Inside this issue COI update...... 1 PARTIAL PROTECTED DEPOSITORS KAUPTHING Parental guarantee ...... 2 IOM DEPOSITORS ACTION GROUP EFTA...... 2 PPD Role ...... 2 Press coverage ...... 2 Submission to Tynwald...... 3 NEWSLETTER 17 Iceland bank failure report ..... 3 April 2010
PPD COMMITTEE COI UPDATE MEMBERS Gavin Brake (COI) by Gavin Brake and Peter Wakeham Alastair Lees Adrienne Liebenberg Meetings of the COI continue to take place on a regular basis with Gavin and Peter in attendance. The Nigel Smith committee maintains a very regular email and telephone dialogue amongst themselves and with the Stephen Thomas PWC team. The next meeting is expected to be face to face in IOM in early summer. Meetings Peter Wakeham (COI) generally include a detailed overview of asset realisations to date plus an update on the claims agreement process. Current key issues include the rejection of the in-flight Habana claim, KSFUK dividend, and the expiry of the Booker deal.
In alphabetical order Please see the details of the minutes of the meetings which are published on the KSFIOM website. Mira is stepping You will also find a number of important documents on this website including a cash and loan book down from the PPD summary for KSFIOM updated to 31 March 2010. In addition there is a statement on the expenses Committee due to policy of the COI and the "Committee of Inspection Policy Statement". This document was written work by the COI itself in order to explain to creditors the role of the COI. commitment but hopes to rejoin later This website (http://www.kaupthingsingers.co.im) is the principal source of information on when commitments the KSFIOM liquidation permit Hilde Bartlett and The total payout to date is 40.0%, and we are hopeful although unable to commit, about a further Dipika has also payout in summer. As a reminder is important to realise that there are now only two significant remaining "parts" to KSFIOM - the loan book (which PWC are running down on behalf of creditors, stepped away from with COI oversight) and the claim against KSFUK (to which we are an unsecured creditor, and so committee have to wait in line with all other creditors for payouts to occur - there is little further action we can membership due to take here). The actions required on both these areas are well understood, and although they do take other commitments time, they are relatively straightforward.
However in order to maximise our returns, it is important that we remain very focused on the investigative/legal work being undertaken by the law firm Reed Smith. (including the parent guarantee). This is a very complicated situation, but one which is under close scrutiny by the COI. If we can bring legal action and improve our overall returns, then we will certainly follow this course of action.
KSFIOM PPD – DAG Queries / Contact [email protected] Website: http://chat.ksfiomdepositor.org Kaupthing Partially Protected Depositors Group
PARENTAL GUARANTEE EFTA
by Gavin Brake and Peter Wakeham by Adrienne Liebenberg The EFTA Surveillance Unit is responsible for ensuring that A meeting of the Committee of Inspection was held on EFTA members, including Iceland, comply with EEA 04.02.2010 to continue discussions regarding the rejection law obligations. In support of a campaign to ensure that an of our claim under the parental guarantee. The Liquidators Icelandic application to the EU is conditional on Iceland treating confirmed that the objection to the rejection of the ourselves and other customers around Europe equally with their company's claim against Kaupthing hf had been lodged domestic customers, we have prepared a formal complaint. We with the Winding Up Committee in advance of the are working with the Landsbanki DAG on this issue. Creditors' Meeting as required and updated the Committee
on discussions with the Winding Up Committee on the PPDG was the primary initiator of the initiative to contact EFTA matter. The Liquidators' Icelandic lawyers explained the and that we chose to get CoI agreement to be signatory to gain objection process and the legal issues which need to be greater credibility with EFTA addressed. The primary focus is now on gathering all
available documentary evidence to support our assertion To this end, the Committee have written a letter of complaint to that the parental guarantee was properly authorised by the EFTA Surveillance Authority, a copy of which can be found Kaupthing hf. This assertion will be pursued vigorously. on the link below. Alternative strategies to maximise the return for creditors http://www.kaupthingsingers.co.im/Pages/2010/April/01April2010 were also discussed for pursuit in the event that our .asp objection fails. If the matter cannot be agreed with the
Winding Up Committee, it will go to Court in Reykjavik Our complaint concentrates on the discriminatory behaviour of the for a decision. Preliminary indications are that the Court Icelandic Government in respect of : process would take several months and it is possible that a 1. the use of KFH funds to guarantee the deposits of all decision would not be reached until 2011. domestic Icelandic savers but not their non-Icelandic
savers Further updates will be released on this matter as 2. failure to accept responsibility fro the Parent Bank information becomes available, however, it is likely to be Guarantee, provided by KFH, to its subsidiary, KSFIOM. some months before it is resolved. This PCG guaranteed to depositors the KFH would
discharge the liabilities of KSFIOM if KSFIOM was
unable to do so from its own assets.
We believe that the Icelandic authorities acted in a manner ROLE OF PPD contrary to the applicable laws of the EU when it implemented its emergency legislation which has resulted in discriminatory by Alastair Lees treatment in favour of domestic savers in KFH vs those international savers who placed deposits in KFH subsibiaries. In order to clarify what the PPD sees as its role we have Icelandic domestic savers have been allowed free access to and summarised it as follows: We will give support to the COI in 100% recovery of their savings whilst the creditors of KSFIOM ensuring the liquidation proceeds smoothly while have not been repaid in any form by kaupthing hf. We request that concentrating our efforts on actions to bridge the gap the EFTA Surveillance Authority review the legality of the between the returns of liquidation and 100% (EFTA/IMF, Icelandic Governments actions in relation to its failed banks. PCG, UK Conservatives Gov't etc.). We will attempt to ensure effective communications with the liquidator and provide a constructive leadership role for creditors. We are PRESS COVERAGE happy to work with all creditors and indeed all parties with the sole aim of 100% return of our money. In addition, the by Stephen Thomas PPDG have implemented a system whereby members will have the opportunity to have their questions passed to the We continue to work on maintaining media interest in our Joint Liquidators for response. We are also currently playing story. Recently Steven Thomas has interviewed for a a liasing role with Landsbanki DAG. We will aim to send out John Towler documentary on political and economic a quarterly update or more regularly if events dictate. background to the collapse of Icelandic Banks Kaupthing Partially Protected Depositors Group
TYNWALD SELECT COMMITTEE ICELANDIC BANK FAILURE
by Stephen Thomas REPORT : Report of the Special Investigation Commission (SIC) Select Committee of Tynwald on Kaupthing Consisting of independent experts A Special Investigation Singer and Friedlander and the Depositors’ Commission (SIC) Commission was established by the Compensation Scheme Icelandic parliament in December 2008 to investigate and analyse the processes leading to the collapse of the three main The Tynwald Select Committee is concentrating on the first part banks in Iceland. The report is the first comprehensive analysis of its remit : the cause of the collapse and the role of the FSC in of the causes of the bank meltdown in the midst of the global ensuring proper management of the bank to protect depositors` financial crisis in 2008. funds. It delivered its report on the bank meltdown to the Icelandic parliament on April 12 2010, which can be read at : The PPD Group made written submission to the Tynwald Special http://sic.althingi.is/, and summarised below Committee (available on the KSFIOM Forum), and were invited to give oral evidence. Steve Thomas appeared on behalf of The report said the former Icelandic government was negligent PPDDAG KSFIOM depositors at the Tynwald Select Committee in the lead-up to the collapse of the Nordic nation's three main hearing 24 Feb 2010 in IOM, and The hansard transcripts of this banks, asserting that former government officials had ignored Select Committee hearing are available on the forum. warning signals and failed to take necessary actions to fight the upcoming economic disaster, local newspaper Iceland Review Depositors are likely to be invited to give further evidence at a said. later date concerning the credibility of the DCS and other The SIC also concluded that the former government's actions in relevant matters. banking affairs at the beginning of 2008 were "unsystematic" We will continue to support the Select Committee enquiry and and that ministers had focused too intently on the image monitor closely the evidence. We believe that they are asking the problems of financial companies instead of the obvious correct questions problem that the Icelandic banking system was far too large compared with the size of the economy, the report said. The chairman confirmed that both the Directors and the FSC "Actions should have been taken no later than 2006 for there to would shortly be recalled for a further evidence session and have been a possibility of preventing the collapse of the banks requested that we send him any further questions (which are without compromising the value of their assets," the report appendixed below (1)). A detailed report of the hearing can be said. found in Appendix 2 Iceland has been hard hit by the global financial crisis. Its three biggest banks - Kaupthing, Landsbanki and Glitnir - collapsed under the weight of billions of dollars of debts accumulated in an aggressive overseas expansion. The collapse shattered the currency and forced Iceland to seek aid from the International Monetary Fund (IMF) and other SPECIAL REQUEST countries."
by Nigel Smith The report also contains some indication that the UK authorities might have had access to information (relating to We are sill interested in receiving any information or currency swaps) about the impending collapse prior to taking evidence with regard to KSFIOM behaviour PRIOR TO action, and we will continue to try to interpret the information September 14th 2008 that might indicate that the bank was aware that it was concerned about liquidity. Examples of behaviour might be i) attempts to prevent you withdrawing cash even though the terms of your bank account entitled you to or ii) unusually slow responses to cash withdrawal requests. KSFIOM PPD – DAG If you believe that you can help on this point, please e mail Queries / Contact [email protected] [email protected] Website: http://chat.ksfiomdepositor.org Kaupthing Partially Protected Depositors Group
Appendix 1 : FOLLOW UP TO SELECT COMMITTEE by Alastair Lees, Stephen Thomas & Peter Wakeham
Select Committee of Tynwald on Kaupthing Singer and Friedlander and the Depositors’ Compensation Scheme: Follow up questions from members of the Partially Protected Depositors Group (PPDG)
Note : We would hope that the following questions will be investigated and answered using the full powers of Tynwald, including demanding contemporaneous documents where appropriate Once they have established WHY this isn't enough. We then need them to propose/demand the actions required to
1. ensure that depositors (at least retail depositors) are protected. They should mandate the IOM Treasury to take action to compensate or mitigate depositors for their loses. 2. provide the framework of measures that should be taken to ensure that a similar failure does not happen again
Both are required to protect the long term reputation of the IOM as a safe financial jurisdiction. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
As matters stand at present, members the PPDG remain convinced from evidence thus far in the public domain that the demise of KSFIOM resulted from serious regulatory failure. Contrary to the minuted requirements of the FSC board £175m of unsecured funds were transferred to KSFUK in May 2008 and kept in KSFUK on a monthly rolling basis throughout the crisis which developed during Summer 2008.
Had these funds not been transferred, KSFIOM depositors would today be expecting full recovery of their savings and the issues surrounding the flakiness of the parent bank guarantee would be confined to questions about FSC processes and accountabilities.
We believe it is vital for the preservation of the IOM reputation as a safe financial jurisdiction that there is full and transparent disclosure of how and why this failure occurred.
Beyond the Committee’s task of understanding the reasons for KSFIOM’s failure, lies the even more important task of recommending action. The IOM Chief Minister is on record as saying that the IOM is responsible for its own position and we hope that his words will be translated into effective solutions:
1. Retail Depositors should be fully protected. The IOM Treasury should take responsibility for defending the interests of retail depositors, compensate them for their losses and then put pressure on other parties to share the financial burden as considered appropriate. Kaupthing h.f., the Icelandic Government, IFAs, Insurance Companies and the UK Treasury may all be judged to have contributed to the KSFIOM failure but it is outrageous that depositors have been left to fend for themselves and take most of the initiatives.
2. A similar failure must not happen again. Regulatory processes and the role of the FSC board and executives must be fully re‐assessed and a framework of new measures put in place to ensure that depositor interests are safeguarded.
PPDG members would be delighted to contribute further to the Tynwald Select Committee’s deliberations with regard to either or both of the above solutions. We have among our members expertise and experience in these matters. Very early in this process a number of proposals were submitted informally to IOM Treasury but rejected. The Scheme of Arrangement took priority and the KSFIOM balance sheet outcome was uncertain at the time. This is no longer the case.
Follow up questions from members of the Partially Protected Depositors Group (PPDG) to The Select Committee of Tynwald on Kaupthing Singer and Friedlander and the Depositors’ Compensation Scheme
Summary situation as perceived by PPDG Depositors in Kaupthing Singer &Friedlander (Isle of Man) Limited, together with depositors in Landsbanki Guernsey, are the only retail depositors in the world not to have received full protection of their savings.
There is cruel irony in this situation. Kaupthing Singer &Friedlander (Isle of Man) Limited [KSFIOM] was a sound bank for savers:
KSFIOM had positive Net Assets on the date it was put into administration
Moreover, KSFIOM liabilities were further protected by a parent bank guarantee from Kaupthing hf (KHF)
KSFIOM failed for 3 reasons
1. Unsecured KSFIOM funds had been transferred to KSFUK. When KSFUK was placed in administration by UK Government action, KSFIOM lost access to necessary liquidity
2. KHF failed to honour the parent guarantee which was “triggered” by KSFIOM lack of liquidity via KSFUK failure
3. KSFUK also failed because KHF failed to provide liquidity to KSFUK as promised to FSA.
Subsequent to KSFIOM failure, actions in Iceland have adversely affected KSFIOM depositors’ chances of full recovery:
Under emergency Icelandic Government legislation, KHF assets have been transferred to New Kaupthing bank and used to provide 100% protection to domestic savers in KHF
The Winding Up Committee of KHF (in administration) has rejected the validity of the KHF parent guarantee to KSFIOM
Not surprisingly, depositors have many questions regarding the transfer of KSFIOM funds to KSFUK and the strength of the KHF guarantee.
Based on the evidence given thus far to the Tynwald Select Committee and to the UK Judicial Review, the PPDG believes there are really only three conclusions to be drawn:
1. The FSC board requirement that exposure to the Kaupthing Group be eliminated ended up being downgraded by FSC executives, without FSC board authorisation, to an elimination of exposure to Iceland. In practice, exposure was not eliminated at all because £175m was deposited unsecured in KSFUK and then upstreamed to Iceland as part of a £1.1bn swap between KSFUK and Kaupthing Group
2. Despite this major concern about exposure risk to the Kaupthing Group, the FSC permitted the KHF parent bank guarantee to be used as part of an aggressive KSFIOM marketing campaign to underpin the acquisition of Derbyshire IOM and to attract deposits to Kaupthing Edge savings accounts in IOM.
3. It is extremely likely that the FSC was put under pressure by KSFIOM, KHF and possibly KSFUK to water down its requirements to protect the Isle of Man business model (FSC evidence 275 – 285, Directors evidence 1120) even though John Aspden denies this (FSC evidence 520).
Why was this allowed to happen? Many depositor questions remain unanswered by the evidence to Tynwald Select Committee thus far. PPDG would like these questions posed in subsequent hearings.
Transfer of funds to UK The funds in question are the unsecured £175m on inter‐bank placement for upstreaming. The £185m secured under the repo agreement can be ignored, practically speaking, for the purposes of the enquiry.
Depositor issues are as follows:
1. Why were these funds transferred to KSFUK? Why did FSC downgrade its initial requirement that KSFIOM eliminate exposure to Kaupthing Group to an acceptance of elimination of exposure to Kaupthing in Iceland?
2. Why did KSFIOM not take steps to recall funds from KSFUK in the days leading up to KSFUK failure?
Questions for FSC Board The contentious evidence regarding FSC processes is as follows:
4. On 2 May the board of FSC resolved: “The Commission unanimously resolved to retain its requirement that the licence holder (KSFIOM) should remove all of the group’s indebtedness to the Isle of Man by appropriate means” (Directors evidence ‐ Hansard 1170)
5. Aidan Doherty steadfastly maintains in his evidence on several occasions (Directors 1175 in particular) that the FSC never advised him that there should be no group exposure, as opposed to Iceland exposure. Throughout his evidence he maintains that the transfer to UK did not represent an exposure to Iceland. (Directors evidence 1435)
6. Moreover, John Aspden confirmed Aidan Doherty’s position in his evidence (FSC evidence 545).
7. Michael Weldon, Head of Supervision, made the following written minute of a telephone conversation with Aidan Doherty on 25th April 2008 (FSC evidence 1340 to 1370)
Note of telephone conversation, Kaupthing Singer and Friedlander (Isle of Man) Limited.
I telephoned Aidan Doherty on Friday, 25th April and informed him that I was sending him a letter, following a board meeting of the FSC that had taken place yesterday. I read Aidan the contents of the draft letter. He expressed astonishment and asked if we understood the implications of what we were requiring. It could mean that Kaupthing close their Isle of Man operations with the loss of 70 jobs. Aidan asked if the FSC board understood this. I explained that the board had taken the relevant matters into account and had made its decision on prudential regulatory grounds. I explained to Aidan that if the bank did not agree with what we were seeking, matters could be firmed up into the form of a direction. This would give the bank the opportunity to challenge what the FSC was requesting. I explained that anything the FSC requires is always open to challenge if a firm does not agree with what is being required and requested. Aidan asked for the reasons for the request. I thought this was an entirely reasonable request from him and therefore I said we would revert back to him on this. (I considered that, bearing in mind the importance of ‘reasons’ it was appropriate to take time to put these down on paper). Aidan asked if JRA was around to speak to and I said he was and I would ask him to phone Aidan. Updated JRA. We and AK worked on setting the reasons down with a draft. JRA subsequently spoke on Friday p.m. with Aidan. JRA agreed to hold over sending the letter until next week. (The FSC board had not said it had to go out by the end of this week). This would give us an opportunity to reflect on matters over the weekend.’
The evidence raises the following questions:
What did “group” mean to the members of the FSC board when making the 2 May resolution?
How could John Aspden misunderstand the FSC board resolution? (FSC evidence 545). The board minutes appear clear.
Is the content of the draft letter read by Michael Weldon to Aidan Doherty on 25th April 2008 unequivocal that exposure to Kaupthing Group should be eliminated
Is the content of the letters that Michael Weldon subsequently sent (FSC evidence 1365 and 1430) unequivocal that exposure to Kaupthing Group should be eliminated
Why are there no minutes of conversations with Aidan Doherty on this matter ? (FSC evidence 1395). Why would Michael Weldon minute his conversation diligently but similar diligence not be applied to further conversations, particularly as it is clear from Michael Weldon’s notes that the subject is highly contentious.
Why did the board not challenge John Aspden’s misunderstanding when the transfer of funds from Iceland to UK was proposed?
Why was there no follow up or status check by FSC board between end of May and end of September 2008?
Was the board advised of the content of communications between FSC and FSA? Did the board discuss the conclusions drawn by FSC executives.
Questions for FSC Executive/John Aspden regarding communications with FSA The contentious evidence is as follows:
1. The FSC sought reassurance from the FSA regarding the liquidity requirements of KSFUK and its maximum exposure to related parties including KHF
2. Lord Turner in his oral evidence to the UK Treasury Select Committee (UKTSC) stated: “That was the liquidity regime that was in place, which I have to say was more onerous than our normal liquidity regime that we put in place in 2005 in response to some of our concerns earlier. We confirmed that regime was in place. Whether that provided sufficient assurance to the regulator on the Isle of Man was for them to decide. We are another, as it were, host regulator and our job under our [Memorandum of Understanding] with them is to provide them with information; it is not for us to make judgments on that information. We accurately answered their question and that regime was indeed in place with the bank”
3. Moreover, Mr. Tony Brown, Chief Minister, Isle of Man, in his oral evidence to the UKTSC stated: "I do not think the UK Government is responsible for the financial affairs of the Isle of Man".
The evidence raises the following questions
To what extent did John Aspden make it clear to the FSA on 21 May that the FSC was relying on the FSA in allowing an unsecured £175m deposit by KSFIOM?
When the FSA informed John Aspden that the maximum exposure that the FSA permitted KSFUK to have with related parties was 25% of the large exposure capital base, did the FSA explain how and how often this was monitored? (Paragraph 1.8.14 of the IoM Government’s Memorandum to UK Treasury Select Committee (“TSC”) in January 2009).
How did the FSA communicate that there was no net exposure between KSFUK and KHF? (Also Paragraph 1.8.14 of the IoM Government’s Memorandum to the TSC). [The UK Judicial Review evidence of Gudni Adalsteinsson suggests that, regardless of the meaning of “group”, KSFUK had significant exposure to Iceland. Effective March 2008, KSFUK had entered into a £1.1bn Swap arrangement with KHF (with overnight risk). The FSA was fully aware of this arrangement in the context of its imposed 90 – 95% liquidity ratio on KSFUK. Simplistically, KSFIOM unsecured funds represented 17% of the Swap.
How did the FSC Executive interpret the FSA’s letter of 21 May and how much comfort did this give them and why?
Did the FSC Executive consider that subsequent events must have constituted a breach of what the FSA was monitoring and if so when and how did that breach occur?
Was there ever any discussion with the FSA of the financial arrangements between KSFUK and KHF and if not, why not? For instance, was there any knowledge of the £1.1billion swap arrangement, of its nature and of when exposure under it first arose? Do the FSC have any reason to believe that the FSA knew about the £1.1billion swap arrangement and the potential impact of that?
Is it the FSC Executive’s understanding that this swap arrangement is what caused the debt to be created from KHF to KSFUK, which in turn caused the latter’s demise?
Why were there no communications with the FSA between 21 May and 8 October 2008, even as the press reports (and FSC evidence: 1540 to 1550) suggested continued deterioration in Iceland? Were there no requests for assistance under the MoU?
What is the evidence on which the FSC Executive relies (written communication/ notes/records of conversations etc) that demonstrates that the FSA clearly knew what the FSC was relying on them to do? Did the FSC believe that the FSA was assuming a duty to monitor KFSUK to ensure that deposits by KSFIOM with London were ring fenced from Iceland?
Please explain further the statement in the IOM Government’s Memorandum to the UKTSC, where it is stated that the usual channels of communication between the FSA and FSC were not followed in advance of or during the Kaupthing insolvency (see page 1 of the submission).
Questions for FSC/KHF/Aidan Doherty (FSA) regarding the Swap arrangement
How is it possible that neither Aidan Doherty nor the KSFIOM board were aware of the Swap agreement? How does this square with Aidan Doherty stating that KSFIOM had no net exposure to Iceland (Aidan Doherty 1605) and the e mail of Armann Thovaldsson (CEO of KSFUK) on 6 October (Directors 1770)?
The FSC was aware that Kaupthing Treasury functions were in Rejkjavik and London, not Isle of Man (FSC 455). Aidan Doherty was regularly receiving financial information right through to September 2008 (Directors 760). Exposure to parent bank was on the KSFIOM risk register (Directors 775). How could Aidan Doherty not know of the Swap? Why did neither Gudni Adalsteinsson (Icelandic Director on KSFIOM Holdings board) nor Armann Thovaldsson (KSFUK CEO) disclose the Swap? Or was it disclosed and known by the parties and everyone chose to ignore it under pressure to preserve the business model?
Questions for FSC Executive/John Aspden regarding the unsecured deposit of £175m
Why did the FSC allow the £175m to be unsecured (unlike the previous repo arrangement)? Was that discussed with KSFIOM in May 2008 before agreement was reached to allow the money to be deposited, unsecured?
Given the concerns initially expressed by Mr Doherty (as to the group model requiring deposits for group liquidity), why did the FSC think that the group was happy with the proposed unsecured deposit in London? Did it not then explore what the links were between London and Iceland to ensure that the money was not just going round in a circle?
What did the FSC executive think would happen to the funds deposited by KSFIOM with KSFUK? Was it the understanding that the funds would be upstreamed to Iceland, in accordance with the normal practice of Kaupthing and other similar groups? How often did the FSC monitor KSFUK’s liquidity ratios with the FSA?
Questions for FSC Executive/John Aspden regarding treatment of EDGE deposits The contentious evidence is as follows:
1. The initial suggestion from the FSC was that new and maturing deposits should be held outside of the group (FSC evidence: 1215 to 1245).
2. A “Financial Times” Article on 1 February 2008 recorded that “Icelandic banks undeniably deserve a risk premium. Reliance on wholesale debt markets – 58% of funding at Kaupthing, for example – remains a problem. Moodys is right to question whether the money recently poured into banks’ internet savings accounts genuinely offsets that dependence.”
3. KSFIOM Launched Kaupthing Edge deposits with an aggressive marketing campaign, underpinned by the KHF parent guarantee.
The evidence raises the following questions
How and why was the FSC suggested requirement apparently watered down? What was the FSC Board told about the plans for aggressive marketing for new deposits?
What steps were taken by the FSC to monitor the position of Edge deposits coming into KSFIOM and what was said to the company about the manner in which the deposits should be held?
Why were the proceeds from the IOM Edge deposits simply allowed to flow to London?
Questions for FSC Executive/John Aspden regarding FSA Transfer Order/KSFUK Administration Order
The special arrangements to protect incoming money without putting the whole group into insolvency (FSC evidence 1615 to 1620) appear to be a potential preference (i.e. a preferring of the interests of the UK depositors to the detriment of IOM depositors)? Did the FSC raise this concern with the FSA? If so what was the response?
With regard to documents from the FSA, what did the FSC ask for, what questions did it raise and what has the FSA said/provided since? In flight payments: What did the FSC learn about any restrictions imposed by the FSA/UK treasury in relation to these in the days leading up to 8 October?
Recall of funds from UK The contentious evidence is
1. Messrs. Doherty, Gelling and Cashen are adamant throughout their evidence that there was absolutely no hint of trouble in UK or Group. All statements were positive up to the last minute.
2. KSFIOM did enquire of London, “from a prudency perspective” whether, if necessary, they could break deposits in KSFUK ahead of contractual maturity dates. KSFUK refused to entertain it. (Aidan Doherty 2135 – 2140)
The evidence raises the following questions:
Was there never any concern given the messages from everywhere else (press, regulators etc)? For instance, the Daily Telegraph article on 5 February 2008 which recorded “based on prices quoted in the credit markets, international investors reckon Kaupthing, Iceland’s biggest bank, is about 7 times more likely to default than the typical European bank”.
What did others, such as directors of Holdings, know of KHF’s financial position?
Who agreed to a monthly roll of the £175million unsecured deposit (notwithstanding the FSC’s initial suggestion that it should be rolled on a weekly basis?)
Given that it was an unsecured deposit, was a monthly roll appropriate?
What consideration was given to the increased risk that this was creating and how was this being monitored?
If it had been rolled over on a weekly basis, could KSFIOM have recovered its money? – presumably, there would have been a date prior to 8 October (but close to it) when sufficient concerns would have existed for this demand to have been made?
Parent guarantee strength Questions to FSC/John Aspden re FSC involvement in parent guarantee
Why did the FSC allow KSFIOM to continue marketing the 2007 parental guarantee in its literature and on its website if it was so concerned about Icelandic risk and wanted at the very least to eliminate exposure to KHF and Iceland?
What was the FSC told about the parental guarantee? What communications (if any) with Iceland did it have in relation to this? Does it have any written communications from the parent in Iceland or from the Icelandic regulators confirming that this guarantee had been ratified by or accepted by KHF?
Did the FSC request evidence that the signatory had KHF board authority? The FSC were presumably aware that the acquisition of Derbyshire IOM was undertaken using the parental guarantee as a reassurance to Derbyshire savers? Did the FSC raise any questions at the time of the acquisition about this? Why did the FSC not demand a due diligence exercise as a matter of course? With regard to the suggestion that John Aspden was in direct contact with the group treasury in Iceland in September (FSC evidence 1540 to 1550), who was he speaking to, what was discussed and what was their view of the position?
The KSFIOM claim has been rejected on grounds that the Winding Up Committee cannot find any evidence that the signatory to the Parent Guarantee (CEO Iceland Operations) had the appropriate authority from KHF board to sign.
Questions for Aidan Doherty/KHF/KSFIOM Holdings Directors
What steps were taken to ensure that the signatory did have KHF board authority? Did FSC request evidence? Did Aidan Doherty request evidence? Was there any other indication from KHF board to indicate that the signatory was authorised to sign the guarantee? Is there any reason why a KHF board member did not sign?
Was KHF board or were any KSF board members aware that the acquisition of Derbyshire IOM was undertaken using the parent guarantee as a reassurance to Derbyshire savers? Did Aidan Doherty receive any approval from KHF board members to use the guarantee in communications to Derbyshire savers? Did FSC raise any questions at the time of the acquisition and if not why not?
Was KHF board or were any KSF board members aware at any time that the parent guarantee was extensively used in marketing KSFIOM to retail depositors? Appendix 2 : SELECT COMMITTEE HEARING REPORT
Manx Herald 06 Apr 10: FSC officials give guarded responses to KSF (IOM) Select Committee questions John Aspden, Chief Executive of the Financial Supervision Commission (FSC) and Michael Weldon, Head of Banking Supervision, were some what guarded in their responses to the series of question posed to them at the recent Tynwald Select Committee hearing investigating the collapse of Kaupthing Singer & Friedlander (IOM) Ltd. (KSFIOM) This was despite Mr Aspden stating on at least one occasion he was being candid in replying to the question. The questioning commenced with North Douglas MHK, John Houghton putting to Mr Aspden KSF (IOM) was a long standing bank, so how had the FSC assessed the risk of it collapsing. Mr Aspden explained there are different methods of risk rating a business with a number of factors involved: including capital adequacy, the quality of lending, quality of the directors, the parental regulators and of course the country of origin. Mr Houghton referred to comments attributed to UK Chancellor, Alistair Darling regarding the relationship of subsidiaries to the parent bank; and asked for his comments. Mr Aspden thought it a good question and said two years ago it was believed the subsidiary ‘vehicle’ gave “better protection” than a branch arrangement. He described this as the “traditional view”. However, he went on to say a subsidiary “disassociates a bit” ‐ so a parent could “cut off” a subsidiary ‐ and perhaps it would be possible to argue a branch is better protected; not that it would give ring‐fencing to local deposits. Committee Chairman, Juan Watterson MHK, asked in which direction the debate is going; and Mr Aspden replied is is heading in the direction of subsidiaries, with the independence factor weighing in its favour. Mr Houghton inquired to what extent the FSC had been involved in actions by the UK. Saying he was giving a “candid answer”, Mr Aspden said they were not involved so couldn’t really comment. He thought it an issue more for the politicians, not that he thought a lot had occurred; and suggested it is an issue which “now rests with the ‘IOM’”. Remarking on the expected recovery rate of assets, which he suggested were good, Mr Houghton wondered if Mr Aspden thought the action by the UK had been a“knee jerk reaction”. Mr Aspden pointed out in his opinion Bradford & Bingley (B&B) needed to be saved by the UK authorities, so the action in that case had been justified. His reflection on what their view had been ‐ once they had redistributed the Edge deposits ‐ was KSF was not systemically important to the UK so could be “allowed to go”. Mr Houghton queried the actions of the UK Financial Supervision Authority (FSA) at the time of the collapse of B&B. Mr Aspden said they had sent a “relatively senior person” to the Island to directly discuss the situation, which, to him, demonstrated its importance to the UK. Changing tack slightly, Mr Houghton wanted to know how Mr Aspden rated the FSC’s banking team. Had they got enough quality to deal with the crisis? “I am satisfied supervision was well up to the task”, replied Mr Aspden; probably much to the relief of Mr Weldon sat beside him. He went on to say they had the “macro issues to consider” as well, such as country risks ‐ although some of this was probably more appropriate for the Board to consider ‐ but still said he considered they were. Mr Houghton put to the witnesses there had been no denial that John Cashen {KSF (IOM) executive director and deputy chairman of the FSC} had been present at meetings to discuss KSF (IOM). So at how many meetings had he been present? Mr Weldon answered this question, saying he would need to check as he couldn’t remember. “Was his name removed” from documents inquired Mr Houghton; adding he had to ask the question for the record. “No”, replied Mr Weldon. “Did he get the minutes”, asked Mr Houghton; and Mr Weldon replied, “Not to my knowledge”. Mr Houghton then wanted to know if the FSC had withheld any relevant documents; to which Mr Weldon replied as far as he was aware he thought the Committee had them all. Mr Houghton then asked Mr Aspden if he agreed auditors are too close to the companies they audit. Was it not a case of “you don’t bite the hand that feeds you”? Mr Aspden said he had not seen the audit papers for KSF (IOM), therefore, he had nothing to compare against. He went on to say it is “a very well accepted argument”‐regarding the ‘independence’ of auditors ‐ not that he was aware of any conflicts of interest having been identified in this case; or with any of their other licence holders. Mr Houghton undeterred by this response put it to Mr Aspden audit personnel may be in the bank for a year ‐ representing a lot of business ‐ and the people involved would become “rather familiar” with each other; and stated “familiarity breeds contempt”. Mr Aspden agreed this could be so. Changing subject, Mr Houghton brought up the issue of promotional activities of banking institutions. Mr Aspden replied that not a lot of time is spent on getting involved in the promotional activities of licence holders; and added the FSC, unlike other regulators, does not have a dual role regarding “educating customers”. (This response seems ironic to the Manx Herald given Mr Aspden’s widely publicized opinion that customers need to be ‘re‐educated’ into appreciating banks can ‘fail’ and they will lose your money from time‐to‐time. An attempt to interview Mr Aspden about his stance on this subject, and other regulatory/supervision issues, once he finished giving his evidence, was firmly declined; and an offer to call his office later in the week also fell on stony ground ‐ Ed.) Mr Aspden went on to explain in relation to high risk/liability products: e.g. deposits, the FSC was not aware of any of KSF (IOM)’s products being high risk; although some may have been medium risk. Where institutions are offering higher rates of interest, he said, they then may take some interest; but reiterated they had no concerns regarding KSF (IOM) products. Mr Houghton invited Mr Aspden to comment about the bank’s ratings; but he replied they are not the only tool used by regulators and, therefore, not the sole source of information. Mr Houghton then put to Mr Aspden there is an issue for ‘non‐doms’ opening bank accounts in the UK; and wondered whether it is an issue discussed with the UK authorities and also whether it poses a “concentration risk for the Isle of Man”. Mr Aspden said it is not something they have really discussed with their counterparts in the UK; nor did he really consider it a prudential concern for them. Mr Houghton then pointed out all the Edge account holders had been supported by the UK authorities, including non UK account holders, accept the ones who had accounts set up through KSF (IOM); and assumed he was disappointed not to be consulted by the UK over a possible solution to this issue. Mr Aspden appeared to concur. Mr Houghton changed subject again and harked on about the lack of minutes or written record regarding, what he considered, key events involving Treasury officials, and pointed out in July 2008 an MOU had been signed covering this issue. Mr Aspden’s response was that the meetings, held between July and September 2008, were not of the type covered by the MOU. Mr Houghton seemed slightly taken aback by the response and pointed out it was “crisis time”; albeit he acknowledged (former) Treasury Minister, Allan Bell had been asked about the discussions held on the 7th September 2008 and the lack of minutes. Mr Aspden replied that according to his records he now knew the meeting was on the 6th September, and wished to clarify the date and apologise if the Committee had been mislead about the date. He went on to explain his recollection was the meeting had been to discuss the Depositors’ Compensation Scheme (DCS) and the predicament of KSF (IOM) came up at the end; and confirmed no minutes were taken. Mr Houghton pointed out when Mr Weldon attended a meeting or had a telephone conversation with KSF (IOM) he made a note on the file; but he kept no record. Mr Aspden’s explanation for this was subsequent to any meeting he attended with KSF (IOM), on most occasions, a formal letter would be sent setting out any significant issues discussed. Stating again he was being candid in his response, he said he has “fairly regular dialogue with Treasury” and he doesn’t “tend to make notes”. It seemed, with hindsight, it was agreed taking notes, to back up anything the bank had been telling him, would perhaps have been useful. Mr Watterson inquired if recordings were made of any telephone calls; but Mr Aspden said, although a warning was issued calls may be recorded, in practise this does not happen. Mr Houghton listed some dates/events, in April 2008, he considered crucial, for which there are no records, and asked Mr Aspden if he had any further comment to make; especially as he thought it “thoroughly irregular not to record them for the audit trail”. Mr Aspden agreed; but again stated any significant matters were followed up in a formal letter. The Manx Herald believes this is an issue the Select Committee, or other authorities, may wish to pursue further. Moving on again, Mr Houghton inquired how the FSC treats the ‘parentage’ of B&B and the Alliance & Leicester; to which Mr Aspden said they make clear who the parent is. Perhaps hitting a bit of a nerve, Mr Houghton followed this question up by delivering a bit of curved ball by asking if Mr Aspden thought Landsbanki (another Icelandic bank that had a presence in Guernsey) was better regulated. “With respect to you”, replied Mr Aspden, “we don’t compare ourselves”; and went on to add there is no evidence to suggest the bank was badly supervised or regulated. He said the 93p in the £ anticipated recovery rate is “by no means beyond normal” and, whilst it is a “shock” for anybody to lose money, from an “academic”point of view it is a “satisfactory recovery”. Moving back to a time before the bank collapsed, Mr Houghton queried whether the failure by the FSA to respond to some of their correspondence had put them on notice to a potential issue of concern. Mr Aspden said they had received a reply to one piece of the correspondence, which had set out the limits applying to KSF (UK), and this had been satisfactory. However, he conceded it was a “fair point” to wonder if they should have been on the FSA’s back on a weekly basis; but they took the view it was reasonable to believe the bank was in a position to continue in business. Mr Houghton inquired if Mr Adalsteinsson had been judged by the FSC to be a fit and proper person to be on the board of the bank’s holding company; but Mr Aspden pointed out he was not on the board of the bank and thus the situation is different. All the same, Mr Houghton wondered if they should have “squared the circle” and checked anyway; but Mr Aspden replied it would be necessary to check on the due diligence carried out. So did the directors have enough experience, asked Mr Houghton, to challenge the bank’s management and to make suggestions or properly consider options? In the FSC’s view, replied Mr Aspden, the technical knowledge and experience from “years on the job”, and the broad spread of it, meant the answer was yes. Not totally content with the response, Mr Houghton wondered if there is a need for a change to the policy on the suitability of potential directors in the future. Mr Aspden conceded there may need to be a change in the requirements for local directors, but trotted out one of Mr Bell’s favourite excuses when he is asked similar questions about membership of the board of the FSC and FSA. That is, there is a “limited pool of people to draw from” in the Island; and an even smaller one without conflicts of interest. So he said it is “difficult to find people with these skills so we get a blend” of people. Mr Houghton put to Mr Aspden they had been getting a “no net exposure assurance” from the FSA and wondered if this was correct; and he replied it was. Mr Houghton put to Mr Aspden there was no record on the FSC’s files of them receiving this assurance from the FSA; and inquired if there was an auditable paper trail. Mr Aspden said the FSC’s letter to the FSA and their response provided the answer. Mr Weldon interjected that the no net exposure was a note on the file rather than in a letter. He pointed out they had received confirmation from the FSA on the large exposure rules, being 25% of the large capital base, with no exception for inter‐bank lending. They had that in writing and it was also later confirmed in a telephone call. As for the margin on the Repo, this counted as connected exposure; and so overall it was not that critical compared to other issues. He went on to say on the no net exposure, in respect of the £180m, they were mirroring a similar situation in the UK. Having his final say for a moment, Mr Houghton referred to the IOM’s evidence to the Treasury Select Committee in January 2009, and suggested if any attempt is made to lay the blame on the FSA they will deny it; to which Mr Weldon responded, the large exposure rule is the important bit. Eddie Lowey, MLC returned to the issue of the suitability of the directors and Mr Weldon pointed out some had been vetted by their ‘home’ regulators, not the IOM’s; and as for Mr Foster’s status a check of the records would need to be made, said Mr Aspden. Mr Lowey harked back to the ‘letter of comfort’, wondering if it was normal, and wanted to know what is the purpose of the guarantee as it is only good if it delivers. Mr Aspden replied the giving of a letter of comfort is normal, and its purpose ‐ given that it is neither a legal document nor a guarantee ‐ is to provide an “expression of support” should they get into difficulty: i.e. they will lend support. So if it isn’t a legal document what is the point, he asked rhetorically. It is just very helpful he explained, like an MOU, so, for example, there is no misunderstanding on how to communicate and it sets out the party’s responsibilities. Looking back, he added, even if it had been a fully blown legal document, given the situation, it would have no value when the country is in such a mess. Mr Lowey inquired if the IOM authorities checked whether it was legally binding given that companies are trading on the back of guarantees and being regulated by the FSC in their promotional literature. Mr Aspden said they did, but seemed to contradict this by saying they do not check for legal enforceability; but just to make sure it covers the areas they need it to cover. As for the extent banks refer to them in promotional documents, and with the benefit of hindsight, going forward, he thought they may need to think about being more “intrusive”; and so they would have to consider these issues. Mr Lowey wanted to know about the complaints regarding the takeover of the Derbyshire and asked if the FSC holds a register of complaints. Yes they do have a fully published complaints procedure, replied Mr Aspden and there were very few in the lead up to the takeover. There had, however, he added, been more since the bank went down; and Mr Weldon said he would provide the figures to the Committee. So they hadn’t been consulted about the transfer of the Edge accounts, inquired Mr Lowey; to which Mr Aspden replied they only found out after the event of the transfer to ING. However, he was not sure, even if they had been informed in advance, they would have been able to do anything to protect the ‘IOM’ accounts. They had, he said, “Just woken up one day” and found they had been presented with a “fait accompli”. He did believe though the size of the IOM accounts was not significant so perhaps it may have been possible to get them sorted. Mr Lowey asked about new products launched by the bank; and Mr Aspden explained the banks tend to aggregate the deposits before deciding what to do with the money; so tend not to allocate assets to the deposits. However, he pondered, with a crisis coming up, could they try to earmark certain deposits and assets. He suggested they couldn’t really do this as they had to try to protect all customers and they wouldn’t have been doing their duty if they had only protected the Edge deposits to the detriment of all other depositors. Furthermore, if they had tried it would probably have been challenged by the non‐Edge customers. As the Derbyshire was no longer a building society, Mr Lowey wanted to know if the FSC should have taken a closer look or paid more attention; but Mr Aspden pointed out this does not make any difference to them as they carry out their duties on the basis of risk and not the class of the licence holder. He reiterated the evidence he gave at the previous session that as far as the FSC was concerned the Derbyshire “was a mess” and no “virgin bank” and had a number of problems for historical reasons: a case of servicing widows and orphans rather than income generating; and as a result of the takeover it “emerged in a more dynamic institution” ‐ KSF ‐ and it was a “great shame” how it all ended. However, KSF “had not taken something pristine to something higher octane”; albeit, in his view, some customers had chosen KSF for its better rates.
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