T Y N W A L D C O U R T O F F I C I A L R E P O R T

R E C O R T Y S O I K O I L Q U A I Y L T I N V A A L

P R O C E E D I N G S

D A A L T Y N

(HANSARD)

S E L E C T C O M M I T T E E O F T Y N W A L D O N K A U P T H I N G S I N G E R & F R I E D L A N D E R ( I S L E O F M A N ) L I M I T E D A N D T H E D E P O S I T O R S ’ C O M P E N S A T I O N S C H E M E

B I N G E R - L H E H T I N V A A L M Y C H I O N E K A U P T H I N G S I N G E R & F R I E D L A N D E R ( I S L E O F M A N ) L I M I T E D A S Y S K E I M S O N K E R R A G H E Y C O A Y L F I R - V A I H A R G I D

Douglas, Thursday, 2nd December 2010

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PP07/11 TKSF, No. 8

Published by the Office of the Clerk of Tynwald, Legislative Buildings, Finch Road, Douglas, Isle of Man, IM1 3PW. © Court of Tynwald, 2011 SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

Members Present:

Chairman: Mr J P Watterson, MHK Mr A Crowe, MLC Mr J R Houghton, MHK

Clerk: Mr R I S Phillips, Clerk of Tynwald

BUSINESS TRANSACTED Page

Procedural ...... 255

Evidence of Mr J Aspden, Chief Executive, Financial Supervision Commission ...... 255

Procedural ...... 270

The Court adjourned at 3.50 p.m.

______254 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

Select Committee of Tynwald on Kaupthing Singer & Friedlander and the Depositors’ Compensation Scheme

The Committee sat in public at 2.30 p.m. in the Legislative Council Chamber, Legislative Buildings, Douglas

[MR WATTERSON in the Chair]

Procedural

The Chairman (Mr Watterson): Welcome, everybody, to the oral evidence session of the Select Committee on Kaupthing Singer & Friedlander. As we all know, the Select Committee was appointed on 16th July 2009 to investigate and report on the cause of the collapse of Kaupthing Singer & Friedlander (Isle of Man) Ltd; the role of the FSC in ensuring the proper management of 5 KSF (Isle of Man) Ltd to protect depositors’ funds; the credibility of the Depositors’ Compensation Scheme; and any other relevant matter; and report back by March 2010. The Committee has reported on the first two parts of its remit, and is now concentrating on the credibility of the Depositors’ Compensation Scheme, and any other relevant matter. Parts of its inquiries will focus on the action taken to try and save Kaupthing Singer & Friedlander Ltd. 10 Today, we have Mr John Aspden, Chief Executive of the Financial Supervision Commission, and further evidence sessions will take place later. Unfortunately, Mrs Downes has been unable to join us today on behalf of the Depositors’ Action Group, due to the adverse weather conditions. It is anticipated, but not certain, that she will join us at our next evidence session on 10th December. In case anybody is not aware of the members of the Committee: from my far left, rather 15 ironically, John Houghton MHK; the Clerk, Roger Phillips; and to my right, Alan Crowe, MLC. I am Juan Watterson, MHK, Chairman.

EVIDENCE OF MR J ASPDEN

Q1137. The Chairman: Thank you very much, Mr Aspden, for joining us today. Do you have any opening remarks to make, before we start on some questions?

20 Mr Aspden: Not really, Chairman. You kindly sent a request, back in August, for a submission from us, so we put in about a four page document on that, answering some of the key questions that you put at that time. I think that is fairly complete from our side, so I am happy to rest with that as an opener.

25 Q1138. The Chairman: Thank you very much. You will recall that we finished the last part of our enquiry at the eve of the collapse of Kaupthing Singer & Friedlander so, picking up the story at that point, those transcripts indicate that there was a view in the FSC and elsewhere that a straightforward liquidation might not be appropriate in the case of KSF. Can I ask you when plans for the potential recovery of KSF were 30 prepared and who was involved with that?

Mr Aspden: Right. I am just interested in your opening remarks about the fact that there was ‘a view’ that liquidation might not be the most appropriate. I think, looking back, or thinking back, to that time, on the evening of the 8th, by which time, 35 of course, the UK bank had already gone into administration, when we actually sat in the office, as it were, on the evening of the 8th, deciding on courses of action and so forth, at that stage, of course, we were dealing with a situation that presented itself in front of us. We had not really had ______255 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

the opportunity to look at any wider alternatives, at that stage. We certainly had not had the opportunity to take any substantial legal external advice, apart from who was with me at the time. 40 So I have to say, at the initial outset, as at that evening on the 8th, we were really looking probably not much further, at that stage, than submitting to the court – jointly, of course – for the appointment of a liquidator provisional, if only as a holding position. Now, of course, after that – and we can discuss this further – more people became involved, advisers were appointed, and then all the wider options started to emerge; but at the first stage, at 45 that very early stage, we were thinking, on that evening, really no further than how we were to respond to what had happened in London – because that is, after all, where a large part of the Isle of Man’s bank’s – the KSF (IOM) deposits – were, and how we should respond to that. I think, at that stage, we really felt no further than the fact that a liquidator provisional would be the best initial way of holding the situation. 50 The Chairman: Okay.

Q1139. Mr Crowe: Can I just ask Mr Aspden, on the evening of the 8th, who was actually present for these discussions? 55 Mr Aspden: Well, through you, Chairman, basically I was there the entire time and then I had various people with me from time to time. This included a legal adviser from Callin Wild. It included a number of senior colleagues in the office, but that was really it. We made one or two additional phone calls but, in terms of personalities, that is who was there. 60 Q1140. Mr Crowe: You did not have Bank directors with you?

Mr Aspden: We had no Bank directors with us. Now what we did do is, in the course of that evening, we needed to put through two or three 65 phone calls. We had two or three telephone exchanges with the Bank directors… well, in fact, it was not the Bank directors, I think it was their legal adviser in the room at the time. At any rate, one or other, but we did have some conversations on the telephone with them, because the issue at that stage was: would it be the Commission that petitioned the court or would it be a joint petition by the Commission and the directors of the Bank? So there were discussions but they were 70 primarily around that subject.

Q1141. The Chairman: Can I ask you, at this point, why it was felt that joint submission would be better; why the FSC would be involved as part of the submission for a liquidator provisional, as opposed to just the directors putting in a winding up…? 75 Mr Aspden: I think it was a very important decision of ours that, considering we were actually making a regulatory response to what was happening, it was pretty fundamental for us that we needed to, at the very least, be a joint petitioner.

80 Q1142. The Chairman: So, when was an early view established that a sale of all or part of the business might be feasible, and was this something that you had a view on at that early stage?

Mr Aspden: This, Chairman, is not something that we, on our own, had a particular view on. I think as you, of course, will know yourself, liquidations of banks are highly complex and, in 85 particular, the reason they are highly complex is because, when one liquidates a bank, typically one is unwinding a lot of counter-party transactions, a lot of secure transactions and a lot of arrangements with third parties. So when immediately after the initial appointment of the Liquidator provisional – and this I should say was not an FSC-led initiative because I think, as our submission mentioned to you, that it was fairly quickly that the Chief Minister appointed an 90 oversight committee for all of this – at that stage I think it was only logical that a number of options quickly came on the table because, as I said a moment ago, the whole purpose of having a Liquidator provisional was to get someone in there to bring the situation under the aegis of the court, to hold the position. That gave, then, an option to look at various alternatives. Now, it was far too early to know what might be viable or not but, very clearly, we were 95 dealing with an entity that had a banking licence, that had raised a number of deposits – and even a mere book of deposits has value in the market – that only had – and I say ‘only’ because as we’ve subsequently all found out, it has been very relevant – 50% , or roughly 50%, of its assets upstream, the rest were in independent… [Inaudible]. It had a client base, and part of its ______256 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

independent assets comprised a higher end mortgage portfolio in the UK. So all of these had 100 potential value and, at that stage, I think that the view was that it seemed reasonable to explore those options as, perhaps, a cleaner deal than going into what could be a time-consuming liquidation.

Q1143. The Chairman: Really, as far as the regulator is concerned, it seems that the options 105 that would be going to you, at the end of the day, would either be to sell the company, simply transfer to another licenceholder, sell the assets to another licenceholder or wind up the company – and yet the FSC’s involvement seems to be more than just making either of those options possible?

110 Mr Aspden: Actually, that is an interesting comment, Chairman, because if one looks at what actually happened, if one looks at the chronology of it, we were heavily involved, obviously, up until 9th October. As soon as the Chief Minister’s committee was appointed, essentially, the evidence will show that the FSC, apart from the fact I was on that committee… I did do a trip to Iceland. I did make an initial visit to meet AlixPartners, who were advisers to the Government but, 115 apart from that, actually particularly in terms of exploring options as to what to do with the Bank, the FSC played very much a subsidiary role. We by no means led on any of that. There were one or two people working with Treasury on that who were far more active than we were. Indeed, I found my position… on the one hand, I think it was very important that we were there to keep track of what was happening and 120 everything, but I was a little bit – and I say, Chairman, only a little bit – conflicted because, after all, I was representing a potential scheme manager, should the DCS be activated and as, of course, you will appreciate, throughout the period from 9th October going right round to 27th May 2009, throughout that period, the scheme manager had constantly to review the situation and decide whether… Exactly. 125 Q1144. The Chairman: So this just brings me on to whether you felt it was appropriate that you should actually have gone along to the meeting with AlixPartners and had that extra level of involvement. I can appreciate that there was a certain amount of regulator-to-regulator discussion required in both London and Iceland but, in terms of these additional things in terms of the Chief 130 Minister’s committee and the introduction to AlixPartners in particular, do you feel that it actually was really appropriate for you to have been quite so involved in that?

Mr Aspden: I think, Chairman, so far as AlixPartners are concerned, at that very early stage, because of the magnitude of the problem and because time was of the essence, really, at the very 135 outset, it was all hands to the pump. So far as AlixPartners were concerned, all I did was go to London, have an initial meeting to establish whether, potentially, they could be the sort of people who might assist Government, and then facilitate, by inviting them to the Island, an introduction to Treasury. Once that happened, essentially Treasury paid their bills; we did not. They were not booked through the FSC. We were not their client, in that context. So we quickly became 140 disengaged on that. I think, so far as my sitting on the committee is concerned, that was essential and I will tell you why: because although Treasury was leading on all of the Scheme of Arrangement issues and all of that, the fact was, particularly so far as the public was concerned, there were a number of members of the public who obviously felt that the FSC was fronting for this. So we were receiving 145 calls from the public. We did have to answer concerns about what was happening and so forth. Therefore, I think my membership of the committee gave me an insight into what was going on – number 1. Number 2: as the committee went forward, all the different options they were considering, including the Scheme of Arrangement, had regulatory dimensions, because if the Bank was going 150 to be sold, we would have had to have been involved; if assets were going to be sold, we would have to be involved, etc. So I think our involvement at least meant that we were parallel in keeping in step with what was happening.

Q1145. The Chairman: Obviously, after the liquidators were appointed, they became the 155 licence holder of the Bank. Once that happened, it seems to be a rather unusual regulatory environment, inasmuch as normally you would be up at the FSC with occasional meetings with the directors of the company, occasionally issuing directions and all the rest of it. This seems to have brought the FSC a lot closer in, almost as far as the management of the company and some of the decisions as to the ______257 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

160 future of the company, and being part of that. Is that not a cause of concern, in terms of that proximity, as opposed to a more regular regulatory relationship?

Mr Aspden: I think you are quite right, Chairman, in the sense as to what would happen in normal times: your reading of that is entirely correct. 165 But I just go back to what I said a moment ago. Essentially, throughout the progress of the Scheme of Arrangement… and it was not just the Scheme of Arrangement. For many months, there were possibilities of people wanting to buy the Bank. We even had some suitors actually visiting us, as potential acquirers, and so forth. Even on the Scheme of Arrangement there were regulatory issues arising on that, in terms of prospective balance sheets and how the Bank might 170 be reconstituted and everything. So I think the important thing is that the record will show that I took no part in any in what I would call policy or executive decisions of activity, but in terms of being completely in step with what was happening and making sure that the regulators were taken with the process, I would have thought… I viewed that as pretty essential because, otherwise, when we were brought in on 175 particular issues, had the Bank been sold, had the scheme gone through and everything, if we had come in from the cold on that, I think it would have been a big disadvantage.

Q1146. The Chairman: To what extent were you consulted about financial support that could be allocated to support the sale of assets? Was that something that was beyond the area you were 180 dealing with, or was that something that you were consulted about and gave a view on in that Committee?

Mr Aspden: No, I was not involved in that.

185 Q1147. The Chairman: From your point of view, was there an early opinion within Government and this committee that it wished to avoid invoking the DCS?

Mr Aspden: I certainly do not detect or recall any sort of firm policy view on that, but I think, if one looks at it, that, first of all, the revised DCS – it had only just been revised and so forth – 190 was very new, so I think, in that form, there must obviously have been some apprehension about invoking it from that, so that is one point. Secondly, I think if a commercial solution to that sort of situation can be found, then I think... Had a neat, clean commercial solution been found, I think it could have been very good for the Island, in the sense that someone could have come in, bought it, clean deal, no involvement of 195 Government money. That could have been nice and straightforward. I think there was certainly a lot of time spent looking at all the different options there could be, but I did not detect any sense of ‘another option must be found at all costs’. It was more of a process of looking at all viabilities.

200 Q1148. Mr Crowe: Sorry, Chairman. So you were looking at a wide range of options concurrently.

Mr Aspden: Yes.

205 Q1149. The Chairman: Do you want to just outline, before we go into more detail about the Scheme of Arrangement, how the concept of financial support was created, what options were considered and whether you were happy that you were adequately consulted on that?

Mr Aspden: Perhaps in a moment, I might just ask you to elaborate on what you mean by 210 ‘financial support’, but I think, essentially, the FSC and myself… I was not involved in spearheading or initiating the front-line discussions with potential acquirers and that sort of thing. I did have discussions with them because they had to come and see us, to understand the regulatory position, but I was not the first port of call, either with depositors or with any potential inquiries. Clearly, in the course of exploring various options – you have possibly got better records than 215 me of this – various potential acquirers, various propositions and so forth, some of those propositions might have involved some sort of financial support or whatever. I never got involved in that, because this was… We would have done, had there been an entity that was going to remain in business afterwards, but I never got involved on the detail of any sort of financial support issues on that. 220 ______258 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

The Chairman: Okay. Thank you.

Q1150. Mr Crowe: Can we just consider some aspects of the Scheme of Arrangement: can you let us know when was this proposed and by whom and was the Scheme of Arrangement 225 developed to keep in play an option that might include some aspect of sale?

Mr Aspden: Right, as regards the precise date, I would have to get back to you on that but, essentially, the Scheme of Arrangement as I recall it was very much a favoured option – not necessarily the option, the only option, but very much a favoured option – put forward by 230 AlixPartners. As you may have seen from their credentials, they are very experienced in restructurings and I recall, on more than one occasion, them reporting that they had used a scheme of arrangement technique and so forth on a number of occasions very successfully. They were experienced in that and they were very strong advocates of it. So I think I am right in saying, to the best of my knowledge, that they were the ones that put 235 that forward. They put that forward at a fairly early stage, as you will have seen from the court chronology. So that was something that very much was there. Now, in terms of how that might have assisted and so forth, clearly, had the Scheme of Arrangement provided a vehicle which everybody, creditors and all parties, actually came in and agreed on a restructuring on that basis… We can discuss it separately, but there were various 240 benefits that some people thought would accrue from that. That is where, basically, the idea came from.

Q1151. Mr Crowe: Thank you. That leads me into the question of what were believed to be the tangible benefits of the Scheme 245 of Arrangement over the Depositors’ Compensation Scheme?

Mr Aspden: Well, the Depositors’ Compensation Scheme: as you know, the purpose of the Depositors’ Compensation Scheme is to provide a defined level of compensation to eligible depositors, whereas the Scheme of Arrangement was looking at all creditors and providing, 250 ultimately, a solution for all creditors. I suppose one or two of the benefits that were identified on this were that, first of all, a scheme of arrangement would, potentially, give a better basis for working out the existing asset book. I am not an accountant or a liquidator but, whereas a liquidator might have more of a mandate to go out and sell the assets to get a speedier recovery, as full a recovery as he or she can, albeit perhaps a 255 more protracted but, nonetheless, perhaps at the end of the day, a fuller rate of recovery. Now, I am not saying that, in fact, in this case would have happened, but those were the sort of discussions taking place at the time, particularly also because, to give you a practical example of this, as you are probably aware, part of the loan book of the Bank related to higher end mortgages in the UK, including some interest-only mortgages. 260 Where you have got an interest-only mortgage for a defined period that would be coming up for renewal, instead of actually at a time of depressed property values forcing the borrower into having to refinance that and, in some cases, not being able to refinance it, arguably a sale, or a loan book that was being worked through, might have offered a better possibility for rolling the loan, refunding it, or even giving the borrower additional monies: so, in other words, managing the asset 265 book more in a commercial real-time environment, rather than just a straight liquidation, which is just realising the assets, full stop. So, there were a number of discussions, I recall, not with us, but I recall that these were the sort of arguments being put forward by AlixPartners as an advantage of a scheme of arrangement over a formal liquidation.

270 Q1152. Mr Crowe: But were you concerned at the delays in the DCS being triggered off, when you had responsibility as scheme manager? Were you worried about the delays that were taking place?

Mr Aspden: Right, well, I think it is very fair to say that we were… It was something that we 275 were entirely on top of, had regular meetings of our board and I do not know whether ‘concern’ is the right word, but we were certainly very alive to this issue because, after all, Tynwald had set up a DCS – so question – for such a scenario, arguably fit for purpose, so why is it not being activated? But I think the overriding point was that all of the proposals relating to the Scheme of Arrangement were fully discussed in, and tested and brought before, the court in scenarios in 280 which all parties had an opportunity to make submissions and for the court to hear all views.

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So, at the end of the day, I think the Commission took the view – the Commission scheme manager took the view that, whilst this was taking place within the remit of the court, it was not for the scheme manager to pre-empt or potentially frustrate or undermine that by suddenly calling an event of default. 285 Q1153. The Chairman: You said there that the Depositors’ Compensation Scheme was arguably fit for purpose. Was there ever any doubt about that, that it was fit for purpose?

Mr Aspden: No, I used the word ‘arguably’ because, at that time, it had not been triggered and 290 therefore we did not know whether or not it was fit for purpose in quite that way; but since it had been drawn up and approved by Tynwald and everything, then I think the working assumption has to be that it is fit for purpose.

Q1154. Mr Crowe: Just considering the likely level of repayment, with hindsight, do you 295 think the initial estimate of the likely level of repayment, once the DCS was invoked, was a bit cautious?

Mr Aspden: First of all, to be very frank with you, I do not actually remember what the initial… It depends which figure we take as the initial estimate of recovery. I am aware that, at the 300 moment, the upper range of recovery that the Liquidator has so far announced, is I think 95.7p in the pound. So, by definition, we were looking at amounts much less than that. I think the fact is this: at the time, you can imagine, the Bank goes under and, suddenly, at that stage, you have, as you will know, at the initial stages, lots of woeful stories about the fact that here is a bank, the assets have all gone, recoveries are going to be poor, everybody is feeling, 305 obviously, very concerned about the situation, etc. It is not until one starts to do a cold analysis, one starts to get a better feel, as the Liquidator has done, with recoveries and all of that, one can then move to a more informed position. So, I think it was no more than that. Certainly, I am not aware that there are any critical decisions, irreversible decisions, taken at the time, at the beginning that might have shown that a 310 more cautious forecast at the beginning was imprudent.

Q1155. Mr Crowe: Thank you. Again still on the Scheme of Arrangement, to what extent were you involved in publicising it and are you aware of adequate and effective consultation with key parties from an early stage? 315 Mr Aspden: I would hope that other evidence would show that we had no part whatsoever in the promotion or promulgation of the Scheme of Arrangement. That was entirely done through this Committee, with AlixPartners advising the Committee, and essentially that was being handled by lawyers for the Government – AlixPartners as advisers and we, as a Commission, and I myself had 320 no involvement in day-to-day liaison with some key depositors who might have been particularly interested in what a Scheme would offer.

Q1156. Mr Crowe: So you had no direct involvement with depositors.

325 Mr Aspden: No direct involvement, no.

Q1157. Mr Crowe: You were in a slightly strange position because you were a member of the Chief Minister’s committee, so you were aware of everything that was happening, but are you saying you were on the fringes of some of these decisions? 330 Mr Aspden: The critical decisions on some of this were not actually taken on the committee. The committee, I think, was... I would term it as more of an advisory committee rather than a decision-making body, so these were all the issues being discussed and everything but, at the end of the day, some of the final decisions on these sorts of things would have been decision-making 335 between two or three key people, on the basis of what had been discussed and informed through the committee. So, I think, I do not recall it directly, but if you have a look, I am sure, at the notes or minutes of these meetings, there were no matters put to a vote or anything like that.

340 Q1158. Mr Crowe: We are aware and you will be aware, of course, that in the UK liquidation or the administration, the UK Treasury imposed an order that most activity had to be concerning ______260 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

the liquidation of KSF in the UK. This lack of information: were you aware of this lack of information, which was holding the proceedings up, and preventing the Liquidator from getting all the information, and say, Treasury or this committee from getting the information needed to make 345 reasonable judgements on what the value of the assets of the Bank were?

Mr Aspden: It became... I have to say that I think I am right in saying – I will have to check my records exactly – before the Liquidator provisional was appointed, really we were not aware of any of these orders, and so forth, because there were some that came in place even before the 350 administration of the Bank in the UK. We were not aware of any of this. Afterwards, it soon became apparent that there were Statutory Instruments in the UK that achieved exactly as you have said, related particularly as to... In fact, they particularly affected the terms of the administrators in the UK, and the way in which they would actually conduct the liquidation. 355 We also, at that stage, became aware of how funds also had been handled prior to the going into administration. This really only gradually all came out in the immediate aftermath and I got to hear about all of this, partly through the committee; the Liquidator was obviously doing his work and we did some of it from our own research as well. But a lot of this – most of this that you are referring to – was actually in terms of what the UK did on orders and so forth, that was complete 360 news to us.

Q1159. Mr Crowe: So, between 8th October and 27th May, when the final order was made, at what point do you believe there was sufficient information for all stakeholders to make value judgements on the assets of the Bank and on whether the Scheme of Arrangement should be 365 accepted or not?

Mr Aspden: I am not being defensive in saying that this whole process was conducted through the courts, so it would be... I would respectfully suggest it would be wrong of me to assume that there was any earlier information to hand, other than when the court made its own decision as to 370 what would happen on the Scheme of Arrangement. I have... that was something which we deferred to the court on throughout the process because, at this time, there was a long – well, a number of months’ period which more information was coming out. It was proving, as I understand it, although we were not directly involved, but it was obviously proving time consuming to value the assets. As you will know, in particular you will know, when 375 you look at a bank, the published accounts, like any company, are drawn up on a going-concern basis. Immediately a bank goes into liquidation, its assets move from going concern to gone concern and you are into fire sale mode and all of this sort of thing. So a lot of the values that we, as regulator, would be working off, in terms of prudential returns and all that sort of thing, those values go out of the window almost if one is into a fire sale or asset ratio liquidation mode. 380 So I think this was a very complex process frustrated by the fact that there were administrators in the UK and those administrators in the UK had their priorities clearly set for them in the local legislation and the impression I had – and I made some attempts to contact the administrators myself as well, so I have first-hand experience of this – while they are nice people, at the end of the day they had their priorities and the Isle of Man might not have been at the top of that list. 385 Those were the sort of challenges that one was dealing with in those times.

Q1160. The Chairman: It is also fair to say that this was happening during a period of regulator-to-regulator ‘Cold War’, following the circumstances at the time. Do you feel that that relationship has thawed? Has that improved again in the last two years? I think it is an appropriate 390 juncture to ask whether things have improved.

Mr Aspden: I think that is a very relevant question, Chairman, and I am happy to report that I think relations have been fully restored and we have actually... In fact, only yesterday I was on an extended conversation, yesterday afternoon, talking about liquidity policy and all of this sort of 395 thing, so I think we have a good working relationship now. It is important that we do have, because of the number of UK-based businesses we have got here. So as much as it can, within the way that the FSA is going to be changing over the next couple of years, it is business as usual.

400 Q1161. The Chairman: I do not particularly want to push the issue, but did you ever get an apology for the actions of the FSA at the time?

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Mr Aspden: No, no – no apology!

405 The Chairman: I will not force the issue!

Mr Crowe: That was all, Chairman.

Mr Watterson: John. 410 Q1162. Mr Houghton: Thank you. Thank you, Mr Aspden. The Depositors’ Action Group feel strongly that the primary motivation to delay invoking the DCS, therefore pursuing other options which bought time to develop a potential funding solution, was to protect the reputation of the Island, rather than seeking to prioritise and maximise the 415 support of the affected depositors. What would your comments be on that?

Mr Aspden: I think that is certainly a view and I have heard that view before. Our position, or my view on that, is that, yes, lots of options were being explored – for whatever reason, but they were being explored. I would like to think that people should have 420 confidence in the fact that those options were being explored properly, in the sense that they were all being explored under the court process and, at each hearing, as I recall, all parties, all creditors, had full opportunity to put their concerns and their views directly before the court. Presumably, therefore, when the court heard those representations and made whatever decisions it did at the time, it was on a fully informed basis and after weighing up all the sorts of 425 considerations that you mention.

Q1163. Mr Houghton: Thank you. So with hindsight and taking account of the latest expected dividend, would the Scheme of Arrangement have been beneficial for any stakeholder in the recovery process? For example, there 430 would not have been any separation between the Liquidator and the DCS manager, would there?

Mr Aspden: You are right on the last point, although it is a bit difficult, I would suggest, to quantify the benefits or otherwise of that. I think I cannot speak for other parties, but I am presuming that one of the concerns in people’s minds is that a liquidation is potentially protracted 435 and, therefore, whilst a large number, easily the majority of depositors through the compensation scheme, had got back their money, nonetheless, there are a number of larger depositors who are going to have to wait until a future date in order to get whatever final recovery is achieved. They possibly could argue that that is a protracted timetable, or more protracted than it might otherwise have been, but it is very difficult to say because, at the end of the day, these were not short-term 440 assets that could just be sold into the market.

Q1164. Mr Houghton: Thank you. What overall lessons have been learnt by the FSC and changes been made, in light of the KSF experience? 445 Mr Aspden: That is a very big question and –

The Chairman: Bear in mind that we did cover some of it last time as well.

450 Mr Aspden: Thank you, Chairman, we did cover a bit of that point. I think, first of all, perhaps things have moved on a little bit, even since we last met, and that is that, in relation to liquidity issues, in relation to intra-group exposures, in relation to upstream business model of banks, I think, undoubtedly, everybody has continued to become more cautious, in many respects. I think a good example of that also is what is happening in the Eurozone at the 455 moment. Conditions now are very much tighter than they were when we last met. I think also the co-operation between regulators and so forth has become a lot closer, including between ourselves and other regulators. I think the other important development is that international standard-setting bodies – like the Financial Stability Board, the Basel Committee of Banking Supervisors, the securities regulators and so forth – all of them, since we last met, have 460 continued, under the auspices of the G20, to bring out and put out initiatives and proposals as to how the system could be strengthened, in a response to the financial crisis. That is very much an evolving process and one in which we on the Island are playing a full part.

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Q1165. Mr Houghton: Thank you very much. 465 What would you see that DCS – a further DCS – should seek to deliver, taking account of continuing economic uncertainty? What would your helpful proposals be in that area?

Mr Aspden: This, being very frank, is a very difficult issue for the Island, because we have a significant banking sector. 470 It is a fact, in financial stability terms, now that responsible jurisdictions such as ourselves are meant to have depositors’ compensation schemes. We, as an Island, have had one since 1991 and it must be said, we have had one long ahead of some of our other island colleagues. So I think this Island has shown great foresight in terms of the protection it affords. I think the key issue is that what has happened is, in the light of the crisis, expectations of 475 coverage have gone up. We used to be £20,000 and then, as we know, in October 2008 it became £50,000. Across in the UK it is now £100,000. I think the EU standard is €100,000 and so forth. But, interestingly, when you look at other countries, like the UK in the time of the crisis, the UK government did not even really have regard to its own depositors’ compensation scheme. The Chancellor said, we will bail out or we will make sure nobody suffers any loss, so even 480 compensation schemes at that stage become, not redundant, but they are not enough and, indeed, the Irish guarantee, where the Irish government has guaranteed depositors on top of any coverage of DCS schemes... So it shows where the consumer protection pendulum has swung to such an extent that, in the current crisis, all consumers basically have an expectation that they are going to be bailed out. 485 Governments... the Isle of Man, because we have held steadfast to our DCS, we arguably are in a slightly better position because, unlike other governments that have provided effective 100% cover, they have actually got to plan their exit strategy as to how they re-educate their depositors that, actually in future, the government is not going to just underwrite 100% deposits, but they are only going to get the DCS, the Depositors’ Compensation Scheme level. That is an exit strategy, 490 which these governments have got to go through to re-educate. We here have got our DCS, it is £100,000 – sorry, £50,000, with £20,000 for non-individuals. Why do I say it is a challenging position for the Island? First of all, it may change but, in view of the figures I have just quoted to you, it will be immediately apparent to you that the £50,000 we have got at the moment does not fully equate with how some of the other schemes in other 495 countries have been elevated. So that is an issue which probably we might not do anything about but, nonetheless, is something that, no doubt, people will look at. So that is one issue. The second issue is the whole issue of affordability. To be very frank about the DCS we have got at the moment – because I think it is very important and we have spelt this out as a Commission, it is very important that we all understand this – the Depositors’ Compensation 500 Scheme we have got at the moment is limited, because the banks contribute, Government contributes, and there is a cap on those contributions. But then the Scheme can, in addition, borrow. So to the extent that the Scheme can raise money from banks and from Government, it can also borrow on top and, in theory, there is no limit to the borrowing. So, in other words, the DCS could go out and borrow enough to actually repay anybody of any bank size. The reality of it is 505 that, of course, the Scheme in that situation... the chances of it being able to raise large amounts of money might be quite difficult. So, we have a Scheme. It is capped, and I can fully understand why it is capped, from a Government liability viewpoint, but it is important that depositors understand what the terms of that Scheme are, so that there is a proper understanding of the potential coverage, rather than like 510 in some other countries where there has been an automatic presumption that the government would just stand behind 100% of deposits, which I think is probably unrealistic. That is the sort of dilemma that I think exists at the moment.

Q1166. The Chairman: If I can just probe you a bit further on our present DCS, then: if KSF 515 was widely acknowledged to be somewhere in the middle of the Isle of Man, in terms of size and in terms of the Isle of Man’s banking regime, if one of our larger deposit takers were ever to go into liquidation, you potentially have a gap between the capped funding and the overall liability to depositors. Whilst I appreciate that there are powers there to borrow, I am not quite sure what it would be borrowing against, because there would not be any future income streams to go in, apart 520 from the recoveries from the bank. So, if a gap then arises, where does the liability lie for that?

Mr Aspden: I think that is a very good question, Chairman, because, of course, thanks to the generosity of the Government in the KSF case – and, as you say, the figures were manageable – ______263 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

525 but the Government effectively bankrolled the DCS, so that the DCS could pay out 100% of the compensation due to eligible depositors in one go. I think that was great. Now, had the figures been very much larger, the response, by necessity, might have been different or would have had to have been different. So there is an issue there. How might the DCS borrow? I agree with you, as a banking proposition, to lend clean to the DCS might be very 530 difficult. I do not know whether, in such a situation... We never considered borrowing, other than from the Government on commercial terms. We never had to; but had we done so – I do not know – would one option be of us going to Government and saying, ‘would you guarantee the borrowing?’ Another one is the point that you have just made, Chairman, and that is the extent to which any borrowings could be secured against future receivables, from the known realisation 535 levels of the assets... So I think the borrowing option is very important for flexibility, as we have already seen. In practical terms, though, who is going to lend to the DCS clean, a large amount? That, I think, would really crystallise the issue.

540 Q1167. The Chairman: That is the question I suppose I am putting to you, in terms of the FSC surely has had a hand in formulating the new Depositors’ Compensation Scheme with Treasury: would it be – let us put it this way – who is in the driving seat with regard to the policy of the Depositors’ Compensation Scheme? Is it the FSC or is it Treasury, inasmuch as when the consultation came out in 2008, that was an FSC consultation and, of course, they are all moved in 545 Treasury by the Treasury Minister. So who is in the driving seat? Is it the board of the FSC, or is it Treasury, that really are setting the terms of the DCS?

Mr Aspden: I think the answer to that, Chairman, is evident and can best be described from the chronology. You are quite right that a large amount of the consultation was conducted by the FSC. 550 We have the figures, we went out with scenarios, we put scenarios before Treasury. In terms of the policy of how the Scheme should be framed, what level of coverage and other details like that, the policy for that was a matter from Treasury and so a policy framework for that was never put before the board – we would not have expected it to be – never put before the Commission board for approval or anything like that. 555 Q1168. The Chairman: But in the early 2008 consultation, am I right in thinking that the FSC actually made a recommendation to Treasury that they not change things and wait and see? So this policy recommendation came from the FSC?

560 Mr Aspden: I would have to, if I might... I am not fudging it: if you are now talking about the results of consultations in the early part of 2008, I would need to refresh on that and get back to you. Yes, I will tell you one policy recommendation we made outright and everything to Treasury, I remember, is the fact that we felt it was not necessary to provide £20,000 coverage for non- 565 individuals. We felt because affordability for a DCS is one issue – and I realise this is a political decision – but, from the FSC’s viewpoint, we felt it would have been quite adequate to offer £50,000 to individuals. So you are right, that is a recommendation or a suggestion.

Q1169. The Chairman: Under the current Scheme that we have, in terms of the 570 recommendation that informed the present Scheme that is approved by Tynwald, what parts of that do represent FSC policy advice or recommendation?

Mr Aspden: I think –

575 Q1170. The Chairman: And what parts were, by implication, politically driven afterwards?

Mr Aspden: I agree, and I think, Chairman, if I may, just so I do not conflict with what we have put up to you in writing, we cover that quite carefully in our written response, particularly in relation to the last question I was asked, which was: 580 ‘To what extent was the Commission involved in preparing for a change to the DCS? When did work on updating the DCS become urgent?’

So that was the question put to us and we gave a fairly full response to that, in particular the 585 fact that some of the discussions that took place, but ahead of the first DCS in October 2008, the ______264 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

fact that, actually, on the second one, as our written response says, we never actually saw the draft of that until the night before. That is in our response.

Q1171. The Chairman: The Commission did not see the first draft of 23rd October 590 regulations until 5 p.m. on 22nd October and the file draft at 9 p.m. that day. Is that consistent with the relationship that you would expect to have with Treasury on these sort of issues, or would you expect to have more time to carefully consider such an important document?

Mr Aspden: Well, the FSC, I like to think, Chairman, then and now, has a very good 595 relationship with Treasury and we co-operate and chat along and all this sort of thing. I think, on that particular issue and everything, the sense I had was that the DCS at that stage was... the policy to be adopted by the DCS – and bear in mind we were talking about October 2008, when all this business was going and everything – I think probably the key decisions on that and everything, I think the Commission felt that those decisions were being taken outwith the 600 FSC. I do not know whether the feeling was that, because we were, potentially, Scheme manager, we might be conflicted or we had a live case there, potentially going to the DCS, we might be conflicted. I do not know but, at the end of the day, a large amount of the DCS, not all of it, but a large amount of the DCS is funded by Government and therefore, presumably, it is right that Government and Tynwald should have the major sway in what coverage it offers. 605 Q1172. The Chairman: Thinking back to the ground that we covered a bit earlier about the ability to borrow: my reading of the ability of the DCS to borrow is very important, if you are looking at time for payments, and that would be a very key motivation. I do not see it as a practical tool for bridging the gap of any liability. 610 Given that the Depositors’ Compensation Scheme is a legal document and it does drive you, in terms of how you operate it, as the scheme manager, has any legal opinion been sought as to how any liability gap would be bridged between an overall large depositor failure, with few assets and the cap that is put in place, and where that liability lies, or is it a pro rata reduction in everyone’s payments? What is that scenario? How does that pan out? 615 Mr Aspden: We have not had a legal opinion on that. We have not taken legal advice on that, although it is certainly something that we have talked about – I think, one of the things that would be very clear in our minds, as Scheme manager – although, of course, under the new Scheme, we are potentially no longer the Scheme manager; the Scheme manager is whomever the Treasury 620 appoints – but I think we would feel duty bound, we would have felt duty bound, to have explored every avenue possible in relation to borrowing. Whether we would have been successful or not is another matter, but I think we would have wanted to sit in front of someone like yourself and say we explored as much as we could. If we did not have enough money, then, yes, we would have had to have looked at a pro rata 625 scheme in which compensation then would have had to have been shared out pro rata. How that ‘pro rata-ing’ would have been done, we have not done any detailed modelling on that.

Q1173. The Chairman: Again, perhaps I am conscious that I am very much putting you on the spot here, but this is, after all, the Depositors’ Compensation Scheme that we have in place at 630 the moment, so it is particularly relevant. Perhaps I could ask if you want to get back to more detail about how some of these scenarios we have put would work out, in writing, and then I am not putting you on the spot here today – but that would be very much appreciated, if you are happy to provide that information?

635 Mr Aspden: Yes, I am very happy to.

Q1174. The Chairman: Thank you. One of the important things that has come out of the Scheme of Arrangement questioning is that the Scheme of Arrangement – and I think we would all agree and certainly, I think, the 640 Treasury Minister agreed when he appeared before us, that – as time went on the Scheme of Arrangement became gradually less attractive as the proposed recovery rate rose and, obviously, now we are at 95% it is a bit of a no-brainer, but that would not necessarily be known at the time. Given that, by the time it actually went to creditors it has been described as ‘marginal’ – I think that was the word used by the Treasury – did the FSC support that, as a party to the court case and, 645 if so, why?

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Mr Aspden: I will double check on this, but my recollection is that, at all the later court appearances, we did not have a major role there, because it was really the court reviewing the Scheme of Arrangement and the various submissions made in relation to that, but I am pretty 650 certain that, for most of calendar 2009, our position was to stay entirely neutral and we said as much at the court.

Q1175. The Chairman: So your policy was that, because this was being dealt with by the courts, it was not your place to trigger the DCS. So effectively, once the courts took over, 655 appointed the Liquidator provisional, it was down to them to either trigger one or the other, that was a judicial decision.

Mr Aspden: Exactly.

660 Q1176. The Chairman: Okay. One of the policy themes that has also come forward, and it is something of an old chestnut whenever you start talking about depositors’ compensation schemes, is one of pre-funding and a pre-funded model, as I think some jurisdictions, such as Canada and the United Kingdom have, to a greater or lesser extent, deposit insurance or a pot of money to draw from. What are your views on a pre-funded model? 665 Mr Aspden: Well, I think, relevant to pre-funded models is clearly the quantum of coverage you are likely to pay out. As you know, the total amount of funding approved by Tynwald for KSF(IOM) was just over £190 million. There are other banks on the Isle of Man right now whose DCS liability, if they collapsed, would obviously be higher than that figure, so one is talking about 670 a range of figures. I think pre-funded models, particularly where resources may be limited and so forth, can be useful in focusing the mind, establishing a sort of preliminary reserve, giving a reserve into which funds could be transferred from time to time, etc. The only caution I would have, though, is a pre- funded model at the sort of level that we are talking about… and as I say, the KSF(IOM) 675 experience, partly because of the size of the Bank and partly because of the rate of recoveries – if you think, at the moment we are over 50p on the pound – because of those two factors, the quantum has been fairly manageable, thanks to the Government’s generosity. So I think it has been fairly manageable. Other figures for other banks would be very much larger, so we would not want to get 680 ourselves in the mindset that we could necessarily have a pre-funded pot that was going to pay out everybody; but, in terms of a discipline, a beginning, something to show that we are serious about it, manage expectations, that sort of thing, I think it could be something to look at.

Q1177. The Chairman: I think it is fair to say there are no models around the world that are 685 fully funded, in terms of their largest bank triggering it, but there are elements, there are some will give you that stepping stone along the way and at least provide a certain degree of certainty in terms of the minimum payment that would be due. Taking one aspect of the DCS, the way that you regulate bodies on the Island, regarding risk- weighted assets and liabilities. In terms of that weighting, is that something that should be 690 incorporated into the Depositors’ Compensation Scheme or deposit insurance scheme in terms of contributions to that pot or triggering of a scheme, being based on the risk that is undertaken by the institution?

Mr Aspden: That is a very interesting line of debate. The challenge we have got in even 695 contemplating that sort of regime here is that we are dealing with a finite number of contributors –

The Chairman: As is everywhere.

Mr Aspden: Yes, but if you actually think – I forget the precise figure – we have got a banking 700 system of over £52 billion and if you look at the –

The Chairman: With 35 to 40 licence holders.

Mr Aspden: Yes, but if you… a number of those are parts of larger groups, so the actual 705 numbers of those, in terms of actual banking groups, are considerably smaller than that. The challenge one has in that situation is that many banks, the larger banks, where contributions are calculated roughly around, for example, the quantum of eligible deposits, okay? ______266 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

Many banks not unreasonably will argue, well, the good guys are just potentially bailing out the bad or the not-so-good guys, at the end of the day, the stronger ones – not good and bad – but the 710 stronger ones are potentially bailing out the potentially weaker ones. That is a fact of life in most DCS regimes that I have looked at. It is a responsibility that larger banks take on in that context. With the sort of question you put to me, that would involve the potentially weaker, or perceived to be weaker banks perhaps contributing at a higher rate, because of their perceived rating or whatever it is and everything, but those, of course, are the ones that probably are least 715 able to pay it, or might be least able to pay it and, in any event, are the ones who are going to generate the least amount of – or a lesser amount of contributions, because their deposit liabilities are smaller. So I think you are quite right, as a regulator we operate on a risk-based approach in terms of capital adequacy and in terms of distributing the burden of the DCS contributions on a risk- 720 assessed basis throughout the banking system. That is very difficult and, unpalatable though it is, most regimes actually do involve some element of the larger banks putting up a larger contribution, notwithstanding the fact they might be more capable of withstanding a crisis.

Q1178. The Chairman: What, potentially, would you say about the cross-fertilisation of 725 compensation schemes, such as blending the insurance of compensation schemes in, as is the case basically in the UK?

Mr Aspden: I think that is certainly something that could be looked at. If one looks, at the moment, in terms of the funding of those schemes, particularly the insurance scheme, it is very 730 different from the DCS, so presumably one would actually have to find a common basis on which funding could be… I think that, for a jurisdiction our size, that has been a challenge, but it is something that one can revisit, yes.

Q1179. The Chairman: It is not something that has been discussed in circles so far, in the 735 build-up to the present model.

Mr Aspden: No, it has been, if one looks back, in some of the consultation papers. It was certainly, as I recall… that was certainly mooted, but we have not done any detailed modelling of that, no. 740 Q1180. The Chairman: Okay. We also talked, in terms of the Scheme of Arrangement, about again it being more timely than a depositors’ compensation scheme approach to winding up. Of course, it also has to be remembered that the DCS is not time-limited, either. Do you think that that is unhelpful, not having an outer time limit on the DCS and that form of liquidation, again in 745 terms of giving certainty to depositors, in terms of their likely return, and again whether a pre- funded scheme would have those advantages?

Mr Aspden: Depending on the level of funds in a pre-funded scheme, clearly a pre-funded scheme, potentially, could provide quicker compensation. However, what I would say, in our own 750 experience with KSF(IOM) – you know what the timetable is for the liquidation, because the Liquidator has given some horizons for that – in relation to the DCS, although there were no timetables in the legislation or anything, we were well aware – particularly after the seven-and-a- half-month gap between October and May – that there would be a lot of focus on getting our payments out. 755 Interestingly, the challenges we faced, even though we were doing an enormous amount of preparation ahead of 27th May, when the Bank finally went into formal liquidation, the main challenges actually that we faced in getting money out to the depositors were operational challenges, making sure we were paying money to the right people, checking records, setting up a duplicate system and so forth, because although we had very good dialogue and relationship with 760 the Liquidator, who was very helpful, nonetheless up until when the bank went into liquidation, naturally the Liquidator’s powers were different, so we were not able to move into the full mode of co-operation that we have been able to have since.

Q1181. The Chairman: Of course, one in four people who have money with Kaupthing 765 Singer & Friedlander (Isle of Man) had more than the DCS cover limit, and that is one of the more protracted elements of this. Do you feel that we could do things in a different way to perhaps give those people a greater degree of certainty over recoverability?

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Mr Aspden: Let me make a comment, which I know is a little bit controversial, but I think the 770 fact is, first of all, the fact we had the event of KSF (Isle of Man) is terribly regrettable. I think various enquiries and so forth have shown that I do not think it really arose from any lapses or anything at this end, but it is terribly regrettable. It is terribly regrettable that either people are delayed in having their money, or some people have not got their money back, but the fact is that the Government funded fully the DCS and three quarters of depositors, very roughly, have 775 received their deposits back in full. The fact is that, contrary – as you noted at the beginning – to some of the earlier expectations, the upper end of the Liquidator’s estimate at the moment is 95.7p in the pound. Whilst I acknowledge the timetable for that is lengthy and that is regrettable, but for practical and understandable reasons, at the end of the day, for a liquidation of the Bank, I would… and this is 780 the more controversial comment, but I think it is reasonable. I think that, in terms of an ultimate payout, having been through the sort of crisis that we have been through, if that materialises, I do not think it is a bad recovery rate. So, I fully understand the concerns of people who want their money back earlier. That is a separate issue; but, in terms of ultimate recovery for a bank, which is, as all of you well know, a 785 complex institution with lots of cross-relationships and everything, I do not think that is too bad an outcome.

Q1182. The Chairman: So, to summarise, are you saying that, in your experience, it might not be perfect, but there is not a better system that you know of? 790 Mr Aspden: Well, they are your words, Chairman. I have just genuinely tried to say what I feel. I just think we have got to put it into proportion. At the end of the day, I think we have also got to bear in mind, we have just been through – or are in the middle of, if you include the euro [Inaudible] – a phenomenal global financial crisis. We 795 have had one of our banks go down. One of the benefits of the DCS I think we should be thinking about is that the Isle of Man actually has a DCS that was triggered, kicked in, paid everyone out and, subject to the figures working out, I think, back in the beginning of this year, in the Budget forecast then, with a net loss to Government of £5 million. I think that was the figure the Ministry included in the Government accounts. 800 So, very regrettable for those who have not yet received their money; but, overall, I think parties concerned can feel that it is a job done as best as possible.

Q1183. The Chairman: If I could pick up a couple of points out of our last report, if that is okay, in terms of one of our recommendations was that the Isle of Man, despite being a very small 805 part of global financial markets, declared its willingness to enter into legally-binding exchange of information agreements. I appreciate the fact that we are smaller, but do you think that there would be any problems for the Isle of Man in declaring its willingness? Obviously, as I would see it the main fun would be getting somebody else who is willing to put their hand in and do the same thing, but do you foresee any problems for the Isle of Man, for the FSC and, by extension, the Isle 810 of Man Government in declaring its willingness to enter into such an agreement?

Mr Aspden: I think, in reply, Chairman, probably we, as I recall, gave a little bit of either oral or written evidence on this subject and I suppose the point I would say is that so far as memoranda of understanding are concerned, as I think we have already mentioned to you, convention is that 815 they are not legally-binding documents. Indeed, many jurisdictions refuse to sign memoranda of understanding, because they do not even like the idea of non-legally binding agreements being put down and, for legal reasons or whatever, they do not feel they have got the capability to sign those sort of things. I suppose the only issue I would say is this; in view of the practical difficulty in establishing a 820 legally-binding memorandum of understanding with any other regulatory body, in view of the – and with every respect – fairly apparent difficulty in doing that, which would be well known about regulators, I would just think that one might want to be cautious about making a recommendation that, at the end of the day, might be to many, fairly plainly unachievable. That does not stop you making any recommendation you want, but I am just saying to you that, if I read that as a 825 recommendation from somebody else, it would almost be to me a no-brainer that it was going to be a non-starter. So that is all I am saying. It would be very nice, if it were, but the trouble is that, and of course you will know from your own experience, no matter what legal agreement you sign, at the end of the day as soon as you invoke it, everyone runs for cover, looks at the small print and sees you in court. ______268 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

830 Q1184. The Chairman: What reticence would you have in entering into such an agreement?

Mr Aspden: Simply that to enter into a legally binding memorandum of understanding, if we were to do that, it would be two-way, so we would be beneficiaries, but we would also be donors, so we would have to look extremely carefully. This is actually one of the issues that we are 835 looking at at the moment in terms of liquidity. If we want here to benefit from liquidity from elsewhere, there is a price that would go with that. The price that we would pay for that is that we might actually have to make our liquidity available outside. So we cannot just be net takers; we would have to be givers as well. So the question is, would we be happy to give up that element of, if I may call it, ‘regulatory 840 sovereignty’, by going to the…? So it is not one-way street. That would be my concern.

Q1185. The Chairman: The other point I notice is that the FSC is not planning to change regulations to the rule book or vary its supervisory methods in the light of the recommendation we made with regard to directors’ access to their own deposits. Could you perhaps give us some of 845 your reasoning for that?

Mr Aspden: Our present position on that is that I think we felt we had no problem with the overall spirit that was behind it, but there is a careful balance, we find in doing our work, between actually ensuring compliance on the one hand and, on the other hand, effectively running the 850 business of the bank or the institution. So the way, in fact, we felt that, rather than us mandating that on what is one particular point, we felt that would be an issue that would be something that we would propose to cover, in terms of our regular supervision of their controls and systems applying to the board of directors and so forth, rather than actually mandating it in terms of a formal requirement. That was the view that we have come to so far. 855 Q1186. The Chairman: In other words, you are dealing with it in practice but not in regulation.

Mr Aspden: We are looking to see… We felt this was an area which we felt, like a number of 860 areas, like conflicts of interest and these sorts of things, that the directors should set for themselves appropriate standards, which we then go in, look at, opine on, and if absent or not adequate, then suggest remedial action.

Q1187. The Chairman: It is not something you are intending to give guidance on, then, as to 865 what is and is not appropriate action; you will just opine on what they have put?

Mr Aspden: If I may quote an analogy, it is rather like provisions. We, as a regulator, do not tell a bank what provisions to set aside; it is for the management to decide what provisions it sets aside. It is for the auditors to review the adequacy of provisions and then it is for the regulator to 870 assess that. We would apply the same concept to this particular issue.

The Chairman: Okay. Mr Crowe.

875 Q1188. Mr Crowe: So, each bank could have a different set of rules for this sort of issue.

Mr Aspden: I am sorry if we have given the wrong impression. I do not think we have any fundamental problem with this. This is not something that… but I think we already have extensive, fairly extensive, 880 expectations in terms of conflicts of interest and so forth and we felt that this sort of issue would be something that we would be cognisant of and it is something that we would take account of in that process, in terms of what…. In all of this area, you might say to me, does this mean every bank has different procedures for managing risk, managing liquidity, how they run the bank, the type of business they want to do? 885 The answer is yes; but, at the end of the day, the important point is that, although all their systems may be different, we are all working towards the same ultimate objective – in this case, in particular, it comes under the heading of conflicts of interest.

Mr Crowe: Thank you, Chairman. 890 ______269 TKSF SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010

The Chairman: Thank you very much for joining us today, Mr Aspden, and it is shedding some light and expanding further on the evidence that you have given us. We will, of course, be considering that in addition to the other evidence.

Procedural

The Chairman: The next evidence session, just to confirm, is 10th December, where we hope 895 to have a big session consisting of the Liquidator and the Chairman of the Association of Licensed Banks and the representatives of depositors’ action groups. So that will be a big session for all of us and we look forward to seeing those people who are interested there. The Committee will now sit in private. Thank you very much.

The Court adjourned at 3.50 p.m.

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