UK To Sue Iceland Over Bank Deposits

10/09/2008 02:16:00 AM

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winner-uk-2007 Icesave, which I posted about here on October 7th, had their parent bank Landsbanki seized by Iceland on Tuesday and declared insolvent.  Icelandic Prime Minister Geir Haarde stated in a press conference "It is every country for itself.  We want to save what can be saved." 

The Icelandic Financial Supervisory Authority (IFSA) stated that "Domestic deposits are fully guaranteed..."  however, nothing was said about international deposits other than the suspension of non-Icelandic accounts would remain frozen until further notice.  IFSA additionally stated "The action taken... was a necessary first step in achieving the objectives of the Icelandic government and parliament to ensure the continued orderly operation of domestic banking and the safety of domestic deposits."

The domestic deposits of Icesave continued as normal however, any international bank accounts were suspended, not allowing any banking activity (deposits or withdrawals).  Icesave had about 300,000 U.K. customers with about £4.5 billion of funds (USD$7.8 billion) that were not amused. 



At least 20 councils in England and Wales are known to have deposits in Landsbanki - some of tens of millions.  Local government finances were at risk as they were not covered by the IFSA stipulation of domestic deposits.

Councils had amounts such as Kent County Council £50 million; Westminister City Council £17 million, Sutton Council £5.5 million; Havering Council £12.5 million; North Lincolnshire Council £2 million; North East Lincolnshire Council £2.5 million; Hertfordshire County Council £17 million; Buckinghamshire Council £5 million; and Cornwall County Council £5 million.  There are reports that at least one London council had banked £40 million, one in the South East at £30 million, and others with £20-25 million.


In an update on this incident, Gordon Brown, prime minister, said he would chase Reykjavik through the courts after it reneged on its duty to compensate.  "We are taking legal action against the Icelandic authorities to recount the money lost to people who deposited in UK branches of its banks," Brown said at a press conference at Downing Street.  "We are showing by our actions that we stand by people who save in Britain." 

In response, the Prime Minister of Iceland Haarde said there would be an official review to find a "mutually satisfactory" solution.  He said the assets of Landsbanki should be sufficient to cover all the deposits of Icesave, and the Icelandic government would provide help in raising funds if needed for the Icelandic compensation scheme.  "The government of Iceland is determined not to let the current financial crisis overshadow the long-standing friendship between Iceland and the UK," he said.


Alistair Darling, UK chancellor, has pledged to guarantee all deposits made by British savers in Icesave - including those exceeding £50,000, the legal ceiling to compensation claims.  "The Icelandic government, believe it or not, told me yesterday they  have no intention of honouring their obligations here," Darling told the BBC.  "Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it."  "The British scheme would top that up to £50,000, but people over and above that would lose out," he added.  "But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."

Britain's Government used anti-terrorism powers to freeze an estimated £4 billion of Landsbank assets in Britain while it awaits a response from Reykjavik over the position of the UK savers.  A spokesman for the Treasury said that the 2001 Anti-Terrorism, Crime and Security Act was invoked as a "precautionary measure."  Reykjavik has so far made no comment on the UK announcement but the Icelandic government is due to respond later on Wednesday afternoon.  But the Prime Minister of Iceland has said that they were searching for a "mutually satisfactory" solution.


The Treasury said that arrangements were being put in place to ensure that all ISA customers of Icesave would continue to benefit from the tax-free status of their accounts. 

On Icesave's website, it still states that "We are not currently processing any deposits or any withdrawal requests through out Icesave internet accounts."  However, it has been updated with "Statement of HM Treasury" with a link to the HM Treasury website where a statement has been posted in regards to Icesave, and Heritable (another Icelandic bank that is basically bankrupt however it was not taken over by Icelands government as it was bought into by a Dutch bank called ING Direct).


2.  The UK authorities expect that Landsbanki will soon be declared in default.  Should that occur, the Chancellor has put in place arrangements to ensure that no retail depositor will lose any money as a result of the closure of Icesave.  The Treasury and the Financial Services Compensation Scheme are working with the Icelandic authorities and their Deposit Insurance Scheme to ensure that depositors are paid back as quickly as possible.  The Chancellor has also spoken to the Icelandic Finance Minister about the importance of the Icelandic authorities ensuring that UK depositors in Icesave are given the same protections as depositors in Iceland and receive their deposits back in full promptly.

3.  Arrangements are being put in place to ensure that all ISA customers of Icesave will continue to benefit from the tax-free status of their accounts.

4.  The Chancellor has also today taken steps to freeze assets of Landsbanki in the UK until the position with respect to the future of the firm and UK creditors becomes clearer.


Although John Q Public's deposits seem insured by the HM Treasury, it is unclear as to whether the various Council's deposits are insured.  Chancellor Darling refused to give a guarantee that he would extend the same protection to them, as he did the general public's deposits.  He also infuriated counselors by suggesting that they would never have ended up in such a position if they had taken sounder financial advice.  In the Commons, Darling said that town halls were better informed than personal investors, who may not have appreciated that Icesave was a branch of a foreign bank.


Why are British Councils, who hold taxpayers money, putting money in non-UK institutions?  Sometimes, there's no place like home.


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