The Money Blog

The Treasury today guaranteed that no British customers of Icesave would lose their savings after the Icelandic online bank collapsed yesterday. This comes as a relief to the estimated 300,000 British savers who were left fearful on Tuesday night that they would need to fight for any compensation.
Icesave was owned by Landsbanki, Iceland’s second largest bank, which has collapsed into receivership and is now being run by the Icelandic Financial Services Authority and all withdrawals from the accounts have been frozen.

More than 300,000 British customers had around £4 billion deposited in Icesave accounts, with the average saver having about £15,000 with the bank. There were an estimated 15,000 British savers with more than £50,000 deposited with Icesave.

Icesave was one of a handful of banks the uses the passport exemption - meaning that savers are supposed to apply to the Icelandic authorities for the first £16,170 pounds they have lost, with the British compensation scheme topping up the rest.

Mr Darling said: “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 told Radio 4’s Today programme.

“But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back.”

Later, a Treasury spokesman said: “We guarantee that no depositor will lose any money as a result of the closure of Icesave.”

The move by Mr Darling has been welcomed by many financial experts, who have urged the Chancellor to be more explicit in guaranteeing all depositors’ savings. He has been accused of dithering over the issue, creating more chaos for the savings market.

300,000 British savers were left uncertain about whether they had lost their life savings yesterday, after Iceland’s second-largest bank went into receivership.

Savers seeking to withdraw money from Icesave, an arm of Landsbanki, the Icelandic bank, have found they could not operate their accounts online.
A message on the Icesave website said: “We are not currently processing any deposits or any withdrawal requests. We apologize for any inconvenience this may cause our customers. We hope to provide you with more information shortly.”

As recently as Monday, Icesave was still insisting that it was “business as usual” despite the bank’s website temporarily crashing as thousands of savers desperately tried to gain access to their cash. The 300,000 saver could face weeks of uncertainty as their deposits were frozen, after the decision by Iceland’s financial regulator to take control of the stricken bank.

There are a number of ways the FSA can be alerted to a particular problem. It is likely to instigate a fact-finding investigation. Frequently, the investigators will be looking foe relevant documentation.

“Document” has a very wide definition includes information recorded in any form. Firms have a general duty to cooperate with the regulator under principle 11 of the FSA’s Principles for Businesses and, arguably, this will involve producing documents on request: FSA handbook at SUP 2.3.3.

The FSA has statutory powers to require the production of documents by the Financial Services and Markets Act 2000 which sets out, in part XI, the broad framework for the FSA’s investigatory and information-gathering powers.

Section 165 FSMA allows the FSA to require an authorised person (and connected persons) to produce “specified documents or information of a specified description” where the FSA reasonably requires the documents in connection with the exercise of its statutory functions.

Under s167 FSMA, the FSA can, if it considers there is good reason, appoint a competent person to conduct a general investigation into a firm’s business or its ownership or control. The investigator can require any person to produce documents he or she reasonably considers relevant to the purposes of the investigation (S171 FSMA).

S168 contains a similar power to appoint investigators, but in relation to specific contraventions or offences such as market abuse, money laundering or insider dealing.

The investigator can require any person to produce relevant documents but the threshold is lower.

The investigator only has to consider that the person in question may be able provide relevant information before seeking disclosure (s173 of FSMA).
Where a person could be compelled to produce a document under this part of FSMA, but it appears the document is in the possession of a third person (who is not otherwise within the scope of the relevant power), that third person can be required to produce the document (s175 of FSMA).

The FSA may exercise its powers under s165 of FSMA at the request of an overseas regulator.

In last two weeks there have been many rumors and speculations in the media about the safety of Kaupthing Edge. And I have been bombarded by questions from worried savers whether to take theirs savings out of the bank. So after conducting my research and investigation into this matter, I can now boldly and confidently say Kaupthing Edge is safe and savings are protected.

WHY?
Because Kaupthing Edge is a full member of the UK Financial Services Compensation Scheme so savings are protected (up to £35,000) the same as any other UK Bank. As funds are held with Kaupthing Singer & Friedlander Ltd (KSF) which is independently rated and regulated to Kaupthing Bank which means Kaupthing Edge is in essence the same as any other UK Bank (Singer & Friedlander being an old British merchant Bank so the scheme carries over). As KSF does not white label any other deposits (such as AA Savings and Halifax running under the same compensation so you are only covered once) it can be argued they provide better protection than other Banks!

Also
Kaupthing said in a statement it has enough cash to pay all of its obligations for ‘at least 360 days’ and increased the level of savers’ money in its coffers relative to its loan book by 8% to 44% between April and June.

Novation Clause
13. I see in the terms and conditions that my deposit might, in the future, be with Kaupthing Bank, and not Kaupthing Singer & Friedlander Ltd. What would this mean for me?

We have no intention of moving your deposit to Kaupthing Bank, and though in the unlikely event that we were to do so, we would give you at least 30 days notification.

If this did happen you would remain a Kaupthing Edge customer and your account number, details and call centre contacts would not change. Your money would remain safe, and protected up to exactly the same amount as the UK Financial Services Compensation Scheme (which currently pays up to £35,000). The only material difference to you would be the structure of the compensation itself, which would be provided by two schemes (sometimes referred to as a passport scheme):

* the first level of protection is provided under the Icelandic Depositors’ and Investors’ Guarantee Fund. The maximum protection under this scheme is 100% of the first €20,887 (or the sterling equivalent) of your total deposits held with us.

* The second level of protection is provided by the UK Financial Services Compensation Scheme. This scheme “tops-up” your protection so that the protection under both schemes is equal to 100% of the first £35,000 of your total deposits held with us.

* Under EU law compensation for any losses incurred due to the failure of a bank should be paid within three months - regardless of whether it is through a passport scheme or the UK Financial Services Compensation Scheme.

From mid-2001, under the new financial services and market act, all market participants were subject to the same CIVIL regime for dealing with market abuse, so levelling the playing field for all market users. In addition, they will have detailed guidance to help clarify what does amount to market abuse.

Financial penalties will be imposed on those who abuse markets.

As an alternative, the FSA can use public censure. The new market abuse regime complements the existing criminal offences of insider dealing and market manipulation. The FSA will be able to prosecute these offences.

Categories of market abuse
The Act defines three categories of market abuse. The draft Code sets out the FSA’s opinion on behaviours that would or would not constitute abuse in each category so as to give guidance to those affected by the new regime:

Misuse of information
Example, knowing of a forthcoming takeover and buying shares in the Target Company prior to general disclosure of that information.

Giving False or misleading impressions
Example, posting on a bulletin board an inaccurate story that an important deal had been secured by a major company.

Market Distortion
Example, undertaking trades just prior to an exchange closing, with the purpose of positioning the price of a share or basket of shares at a distorted level. This could, for example, be to avoid having to pay out on a related derivative contract.

Fears are growing over the safety of the Icelandic banking system after Glitnir, had to be bailed out by the government 2 days ago. The Government was force to take control of Glitnir as depositors fled the country’s third-largest bank.

This has be of particular concern for savers in the UK since the remaining Iceland’s big banks, Icesave and Kaupthing Edge, are also two of Britain’s most popular online savings providers and are showing signs of weakness.

Over the past 10 days, the CDS rate for both Kaupthing Edge and Icesave have rocketed when compared with their competitors such as Barclays and Alliance & Leicester. Shares of Kaupthing fell four per cent at one stage while those of Landsbanki (Icesave) were down five per cent.

Iceland is particularly sensitive to global volatility in the banking sector due to the rapid growth of its finance sector with its reliance on the international money-markets for funding instead of High Street savers’ cash. Glitnir failed partly due to the scarcity of money on these markets following the recent collapse of Lehman Brothers.

Kaupthing said in a statement it has enough cash to pay all of its obligations for ‘at least 360 days’ and increased the level of savers’ money in its coffers relative to its loan book by 8% to 44% between April and June. A statement released on Icesave’s website yesterday said it has a deposit to loans ratio of 63% and €8bn sitting in its coffers.

Savers in both banks shouldn’t worry since both banks are covered in the UK by the Financial Services Compensation Scheme up to the maximum limit of £35,000.

Source: http://www.thisislondon.co.uk

According to a recent article in the Iceland Review, says Icelandic Banks in the UK are benefiting from recent banking crisis in the UK and US. Icesave and Kaupthing Edge have seen surge in business after UK customers lost faith in their own banks.

Kaupthing said that Monday was in fact the fourth best day of business since it launched its Edge savings account in February this year.

If this article is true, you will expect in the months more UK and US banks facing credit crisis and since depositors are taking out their money, the Central Bank will have to bail them out.

The FSA is an independent body regulating the UK financial services industry. The FSA has three main aims:

The first is maintaining confidence in the UK financial system by supervising exchanges, settlement houses and other market infrastructure providers; conducting market surveillance; and transaction monitoring.

The second is promoting public understanding of the financial system to help people gain the knowledge, aptitude and skills they need to become informed consumers, so they can manage their financial affairs more effectively.

The third is securing the right degree of protection for consumers. Vetting entry aims to allow only those firms and individuals satisfying the necessary criteria (including honesty, competence and financial soundness) to engage in regulated activity. Once authorized, they expect firms and individuals to maintain particular standard and monitor how firms and individuals meet them. Where serious problems arise they investigate and, if appropriate, discipline or prosecute those responsible for conducting financial business outside the rules. They also use their powers to restore funds to consumers.

Their work focuses on three main types of financial crime:
• Money laundering
• Fraud and dishonesty
• Criminal market misconduct such as insider dealing.

They also consider
• The need to use resources in the most economic and efficient way
• The responsibilities of the management in regulated firms
• The need to balance the burdens and restrictions on firms with the benefits of regulation for consumers and the industry
• The need to allow innovation
• The international character of financial services and markets and the UK’s competitive position
• The value of competition between financial firms

Banking giant Barclays bank has agreed to buy some of the core assets of stricken US investment bank Lehman Brothers for 1.75 billion dollars. $1.5 billion for its New York headquarters and two data centers and $250 million for the trading unit following negotiations in New York, the bank said on Wednesday, Sept. 17. The deal still requires backing from a bankruptcy court.
Lehman Brothers’ US parent filed for bankruptcy protection a couple of days ago, with the UK main trading operation also going into administration.

The US arrangement allowed the group to pursue to sale of its broker-dealer operations, as well as its investment management division. Another subsidiary, Lehman Brothers Asset Management, was also not subject to the bankruptcy petition.

It was a similar story in the UK, where a number of business areas were not part of the administration process, including Lehman Brothers’ asset management and corporate finance business.
It is understood that Barclays has steered clear of becoming involved with so-called “toxic investments” made by Lehman Brothers in volatile residential and commercial property markets.
Approximately 10,000 Lehman employees work for the fixed income and equity sales, trading and research and investment banking businesses that Barclays is set to acquire, Barclays said.

But there has been criticism in London that none of the 5,000 Lehman Brothers’ employees in Britain will benefit from the Barclays move.

This is basically the ruling in LIPKIN GORMAN v KARONALE (1989). Bank should not pay any cheques not authorised by the customer (i.e. that the bank has no mandate to pay); and this basically means those with forged or unauthorized signatures.
If the bank pays such cheques it must make good the loss to the customer.

Problems:
Well, there are the one you would expect! How on earth do you know when it’s forged; good ones by definition will not be noticeable?
Further, what if someone has got the authority to draw cheques, but is simply misappropriating funds? This will be even harder to detect.
To complicate things even more, the bank has a duty of confidentiality. The existence of this may prevent them from disclosing facts they know.
The judge in LIPKIN GORMAN had the happy task of sorting this out. (The rulings he established are all quite straightforward if you remember that it’s just a case of when a bank can wrongly pay a cheque and get away with it).
The basic premis are that the bank will be protected if they didn’t know it was a cheque they shouldn’t have paid.
What the judge was giving were the criteria for when they couldn’t reasonably be expected to know that they should not have paid, and will thus be entitled to debit the customers account.

The criteria he established were as follows:
1. When the circumstances are such that a reasonable banker would hesitate to pay the cheque at once.
2. If they did have grounds for hesitating, then to continue and pay would amount to negligence by the bank and render the bank liable.

The question to ask is; whether a reasonable and honest banker, knowing the relevant facts, would have considered that there was a serious or real possibility that the funds were being (misused).
Here the judge held that the bank had no such knowledge and were therefore entitled to debit the customers account. Surprise, surprise the bank won!