1.  We welcome the Committee's report on the Banking Crisis: The impact of the failure of the Icelandic Banks. In this memorandum we respond to those detailed conclusions and recommendations which are relevant to the FSA.

A Crisis in Iceland

2.  We think it laudable that Mr Shearer brought to the attention of the Financial Services Authority his concerns around the takeover of Singer and Friedlander by Kaupthing. While the Financial Services Authority appears to have investigated these concerns, this episode shows the paramount need for the Financial Services Authority to be open to those that may wish to contact it to register their disquiet over problems they encounter in financial markets. We also note with great concern the impotence of the FSA to tackle directly the concerns brought to its attention as a consequence of its lack of any jurisdiction, which we discuss below. (Paragraph 28)

3.  We agree that individuals should be encouraged to share concerns with us as we may receive valuable information to help us maintain market confidence, protect consumers or reduce financial crime. We would like to assure the Committee that we will continue to take any allegations brought to our attention seriously, and ensure they are properly and professionally investigated.

4.  As we acknowledged in the Turner Review, the crisis in Icelandic banks demonstrated that the EU's current regime for branches is inadequate and unsustainable. We have set out some options in the Turner Review and the associated Discussion Paper, A regulatory response to the global banking crisis. There we argue for a reinforcement of host country powers over liquidity and a new independent EU authority with regulatory powers to draft rules, have oversight of EU supervision and facilitate peer reviews. We are in close contact with our EU partners and institutions and are actively seeking to influence the outcome.

Charities and local authorities

5.  We recommend that the Government consider the case for providing charities with further statutory guidance relating to the management of a charity's finances and investments. We further recommend that the Government take steps to clarify what protection is available to charities under the Financial Services Compensation Scheme. (Paragraph 78)

6.  We recognise that the important 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 may be faced with difficult circumstances, we believe that it is imperative that charities have access to the funds that were provided to them by the public. We are concerned that one of the tests a charity must pass to be protected under the FSCS definition of a retail depositor is inappropriate for those charities using fixed assets in the course of their work. We recommend that, on this occasion only, all charities should be compensated for losses incurred as a consequence of the failure of the Icelandic banks. Furthermore, to avoid such problems arising in the future, we recommend that the FSCS re-examine the criteria for the classification of charities as retail or wholesale depositors in the light of this recommendation. (Paragraph 83)

7.  The rules determining eligibility for the Financial Services Compensation Scheme (FSCS) cover are made by the FSA under the Financial Services and Markets Act 2000 (FSMA). The FSCS website includes further information on the eligibility criteria for charities. The information explains that eligibility for protection will depend on how the charity is constituted.[1]

8.  The rules on the eligibility for FSCS compensation do not distinguish between whether a depositor is wholesale or retail, but rather they define eligibility by the size of the entity (including partnerships and mutual societies). Where EU Member States make such an eligibility distinction on size grounds, the Deposit Guarantee Schemes Directive[2] prescribes the size criteria that must be used in the case of companies. This means that EU law prevents us from changing the size criteria for the classification of charities which are protected by the FSCS where the charity is a company.

Protecting British citizens

9.  It is of critical important that regulators in different jurisdictions can communicate effectively at times of financial crisis. We note with concern the suggestion that the paucity of information provided by the Financial Services Authority may have impeded the ability of the regulators in the Crown dependencies to safeguard their own financial systems. This is a particular concern given the close working relationship that appears to have existed between the Financial Services Authority and the Financial Services Commission of the Isle of Man in relation to previous situations such as that surrounding the failure of Bradford & Bingley just days earlier. We recommend that the Financial Services Authority review its existing powers and strategy for dealing with other jurisdictions, and reports on its efforts in this respect. (Paragraph 93)

10.  We recognise that it is of vital importance that we communicate effectively with regulators in different jurisdictions at times of financial crisis and in the normal course of business. We are under a statutory obligation to cooperate with other regulators.[3] In addition, we have gateways that allow us to share confidential information about firms with regulators in other jurisdictions.

11.  We recognise that there is scope for improving regulatory cooperation across borders - see our comments in paragraph 4 of this memorandum.

12.  The TSC report draws a distinction between the case of the Icelandic banks and the failure of Bradford & Bingley. We were the lead supervisor of the Bradford & Bingley Group, while in the case of the Icelandic banks, the Icelandic regulator, the FME, was the lead regulator of the group. Necessarily, the information exchange is different when we are not the lead regulator.

13.  In the majority of cases where we interact with the regulators in the Crown Dependencies, we regulate the parent company of the branch or subsidiary that they regulate. Under the international standards governing cooperation between regulators it is clear that when we are the lead regulator for a banking group in this way, we should pass certain information to the regulators of subsidiaries in other jurisdictions.

14.  However, the cases of the Icelandic banks were very different. Both we and the Isle of Man/Guernsey authorities were regulating subsidiaries of the Icelandic parent bank. There was no parent-subsidiary relationship between the respective firms we regulated. Instead, the parent was regulated by the Icelandic regulator. In these circumstances it is for the lead regulator of the parent bank—in this case, the FME— to coordinate information flows. In other words, our role was to pass our concerns to the Icelandic authorities and it was for the Icelandic authorities to keep the regulators of the subsidiaries abreast of developments.

15.  We accept that there is no specific regulation or law preventing the provision of bank accounts to expatriate British citizens, but in practice the supply appears to have been extremely limited. As such, many expatriates have been forced to deposit their money offshore, outside the protection of the Financial Services Authority, and the Financial Services Compensation Scheme, as a direct result of the way in which Financial Services Authority regulations were interpreted in the UK. We therefore recommend that the Financial Services Authority liaise with both the Building Societies Association and the British Bankers' Association, to identify why provision is so poor, and report back to us on steps to be taken to ensure better provision in the future, whether by new products, or greater access to existing products. (Paragraph 101)

16.  The decision about whether to take on clients is one for individual firms to take. We do not have specific rules which prevent banks and building societies from taking on customers resident offshore. Instead, we have rules and guidance on high-level systems and controls designed to prevent money laundering; we encourage firms to take a risk-based approach to mitigating their money laundering risks. However, we recognise the importance of this issue and we have recently held a preliminary meeting with the British Bankers' Association and the Treasury about the limited provision of bank accounts for overseas expatriates. As recommended, we will continue to consult on this issue, and will update the Committee with our findings.

17.  In 2008, Kaupthing Singer and Friedlander (Isle of Man) took over the Isle of Man subsidiary of the Derbyshire Building Society. While those with non-term deposits could have moved their funds if not satisfied with the new parental guarantee offered by the Icelandic parent bank (rather than their old one from a UK building society), those with long-term bonds had no chance to remove their funds without penalty. Where a parental guarantee is given, the home regulator of the parent company should be aware of that guarantee, and when it is to be transferred, should work with all the host regulators to ensure that all depositors have a chance to switch their deposits if they are not satisfied with the new deal. (Paragraph 104)

18.  The transfer of deposits from one Isle of Man deposit-taker to another is a matter for the Isle of Man regulator. It is for them to take the appropriate steps to ensure that depositors are suitably treated in such a situation.

19.  The question of the parental guarantee and the treatment of term account holders in this case was also primarily a question for the Isle of Man regulator. Depositors should have been aware under the terms and conditions of their accounts that they were at all times, before and after the transfer, subject to Isle of Man regulation. It would not have been desirable for the UK authorities to seek to impose conditions on the transfer, not least because many depositors may have had no connection with the UK. Seeking to address this issue for all jurisdictions outside the UK where firms with UK parents do business would be extremely complex, and would run the risk of unintended negative consequences. Having said that, FSMA, together with related secondary legislation, does deal with the conditions governing the marketing of such products into the UK, including the information that such promotions should contain. It may be that the statutory requirements on such financial promotions need to be reconsidered.

20.  We further recommend 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). (Paragraph 107)

21.  We will continue to cooperate and share information with the Financial Services Commission of the Isle of Man and the administrators of KSF(UK).

22.  We draw attention to the information available to consumers on the FSA's 'money made clear' website which details what compensation a consumer is entitled to if a UK financial services firm is unable, or likely to be unable, to pay claims against it. We recommend that the FSA publishes on this website a list of all bank and building society accounts available in the UK and regulated in part by the FSA which would be covered by the Financial Services Compensation Scheme. (Paragraph 109)

23.  We acknowledge that action is needed to raise consumer awareness of the FSCS and the protection it offers. We consulted on this earlier this year[4] and will, with the FSCS, be proposing measures in the second half of this year.

24.  The fact that a specific account is covered by the FSCS is not, in itself, sufficient for an account holder to be eligible for FSCS compensation. The question of eligibility focuses on the account holder rather than on the type of account. An account could be eligible but an account holder may not. As a result, any list of accounts could be misleading. However, we have published on our 'Moneymadeclear' website a list of the largest UK deposit takers and a description of how the FSCS limits would apply for most customer accounts.[5] The FSCS has also published information on the eligibility of individuals and organisations.

25.  We believe it would be more effective to concentrate on improving the disclosure of information about FSCS coverage to customers at the point when they decide to open an account with a particular firm. In CP09/3, we published proposals to improve disclosure of compensation arrangements by firms to their customers, to be implemented from 1 January 2010. We have proposed disclosure requirements for deposit-taking firms, which include requiring a firm to disclose the compensation scheme it is covered by and any trading names that the firm operates under, and for the information to be provided directly to each customer. We have also published further proposals to implement by 30 June 2009 a new EU requirement to inform depositors if their deposit is not covered by the FSCS (because the depositor does not meet the eligibility criteria).[6]

June 2009

2   Directive 94/19/EEC, as amended by Directive 2009/14/EC. Back

3   See section 354 of FSMA. Back

4   CP09/3, January 2009, www.fsa.gov.uk/pubs/cp/cp09_03.pdf Back

5   www.moneymadeclear.fsa.gov.uk/pdfs/linked_deposits.pdf Back

6   CP09/11, March, 2009, www.fsa.gov.uk/pubs/cp/cp09_11.pdf Back