEA member states are required to ensure that the deposit guarantee schemes directive is adequately implemented in their territories.

Under the directive, depositors at branches in a host state are covered by the guarantee scheme of the home state. Depositors with the UK branch of Landsbanki were therefore eligible for compensation (for deposits up to €20,887) from Iceland’s Depositors’ and Investors’ Guarantee Fund (DIGF).

Where a bank’s home state scheme provides a lower limit of compensation than the UK FSCS, or the scope of protection is less than the FSCS’s, the bank may choose to join the FSCS to top up the level of protection offered by the home state scheme.

Landsbanki chose to exercise this top-up option, meaning that depositors with the UK branch are protected to the FSCS limit per depositor and therefore may claim from the FSCS for the amount of their deposits above the DIGF limit to £50,000 (the FSCS limit).

Landsbanki, the Icelandic bank, is authorised and regulated by the financial services regulator in Iceland. Landsbanki’s UK branch is subject to limited regulation by the UK Financial Services Authority (FSA).

On 8 October 2008 the FSA announced that the UK branch of Landsbanki was in default for the purposes of the FSCS. The Chancellor announced that all retail depositors with the UK branch of Landsbanki would receive their money in full. The Government’s objectives in taking action in relation to the UK branch of Landsbanki were to maintain financial stability and to minimise the exposure of, and costs to, taxpayers.

In total, around £4.5 billion has been paid. It is estimated that this includes £2.35 billion compensation that the UK Government paid out to depositors on behalf of the Iceland Depositors’ and Investors’ Guarantee Fund (DIGF), £1.4 billion paid out by the FSCS for deposits above €20,887 and below £50,000, and £800 million paid out by the UK Government in respect of deposits above £50,000.

In guaranteeing UK retail depositors of the Icelandic banks, the Treasury acted under its common law powers. The statutory authority for the Treasury to incur this expenditure was provided by Section 228 of the Banking Act 2009 (retrospectively).

We expect that the FSCS and HM Treasury will make significant recoveries of the compensation paid to depositors through the winding up of Landsbanki. In relation to the compensation paid out on behalf of the DIGF, on 5 June 2009, the UK Government reached agreement with the Icelandic authorities on a process to ensure the UK is refunded. The terms of the loan arrangements are set out in my letter to the House of 13 January (WA 154). They include a state guarantee which, under Icelandic law, must be authorised by the Icelandic Parliament in order to take effect.

A Bill was passed in August to this effect but with a number of conditions introduced by the Icelandic Parliament. Following further negotiations, the loan agreement was amended to take account of these conditions. On 30 December, the Parliament in Iceland endorsed the loan arrangement and agreed a state guarantee. However, on 5 January 2010 the Icelandic President announced that he would not sign the Bill that the Parliament had approved, and instead proposed a referendum. A referendum has been scheduled for 6 March 2010.

The UK Government have received assurances from the Icelandic Government that they remain committed to meeting their legal obligations under EEA law and intend to repay the loan in full.