DAG Submission to TSC

DAG Submission to TSC

Dear Sirs

The Kaupthing Singer & Friedlander Depositors’ Action Group would like to thank you for the opportunity to present evidence at the Treasury Select Committee hearing held on 3 February 2009. In addition the group would like to thank the committee members for the interest shown in our plight and the diligent questioning of the authorities involved in the demise of our bank.

The Action Group would like to bring to the committee’s attention a few points arising from our evidence presented to the committee on 3 February 2009. We hope that the committee finds the opportunity to pursue these issues with the relevant parties in light of the ongoing question of culpability in the case of the failure of Kaupthing Singer & Friedlander Isle of Man. Currently, although the Isle of Man Government assured you that it was taking its responsibilities seriously, it does not seem to reflect this sentiment by behaving in the same way as other Governments worldwide in ensuring that depositors do not suffer as a result of their actions.
As a general point we would like it noted that as far back as 2001 the Isle of Man was promoting itself using the following endorsement from the FSA:
"For protection of investors, the Island has developed an effective
regulatory regime under the auspices of the Financial Supervision Commission.

The Island was the first to receive "designated territory status" under the UK Financial Services Act, granted only to those jurisdictions deemed to provide a degree of protection and regulation comparable to that applicable in the United Kingdom. Investors can therefore rest assured that their affairs will be conducted in a well regulated and responsible manner - a vital source of reassurance and security to may clients who may live far afield and have little or no previous experience of the Isle of Man"
Is it not important that once granted “designated territory status” the FSA either leaves the regulatory authority, in this case the FSC, to operate independently, or when the FSA does get involved in influencing movement of funds, the FSA takes full responsibility for the consequences?


  1. Depositors would wish to understand why the FSA sanctioned the takeover of Singer & Friedlander (a well known and reputable British bank) by Kaupthing Bank, when members of the board of Directors’ of Singer & Friedlander (including the CEO Tony Shearer) made representations to them indicating that those running Kaupthing Bank were not ‘fit and proper’ to run a UK bank.

  2. Despite these warnings from existing management, not only did the FSA sanction the takeover of Singer & Friedlander but they allowed the corporate structure to be changed 16 months later. This resulted in parental control for the Isle of Man branch being changed from the UK bank to Kaupthing Iceland. It is as a direct result of this change in corporate structure that the depositors in KSFIOM find themselves in the position they are in. Why did the FSA allow this to happen, bearing in mind the warnings given and the change in regulation for existing depositors that this corporate change entailed?

  3. In January 2007, the FSA allowed a British Building Society (the Derbyshire) to be taken over by Kaupthing without any regard for the impact on existing Derbyshire depositors. The parental guarantee, once provided by Derbyshire UK, was transferred to Kaupthing Iceland but no due diligence appears to have been performed by the FSA as to the credibility of this new guarantee which has proved to be worthless. Why?

  4. The FSA held discussions with the Isle of Man regulator (FSC) which resulted in over £580m of KSFIOM assets being held on deposit in the UK sister bank when it collapsed. You have heard from the FSC that discussions took place between the regulators detailing the regulatory constraints under which the UK bank would be required to operate (a fact withheld from the TSC by the Lord Turner at the first hearing into the banking crisis). Depositors would like to know why the FSA, apparently, allowed these constraints to be breached.

  5. Furthermore, depositors would like to know why the FSA chose not to hold discussions with the FSC, as the issues surrounding KSFUK gained greater urgency, despite the UK regulator knowing the extent of KSFIOM’s exposure to the UK bank. This appears to go against the Memorandum of Understanding held between the two regulators as well going against recent precedent set with the Bradford & Bingley issue.

  6. It would appear that KSFUK was acting more as a Private Equity institution rather than a high street deposit taking bank and yet the FSA, aware of this fact, still allowed retail deposits from the Isle of Man to be placed within the UK entity. Considering the vastly different risk profiles of both institutions, depositors would like to know why the FSA believed this to be appropriate place for their deposits to rest at this crucial time.


  1. The FSC permitted a bank within its jurisdiction (KSFIOM) to place 48% of its assets with a single entity. Not only did it allow the assets to be placed with a single entity but the entity (KSFUK) was part of the same group over which the FSC had concerns. Depositors believe that, at the time of the asset transfer, the FSC must have been aware that should KSFUK fail (as subsequently happened) then KSFIOM would be destroyed along with its sister bank. Irrespective of the FSC’s understanding of conversations held with the FSA, it is unimaginable that any reasonable, risk management process would sanction such a transfer at that time - so why did the FSC allow it to happen?

  2. Mr Aspden referred to this at the TSC as ‘upstreaming’ however we contend that this was not ‘upstreaming’ since, due to the change in corporate structure between KSFUK and KSFIOM, there was no direct relationship between the two and therefore no automatic ‘downstreaming’ possible.

  3. In addition to allowing the transfer of assets as detailed above, the FSC failed to require KSFIOM to put in place any protection, such as ring-fencing. Why?

  4. To compound the errors in points 1 & 2, the FSC failed to put in place any procedures to ensure that this incredible risk and exposure was monitored on an ongoing basis. Why?

  5. The FSC has told the committee that assets were placed with KSFUK following in depth discussions with the FSA during which details were provided to the Isle of Man regulator surrounding the controls being put around KSFUK. There appears to be no evidence that the FSC carried out any due diligence on the information provided by the FSA. Was this all taken at face value? Could the fact that the FSC’s head of supervision, Michael Weldon, was once seconded to the FSA have any bearing on this? Although John Aspden has promised to provide evidence of these conversations to the TSC, attempts by our lawyers to access this information has been stonewalled (see attached correspondence).

  6. Why did the FSC rely so heavily on the Memorandum of Understanding held with the FSA? As the situation deteriorated why was there no attempt to rectify the situation? KSFIOM refused to move money on deposit from life companies after 1 October 2008, eight days before the bank’s demise, yet there is no evidence that there was any attempt to retrieve the position with KSFUK at this time.

  7. Depositors believe it is important that the committee are made aware of potential conflicts of interest in this debacle. John Cashen is a commissioner in the FSC and also a director of KSFIOM whilst Donald Gelling is a director of KSFIOM whilst holding the position of Head of the IPA (a division of the FSC).


We believe that The Chief Minister may have misled the TSC regarding the efficiency of the DCS on the Isle of Man.
£150m is being made available by the Isle of Man Government to any DCS that may be triggered by liquidation of a bank on the Isle of Man with compensation up to a maximum cap of £350m, the balance of the funds being gathered through a levy on local banks – any funds in this regard are yet to be collected (Mr Brown suggested this was ‘earmarked’ which we contend to be an exaggeration). It is anticipated that future funds gathered through specified levies on the local banks could take up to 20 years to be paid out under the DCS.
It should be noted that the maximum cap is a total that is applicable to all banking institutions that fall into liquidation before 9 October 2009. This means that if another bank were to suffer a similar fate as KSFIOM before that date the maximum payout of £350m would be shared by depositors in that bank as well thus reducing individual payouts to depositors. This means that any Scheme Manager that is appointed would be unable to calculate total liabilities under the scheme before this date since the future is unknown.
Currently and in the absence of contributions from the IoM banks, the maximum available in the DCS is £150m with the estimated current liability under the DCS to KSFIOM depositors standing at £208m. From this it can be seen that there is already a gap in funding that may be due to all KSFIOM depositors under the implementation of this scheme.
A further complicating factor is that potential claimants have six months to submit a claim from the date the scheme is triggered and the Scheme Manager is duty bound to wait to see the total number of claimants before any money is paid. So if KSFIOM was liquidated on 19 February, the Scheme Manager would have to wait until 19 August 2009 before making arrangements to pay any claim and would then be able to do so only on the basis that there was a degree of certainty that no other IOM banking institution was likely to fall into difficulties before 9 October 2009.
It is therefore unlikely that even a proportionate claim would be paid until October 2008 at the earliest.
All in all, the DCS on the Isle of Man does NOT offer the same route of recompense as the UK Government offered to Kaupthing UK or Icesave depositors in the UK. It has a totally different mechanism in mind, built to combat historic potential liabilities rather than the banking crises we find in the new world of 2008/09. However since even the Isle of Man Government is unable to explain its own scheme in writing to depositors, despite our encouragement and help, the outcome for those unfortunate enough as to be involved is extremely unclear.

FSCLetter.pdf27.56 KB
890166_1_FinancialSupervisionCommission-CEOJohnAspden.PDF110.56 KB


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