Page last updated at 19:46 GMT, Friday, 10 October 2008 20:46 UK

UK 'ignored Iceland bank warning'

By Brian Wheeler
Political reporter, BBC News

People outside Icelandic bank Landsbankinn
Several Icelandic banks have failed and will not release deposits

The government has been accused of "complacency" after it apparently ignored warnings in July about Icelandic banks facing collapse.

Lib Dem peer Lord Oakeshott and Tory MP Michael Fallon both raised the issue with ministers on separate occasions.

They were reassured savers would be protected by law.

The Treasury said it was not the government's role to advise savers and ministers had stressed Iceland had a legal obligation to pay compensation.

Lord Oakeshott said: "Alarm bells were ringing all over about the Icelandic banks and the Treasury must have been blind and deaf not to hear them."

But a Treasury spokesman said: "As the minister made clear at the time, the Icelandic authorities have a legal obligation to pay out depositors under their existing compensation scheme and we expect them to honour this commitment."

He said a government delegation was now in Iceland to find a solution to the current situation.

"This is part of the action the Treasury is taking action to ensure the interests of all retail depositors are safeguarded and that legal obligations to UK creditors are honoured."

Prime Minister Gordon Brown reacted with anger on Thursday after the Icelandic government refused to guarantee the deposits of UK citizens with money in three of its biggest banks, following their collapse.

Iceland's Prime Minister Geir Haarde said he had received a letter from Gordon Brown

Crisis talks

Under Iceland's financial regulations, the government is supposed to pay up to £16,000 compensation per account at a total cost of £2.2bn.

Mr Brown is angry as the UK has received no assurances from the Icelandic government that they will meet this commitment. Treasury officials have travelled to Iceland for crisis talks on repayment.

Would the minister be happy if his savings were in an Icelandic bank?
Lord Oakeshott

Lord Oakeshott, a pension fund manager and former director of Warburg Investment Management, raised the alarm about possible shortfalls in the compensation funds - and the danger of an Icelandic bank collapse - in written questions more than two months ago.

In the first question, he asked how much cash was in the Icelandic compensation fund and if Britain would be left to pick up the bill if there was a shortfall.

He was told by Treasury minister Lord Davies that the liabilities of the UK's Financial Services Compensation Scheme would be limited to "topping-up" funds provided by the country in which the bank is based.

In a second question, he asked: "What steps [have] the United Kingdom financial authorities taken to satisfy themselves, independently of the Icelandic financial authorities, of the solvency and stability of Icelandic banks taking deposits in the United Kingdom and of that of the Icelandic Deposit Guarantees and Investor-Compensation Scheme behind which the United Kingdom Financial Services Compensation Scheme stands as guarantor of last resort?"

Lord Davies, for the government, replied that there was no concern about the liquidity or capital base of Icelandic banks operating in the UK: "All UK-incorporated subsidiaries of Icelandic banks regulated by the Financial Services Authority continue to meet threshold conditions."

Some banks had been allowed to open branches in the UK through a process known as "passporting," which meant they were not regulated by the FSA, explained Lord Davies.

But he added: "The FSA has a regular dialogue with overseas regulators and firms where the firms passport into the UK, to share information about the firms and specifically their UK operations."

'Sky high rates'

He also assured UK citizens with money in Icelandic banks that they would be "protected against any losses in a similar way as if their savings were in a British bank".

On Monday, Lord Oakeshott again quizzed Lord Davies about how much money was in the Icelandic compensation fund and what would happen if it "cannot or will not pay out".

He told peers: "If my cash were in an Icelandic bank I would be very worried indeed: the currency has collapsed, interest rates are sky high and bank liabilities are hundreds of thousands of pounds for each Icelandic citizen. Would the minister be happy if his savings were in an Icelandic bank?"

In contrast to the lengthy and detailed reply he had given in July, Lord Davies said he had not been "fully briefed" on the situation in Iceland.

"It is not for me at the dispatch box to judge whether it is safe to invest in Icelandic banks," he told peers.

"However, the safeguarding of their position will depend on co-ordinated action in which this country must play a leading role."

Speaking earlier on Friday, Lord Oakeshott accused the government and the FSA of ignoring the growing warnings from the City about the position of Icelandic banks, one of which, Icesave, had deposits that were almost the equivalent of Iceland's entire GDP.

"I asked these various, very hard questions and I got a very complacent answer back from the treasury minister, he told the BBC News Channel, adding he had been alerted to problems in Iceland by credit rating agencies, which had downgraded the country's banks.

"The Financial Services Authority is responsible for the security of British savers' money. They should not have trusted the Icelandic banks to look after £5bn of their money," he added.

Minister grilled

The peer said that together with Lib Dem Treasury spokesman Vince Cable, he had put his concerns about the Icelandic banks to the new head of the FSA, Lord Turner, in an hour long meeting on Tuesday, adding Lord Turner had been "very receptive".

Concerns were also raised in July by the Conservative deputy chairman of the Treasury Select Committee, Michael Fallon, who asked junior Treasury minister Kitty Ussher how much money was in the compensation fund, after press reports there was a shortfall.

Ms Ussher told him: "I do not have figures for the Icelandic compensation scheme."

Mr Fallon then asked if she was satisfied that British investors in Icelandic banks are fully guaranteed in the event of a bank collapse.

Ms Ussher replied: "I am satisfied that the law exists to guarantee them, yes."

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

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

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

Ms Ussher: "That is the legal situation."

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