Friday, October 10, 2008

Labour Minister Says Icelandic Investors Are Legally Entitled to Their Money

Catherine Mayer writes on the TIME website...
In July, Kitty Ussher, then Economic Secretary to the Treasury and now a minister in the Department for Work and Pensions, was quizzed by an influential House of Commons committee after newspaper reports that the Icelandic Deposit and Investors Guarantee Fund had insufficient resources to cover its potential liabilities. "Are you satisfied, Minister, that British investors in Icelandic banks are fully guaranteed in the event of a bank collapse then?" wondered Michael Fallon, the Conservative MP who chairs the committee. "I am satisfied that the law exists to guarantee them, yes," replied Ussher. Fallon persisted: "You are satisfied that the law exists to guarantee them?" "Yes," came Ussher's reply, "under a combination of European and British law." "So they will get all their money back?" Fallon asked. "That is the legal situation," said Ussher.

The key phrase here is 'British investors'. There was no differentiation between individuals, councils or companies. And Ussher then went on to say that everyone would be legally entitled to get their money back. If she had misspoken, no doubt the record would have been corrected.

What this does show is that there were doubts about Icelandic banks many months ago. On the face of it, it seems incredible that no one who was offering financial advice to local authorities seems to have picked up on this. And what about HM Treasury, the FSA or the Bank of England? Shouldn't one of them have picked up on what was going on and issued some advice?

UPDATE: Unity has posted a comment which shows that Kitty Ussher was indeed referring to individuals. But the point remains that there were doubts about Icelandic banks back in July and no one seemed to act on them in the investment community.


CROWN said...

Kitty is so out of depth.

As an IFA myself, for years I have advised clients to stay clear of anything that was not UK based, even if a lower return was received.

In a crisis it is protect ourselves

Anonymous said...

Thats the Economic Secretary to the Treasury though.

Any Local Government official reading that and also reading how at least some of these Icelandic banks were being regulate by the FSA would surely be entitled to think that their investments were guaranteed by the government.

Now that the shit has hit the fan the shites are dodging the issue.

Unity said...

Sorry Iain, but you're commenting on piece of piss-poor reporting based on a comment taken out of context.

If you read the full exchange from the uncorrected transcript - (Q271 onwards) - then its clear that what the committee were discussing with Ussher was the position of retail depositors and not institutional investors.

Q271 Nick Ainger: Can I ask you about the Depositor Protection Scheme as it applies to foreign-owned banks. We have had information from the FSA which explains the system for those banks which are based in the EEA and they are covered by the Deposit Guarantee Scheme Directive which means that they have to have a home-based Deposit Guarantee Scheme of a minimum of €20,000. However, our scheme is far more generous than that. We have also been told that 13 banks based in the EEA have top-up arrangements so that a British depositor in their British branch will receive the same compensation overall as if they were in HSBC, Barclays or whatever. There are two issues here. First of all, there are clearly a number of EEA banks who have not entered into the top-up arrangements. That is the first issue. The second issue is even those depositors with EEA banks that have the top-up arrangements, the first call is on the home-based depositor scheme, so there is complexity and the potential for delay in that situation. The same applies for those EEA banks that have not entered into the top-up scheme. We have also had evidence that perhaps some of the home-based depositor schemes that these banks have operated are wholly inadequate to meet their potential commitments. You said in your consultation document in October 2007 that you recognise these issues and the Government has raised these issues with ECOFIN. What has happened? Clearly if we want a system which depositors have confidence in so that we do not have runs on banks then I think this is a clear issue which we have got to resolve. I do not think any minister could say that a British branch of a foreign bank has the same depositor protection as a British bank.

Kitty Ussher: You are right, in a sense. In the branches in the UK the bank has the opportunity to top-up to the same level as the FSCS domestic threshold, but legally all they are required to do is meet the requirements of the relevant European Directive which, as you correctly say, has a limit of €20,000. This is an issue that we are in discussion with our European colleagues, the Commission and the Council of Ministers around, and that is the situation. It is important that individual institutions make it entirely clear to their depositors the extent to which their deposits are protected. I know that a number of branches that have passported their arrangements into the UK have chosen to top-up to the FSCS level.

Q272 Nick Ainger: Do you know how many other banks have not decided to top-up to the FSCS scheme?

Kitty Ussher: I am not sure.

Q273 Nick Ainger: All we know is 13 banks that are based in the EEA have. We were told there are over 100 foreign-owned banks taking deposits in the UK, we do not know how many of those are EEA and outside the EEA, but my guess is there will be a substantial number of EEA banks which have not decided to enter the top-up arrangements.

Kitty Ussher: Perhaps we need to clarify this in correspondence. My understanding is that banks that have subsidiaries here are regulated in entirely the same way as purely domestic banks. The EEA banks can passport branches in, which is the different arrangement.

Mr Maxwell: I will check, but, as far as I know, non-EEA banks do not have that passporting right so they have to set up subsidiaries here in order to do that business.

Q274 Nick Ainger: But there are a substantial number, and we have got a list of them, 13 at least, which are based in the EEA and, therefore, they are not regulated by the FSA and they have decided to top-up. The question is how many more EEA-based banks have not decided to top-up and, therefore, there is a substantial difference potentially between the Deposit Protection Scheme for British depositors compared with other banks.

Mr Maxwell: As a factual question I am afraid I do not know the answer but I could find out for you. It is worth also saying, of course, that individuals can bank electronically and by telephone with banks in other countries without that bank having any presence in the UK, so those sorts of possibilities exist. I can find out for you the number of EEA branches that are not topping up.

Q275 Nick Ainger: Do you appreciate that potentially there is a real problem here in that your consultation paper identifies that there is a complexity, a potential for delay, and the whole idea is we are trying to get away from that to prevent runs on banks, and yet because it is a bit difficult and we have to deal with other countries we seem to be accepting that we cannot come up with a better scheme so that all British depositors in banks, whether they are foreign-owned or British-owned, have the same protection and we do not end up with a run on a foreign bank.

Kitty Ussher: The obvious logical solution would be to have harmonisation of the compensation limit across the EU. I do not know whether that is feasible but it is an issue that we are raising with the European Commission and the Council of Ministers, as I have said, and we will continue to push that for precisely the reasons that you have laid out.

Q276 Mr Fallon: Given there are several hundred thousand British investors in these EEA banks, why are there only two sentences out of a 164 page document devoted to this?

Kitty Ussher: Because the sentences say what is required, I would suggest.

Q277 Mr Fallon: They do not say what is required. They say, "Depositors may be entitled..." When we asked the FSCS last week they simply referred to "an entitlement". It is not a guarantee, is it?

Kitty Ussher: They are guaranteed from their home regulator under the European Directive and if the bank has topped up under the FSCS if it is a branch then they will be guaranteed up to the FSCS limit.

Q278 Mr Fallon: The Times reported that the Icelandic Deposit and Investors Guarantee Fund has only £88 million in the kitty to cover deposits totalling 13 billion. What is your figure?

Kitty Ussher: I do not have figures for the Icelandic compensation scheme.

Q279 Mr Fallon: Are these figures accurate?

Mr Maxwell: It is worth saying, of course, that countries which do not have a pre-funded scheme will not have large funds. We do not have a pre-funded scheme.

Q280 Mr Fallon: Are you satisfied, Minister, that British investors in Icelandic banks are fully guaranteed in the event of a bank collapse then?

Kitty Ussher: I am satisfied that the law exists to guarantee them, yes.

Q281 Mr Fallon: You are satisfied that the law exists to guarantee them?

Kitty Ussher: Yes, under a combination of European and British law.

Q282 Mr Fallon: So they will get all their money back?

Kitty Ussher: That is the legal situation.

Q283 Mr Brady: Firstly, just to follow up on that, in the event that a foreign bank which had joined the top-up scheme were to fail and there were insufficient funds in its domestic guarantee fund, would it then fall to the FSCS to pay the whole amount up to the UK guarantee level?

Kitty Ussher: As I said in answer to Mr Fallon, the legal situation is that the first €20,000 is legally guaranteed by their domestic arrangements and the top-up is legally guaranteed through the operation of the FSCS which comes under our primary legislation. That is the situation.

Q284 Mr Brady: So if the domestic guarantee failed then that first €20,000 might not be paid, or might not be paid in full, and it would just be the top-up that would be honoured by the UK guarantee?

Kitty Ussher: I do not want to be pressed too far on this so as not to unduly alarm anybody. I am simply explaining the legal situation, which is that a depositor has redress from the domestic compensation scheme of the host bank to pay the first €20,000 and the legal arrangement is that the top-up will be paid by the FSCS. I simply do not know how it would work in practice, but that is the legal redress situation.

Q285 Mr Brady: Would you be able to write to confirm the detail on that point as to whether our guarantee would extend if the domestic guarantee failed?

Kitty Ussher: I think what is important to do is perhaps we should take this away and make sure that when we come back to Parliament we are able to say in practice how it would work, do individual investors have to contact the Icelandic authorities or whether there is another way that is simpler to do it.

Iain Dale said...

Unity, thanks for that. I have updated the original post.

Old Holborn said...

My councils lawyers have just informed me after losing £5M that they were following government guidelines

I have launched a FOI request to see those guidelines

Anonymous said...

This is sickening. The public will be furious to learn that much of LA (i.e. OUR) money now frozen in Iceland was invested for the public secto's' massive, elitist pension funds.

Poor little public sector elite, yet no need for our hearts to bleed for them.

They won't suffer the effects of their own negligence in placing funds in shakey Icelandic banks because, like the fat cat bankers and fat cat nulab, they'll just take even more money from us.

Lola said...

They could have asked me! Or rather us. We had assessed that the savings rates paid by Icelands banks reflected high risk yomks ago and told clients not to go with them. But hey! What do I know? I am just a micro business operating in FS in the Styx.

What a bunch of wankers.

Lola said...

For further proof that a lot of us knew that Iceland was bonkers see:-

BOF2BS said...

Money week has been giving information over quite a period of time concerning the relative weaknesses of banks with the Icelandic ones figuring prominently


"Then, there are the foreign banks who are offering us internet savings accounts. The basic rule of thumb here is: if they’re ING, they’re no worse a risk than a UK high Street bank. If they’re Irish, they’re likely to be over leveraged and a bit more of a worry (especially Anglo Irish Bank). But if they’re Icelandic, then be afraid; these banks are starting to be priced for bankruptcy risk.

Kaupthing is now having to pay almost 8.5% more than 5-year government bond yields (i.e. 12.3%) to raise funds. Kaupthing’s savings account pays just 6.5% AER, which doesn’t even come close to compensating us for the risk I’d say. The markets seem to be telling us that there is a very real default risk here. Glitnir Bank is not much better and even Landsbanki (owner of the popular Icesave internet banking business) has to pay the credit markets 6.0% more than risk-free rates and 4.2% more than ING does, for funds".

This article is dated March 2008

Anonymous said...

The daily mail says that the Chelsea
Building Society invested £55 million in Icelandic banks and A few hours ago I received group e-mail message from the Open University VC
that the OU invested 2 millions there. Are there other universities and building societies involved? Paper lion Gordo roars louder and louder, never bothered to put a tighter regulation through FSA,in his years in the treasury.

Anonymous said...

trevorsden 9.03

'Any Local Government official....'

So the teaboy is the one who decides to invest the off £5mn of taxpayers money?

The guys from all these councils and government bodies should be put up against a wall and shot forthwith.

When will people get it - the higher the rate of return, the higher the risk. Like Crown, I'm an IFA and have known for some 12 months that it was highly likely an Icelandic bank would hit the buffers.

Why is is £100k per annum 'professionals' working for the government never seemed to have an inkling of basic financial planning?

Anonymous said...

Will be interesting to see if Labour capitulate if any of their major Union donors have invested in these banks.

Anonymous said...

From 16 March 2008:

Iceland's banks top 'riskiness league'
Simon Watkins, Financial Mail
16 March 2008, 12:36pm

Credit insurance for debts at Iceland's biggest bank, Landsbanki, is priced at 610 points while that for Kaupthing is priced at a hair-raising 856. Given that these two have taken billions in UK retail deposits, it may be a sobering thought for savers to consider where they are putting their cash. These banks are now seen as the most unsafe in the developed world.

Of course, no one can be sure that disaster looms for anyone, but the figures on credit default swaps show clearly where investment professionals think the big risks are.

You have been warned.

Anonymous said...

Brown's treatment of Iceland is appalling. Kicking an ally while they are down.

The reason is because he wants to send a message to his fellow Scots. The Nats held up Iceland as an example for independence. Brown is making sure he kills the SNP off while he can. Disgraceful.

Brown doesn't care that his callous bloodletting is costing hundreds, if not thousands of jobs in the north of England, just so long as the Scots are made to stay in the fold and vote Labour.

Anonymous said...

What is extraordinary about all this, is that not very long ago a number of local authorities invested a lot of money in a high risk foreign bank which was offering above market rates of return - BCCI. They got their fingers burned.

What's happened now? A bunch of local authorities (including incredibly some of the same local authorities who lost with BCCI) invested a lot of money in a high risk foreign bank which was offering above market rates of return.

Chris Paul said...

The doubts go earlier than this Iain. Fallon's word "investors" is a bit of a giveaway on the looseness of some of the language. These people are savers I'd have thought.

Anonymous said...

Iain, Channel 4 news *led* with a twenty-minute piece on the sustainability of Icelandic financial system back in March. Just because no-one was paying attention doesn't mean this stuff came out of the blue

Chris Paul said...

PS There is a letter in today's Guardian from Profs Buiter (LSE) and Sibert (Birkbeck) stating that the shakiness of these ice banks was apparent "by the end of last March".

Credit watchers Fitch placed them on negative watch at the start of April. Assets and liabilities were nine times the national GDP. They go on to suggest that bailing people out in these circumstances is outrageous.

Our regional cancer hospitel The Christie has just revealled that it had £7.5M in Iceland ...

Anonymous said...

Not sure why I should bother wasting precious endangered pixels on you Annon, but 'local gov official' was clearly not intended to mean teaboy.

As each hour goes on - the number of organisations who invested in Iceland grows and the sums increase. Despite 'unity's' comments it seems to me a depositor is a depositor - Charities for goodness sake were persuaded to put money into Iceland.

Just what was the regulator doing all this time. the regulatory structure set up by Brown.

Back in 2005 - Brown went out of his way to introduce a light touch regulatory structure. Its all gone badly wrong.

This comment at a Smith Institute Seminar
(attended by Ed Balls - this is not his comment) points out
"the City needs certainly a low tax burden, and light and effective regulation and only where regulation is appropriate."
With a telling line ...
"but I think we are all
encouraged by the government’s recognition of the need to establish a realistic balance between risk and

As a BTW - Balls is proud of wasting the £22 billion from 3G auctions in repaying national debt. Look at the national debt now ... how better if that money had been invested in web/ internet infrastructure

Tapestry said...

those paying taxes to the British government might take note of the financial incompetence combined with its greed. Happily I am now living elsewhere, after deciding that paying 65% income plus Nat Ins was a waste of time, plus council tax plus the joys of 40% Inheritance Tax to come.

One part of this financial crisis must surely be the end to the notion that you can trust governments with money...and especially Labour governments.

Private businesses are compelled by competition to act responsibly. Governments are literally a law unto themselves.

Unity said...

Old Holborn:

Let me save you the time and FOIA request, the 2004 guidance issued by the ODPM is here... (pdf)

And what it says is that council's should have an annual investment strategy and give due regard to issue of liquidity and risk, etc.

What the government did was relax the regulations on investments to give councils a little more latitude in where they could make investments - there seems to have been an approved list prior to 2004 - but told them they should be prudent in deciding where to invest and spread the risk.

Unless councils come up with something more concrete it looks very much like their trying to blame the regulations for their own poor decision making.

The key passage in the guidance is this one...

14. The general policy objective is that local authorities should invest prudently the
surplus funds held on behalf of their communities.

15. The guidance recommends that priority should be given to security and liquidity. However, that does not mean that authorities should ignore yield. It will be appropriate to
seek the highest rate of return consistent with the proper levels of security and liquidity.

Anonymous said...

Professor Buiter, of the "Maverecon" blog on, an academic at the LSE and a former adviser to the Bank of England's MPC, says in a recent posting that he told the Icelandic authorities in the early part of this year that their banking model was bust. His position is set out in a paper - jointly authored with Professor Anne Sibert of Birkbeck College - that he presented to the Icelandic government which he is now choosing to open up.

You have to ask yourself if he knew even though he might have had a duty towards his client he must surely have also had a responsibility to all UK investors. They could have easily been warned discretely no doubt through Buiter's extensive contacts in the UK government.

It isn't much of a speculation to suggest that if Buiter and Sibert had worked out that Icelandic banking was bust then anyone involved in banking supervision, almost certainly the FSA and the Treasury, would have known too.

Here's the cracker. Ms Sibert is a member of the council of economic advisers to the opposition front bench. Osborne's in the frame.

king said...

I'm sorry but you're demanding a very high standard of competence from the Treasury et al, one that you just don't get any more in this country, under either party.

Aristocracy and noblesse oblige and the common good seem to be alien concepts.

The state can't prevent fraud, control teenagers, stop losing data or foresee self-evident financial crises.

They only care about political consequences, will cover up any mistakes and to hell with the good of the country. What is needed: character.

As the Lady said: "I can't bear Britain in decline."

Tapestry said...

he credit crunch was keenly awaited by Gordon Brown and is being greatly enjoyed by him. He has always desired to bring capitalism crashing down so he can nationalise, and centralise every single step of our lives. Now he can.

The EU has been preparing for this moment a long time, willing it to occur, tempting the fine financial institutions of capitalism to destroy themselves to make the way clear.

Anonymous said...

300000 People and an economy based on fish.

If it looks like a bubble...

Will who ever at my local council has lost us £11000000 get sacked or is it only those of us that have to work until we die to pay their pensions that lose our jobs if we screw up?

Colin said...

I'm with Mike Smithson (PB) on this. The terms offered by these banks were so generous, that responding to their marketing was akin to putting your money on number 3 in the five fifteen at Kempton Park.

In addition, I have no sympathy for the overpaid, under talented twats working in councils or other public bodies who took those punts with our money. Before the dust settles and before another penny of our money is used to bail them out, they should all be shown the door.

Anonymous said...

'Buyer Beware'

'If it looks to good to be true, its 'cos it is'

Do these people who put money into Icelandic Banks, need the government or anyone else to remind them of those truisms

Anonymous said...

Forget all that Iain, there's only one stroy that you as a journalist should be addressing.

The Daily Mail, the Tory party's house magazine, runs a hatchet job on Hague, does a Hello Magazine piece on Brown, why?

Anonymous said...

Anonymous at 9.22 AM -


Simple. The cold, dead hands of Campbell and Mandelson.

Anonymous said...

Forgive me if somoeone has raised this already - but I was amazed and concerned to learn Brown used 'anti-terrorist' laws to freeze Icelandic bank assets.

So the next time I hear Brown's Government promising me that their draconian, rights-suppressing law proposals (eg 42 Days ? Identity Card data ?) will only be implemented in very specific & related situations, I will remember last week and remember just how quickly Brown mis-used such laws because it suited him and his political/PR needs.

Alex said...


You are not alone, nor the first. What gets me is that Brown actually expects a country with the population the size of Wakefield and an economy based on cod to be able to pay up. The FSA permits them to set up a branch because Iceland is in the EEA, but the FSA is responsible for regulation of their UK branch and could have accepted them accepting deposits, and should have done so when the credit swap pricing for their banks went over 500 basis points. The offer to cover depositors is not some free gift from the government, but their obligation because of the FSA regulation. Any payout will be a consequence of more poor regulation from the FSA.

Unknown said...

I wanted to purchase a fixed term bond for my son earlier this year. I looked at the Icebank website and did some background checks then went elsewhere. It looked too good to be true; it was. I'm not a financial professional but if it was obvious to me that this didn't look pukka, what were the professionals doing?

Anonymous said...

Be honest Iain, there were doubts about the global economy two, three, five years ago and nobody heeded the warning voices then.

Why would now be different. Capitalism equals greed and greed makes people stupid.