PP 113/11
SELECT COMMITTEE OF TYNWALD ON
KAUPTHING SINGER AND FRIEDLANDER (ISLE OF MAN) LIMITED THIRD (FINAL) REPORT 2010-2011
THIRD (FINAL) REPORT OF THE SELECT COMMITTEE OF TYNWALD ON
KAUPTHING SINGER AND FRIEDLANDER (ISLE OF MAN) LIMITED 2010-2011
That Tynwald appoints a Committee of three Members with powers to take written and oral evidence pursuant to sections 3 and 4 of the Tynwald Proceedings Act 1876, as amended, to investigate and report on -
(1) the cause of the collapse of Kaupthing Singer and Friedlander (IoM) Limited;
(2) the role of the Financial Supervision Commission in ensuring the proper management of Kaupthing Singer and Friedlander (toM) Limited to protect depositors' funds;
(3) the credibility of the Depositors' Compensation Scheme; and
(4) any other relevant matter
and report back by the March 2010 sitting of this Honourable Court.
The powers, privileges and immunities relating to the work of a committee of Tynwald are those conferred by sections 3 and 4 of the Tynwald Proceedings Act 1876, sections 1 to 4 of the Privileges of Tynwald (Publications) Act 1973 and sections 2 to 4 of the Tynwald Proceedings Act 1984.
Committee Membership Mr Juan Watterson MHK (Rushee) (Chairman) Mr John Houghton MHK (Douglas North) Mr Alan Crowe MLC Copies of this Report may be obtained from the Tynwald Library, Legislative Buildings, Finch Road, Douglas IM1 3PW (Tel 01624 685520, Fax 01624 685522) or may be consulted at www.tynwald.org .im All correspondence with regard to this Report should be addressed to the Clerk of Tynwald, Legislative Buildings, Finch Road, Douglas IM1 3PW.
Table of Contents
I. INTRODUCTION 1
THE INQUIRY 1
II. EVENTS AFTER 8TH OCTOBER 2008 5
BACKGROUND 5
CHRONOLOGY OF EVENTS - AFTER BrIl OCTOBER 2008 TO DATE 5
ACTIONS OF THE ISLE OF MAN AUTHORITIES 11
Actions of the Treasury 22
Actions of the Financial Supervision Commission 13
Conclusion 14
ALTERNATIVES FOR ADMINISTERING THE ASSETS OF KSF (IoM) BANK 14
SCHEME OF ARRANGEMENT 15
Conclusion 23
COMMUNICATION WITH DEPOSITORS 25
EARLY PAYMENT SCHEME 30
DAG LOANS TRUST 32
LIKELY OUTTURN FOR REPAYMENT 34
CONCLUSION 36
III. THE DEPOSITORS' COMPENSATION SCHEME 37
DESCRIPTION OF THE SCHEME 37
HISTORY 38
REVIEW OF THE 2008 DEPOSITORS' COMPENSATION SCHEME 41
HOW IT WORKS: SCOPE; WHO CONTRIBUTES; WHEN IT OPERATES 43
OTHER JURISDICTIONS 46
CREDIBILITY OF THE DEPOSITORS' COMPENSATION SCHEME 47 i Level of funding available 47
ii Competitor jurisdictions 49
iii Union with other Schemes 49
Conclusion 50
FINANCIAL SUPERVISION COMMISSION AND THE BANKING MODEL 51
IV CONCLUSIONS 52
IV. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS (FROM BOTH REPORTS) 54
FIRST REPORT 54
Conclusions 54
Recommendations 56
FINAL REPORT 58
Conclusions 58
Recommendations 64
ORAL EVIDENCE
15th November 2010 67
3rd December 2010 85
24th December 2010 101
11th April 2011 141
APPENDICES
APPENDIX 1: Letter to the Chairman of the Committee from the Office of The Treasury Minister dated 21st September 2010 159
APPENDIX 1 - Annex: Lines of Communication 175 APPENDIX 2: Response of Mark Shimmin, Chief Financial Officer of the Treasury to the questions posed by Mr Roger Phillips, Clerk of Tynwald, in an email dated 10th December 2010 regarding KSF evidence 177 APPENDIX 3: Letter to the Chairman of the Committee from John Aspden, Chief Executive of the Financial Supervision Commission, dated 22nd September 2010 181 APPENDIX 4: Letter to the Chairman of the Committee from Mr John Coyle, President of the Isle of Man Bankers Association, dated 20th September 2010 189 APPENDIX 5: Letter to the Chairman of the Committee from P Dearden, Hospice Care, dated 1st September 2010 193 APPENDIX 6: Memorandum submitted to the Tynwald Select Committee in relation to events following the collapse of Kaupthing, Singer and Friedlander (IOM) Ltd (KSFIOM) on behalf of Kaupthing, Singer and Friedlander Isle of Man Depositors Action Group dated September 2010 197 APPENDIX 7: First (interim) Report of the Select Committee on Kaupthing, Singer and Friedlander (Isle of Man) Limited - Response of the KSFIOM Depositors Action Group 225
APPENDIX 8: KSF Scheme of Arrangement - Summary of Qualitative Issues submitted by the KSFIOM Depositors Action Group 233 APPENDIX 9: KSFIOM Depositors Action Group - Letter to Hon Anne Craine MHK dated 7th April 2011 239 APPENDIX 10: Proposal for a Loan Trust Scheme for KSFIOM Depositors by KSFIOM Depositors Action Group 243 APPENDIX 11: Letter to the Committee from JD Hollis, Chairman of the Manx Insurance Association 249
To: The Hon Noel Q Cringle MLC, President of Tynwald, and the
Hon Council and Keys in Tynwald assembled
THIRD (FINAL) REPORT OF THE SELECT COMMITTEE OF TYNWALD ON
KAUPTHING SINGER AND FRIEDLANDER (ISLE OF MAN) LIMITED
2010-2011 I. INTRODUCTION
The inquiry
1. The remit of the Select Committee is as follows:
That Tynwald appoints a Committee of three Members with powers to take written and oral evidence pursuant to sections 3 and 4 of the Tynwald Proceedings Act 1876, as amended, to investigate and report on -
(1) the cause of the collapse of Kaupthing Singer and Friedlander (IoM) Limited;
(2) the role of the Financial Supervision Commission in ensuring the proper management of Kaupthing Singer and Friedlander (IoM) Limited to protect depositors' funds;
(3) the credibility of the Depositors' Compensation Scheme; and (4) any other relevant matter and report back by the March 2010 sitting of this Honourable Court.
The Members first met on 2211d July 2009.
2. As reported previously, the deadline of March 2010 was not practicable for a complete report in relation to the issues set out in our remit if we were to do full justice to the importance of the subject matter of our enquiries. In particular, we felt that we owed it to the depositors to carry out as full and exhaustive enquiries as possible.
3. We agreed that our remit fell into two parts: the first part related to the causes of the bank's collapse and the connected role of the Financial Supervision Commission (paragraphs 1 and 2 of the remit); the second part related to the credibility of the Depositors' Compensation Scheme and related issues.
4. Our strategy was therefore to divide the remit in two: • examination of events leading up to 8th October 2008, including an identification of the role played by the Financial Supervision Commission and the directors in the collapse; and
• examination of the credibility of the Depositors Compensation Scheme including events after Stn October.
5. The First Interim Report, which we agreed in June 2010, covered the first part of our inquiry. It dealt with the events leading up to the moment of collapse of Kaupthing Singer and Friedlander (IoM) Limited (KSF (loM)).
6. The Court debated the Report at its July sitting and agreed:
That the Report of the Select Committee on Kaupthing, Singer and Friedlander (Isle of Man) Limited be received and that the Treasury consider and report to Tynwald no later than December 2010 in relation to the implementation of the recommendations contained within the Report. 7 The Treasury duly laid a Report before Tynwald in December 2010 which observed the letter of the resolution agreed in July. However, because the Treasury Report contained no recommendations and was only laid before the Court it was not open for debate. Within the report produced by Treasury, there was no clear endorsement or rejection of the Committee's findings and recommendations. In some cases, the Treasury have tried to appear as supporting recommendations without advocating any action to redress the
2 concerns raised (e.g. Recommendation 9). Furthermore, the Treasury Report appears to envision long time horizons for the completion of some of the recommendations which the Committee felt it would be beneficial to the Island's reputation to have resolved sooner rather than later. In order to allow the Court to consider the Conclusions and Recommendations of the Committee in full in the light of the Treasury Report, we re-iterated our Conclusions and Recommendations in our Second (Interim) Report. After debate, consideration of all the matters raised in the Report and in the Treasury response was deferred until the Committee's final Report. For the convenience of the Court, we include all our previous conclusions and recommendations in this Report.
8. The second part of our inquiry is in two parts. The first part deals with events after 8th October including decisions made about whether to put the bank into liquidation (and the impact of such decisions) or to seek alternative methods of protecting the interests of depositors and potentially enhancing returns or the speed of recovery; the second part of the Report examines the Depositors' Compensation Scheme and in particular its credibility and any other matters.
9. As we reported before, after starting this inquiry Mr Eddie Lowey MLC was appointed to the Treasury Department as a political member. He indicated that it would not be appropriate for him to continue with the second part of this inquiry, which would focus more closely on the actions taken by the Isle of Man authorities and in particular by the Isle of Man Treasury. With considerable regret, we accepted that this was correct and therefore we proposed that Tynwald replace him with another member for the Committee. In the event, Mr Alan Crowe MLC was nominated to the Committee.
10. In this part of the inquiry, the Committee asked the following people and organisations for written evidence in advance of taking oral evidence:
• Treasury • Financial Supervision Commission a Association of Licensed Bankers • Life Companies (Manx Insurance Association) • Isle of Man Hospice ▪ The liquidators • Depositors groups (DAG; PPDG).
3
11. Over the course of four public hearings the Committee took oral evidence from:
e Hon Allan Bell MHK, as former Treasury Minister, with Mr Mark Shimmin, Chief Financial Officer.
• Mr John Aspden, Chief Executive of the Financial Supervision Commission. • Mr John Coyle and Mr Clive Parrish, representing the Isle of Man Bankers Association; Mr Mike Simpson, of PricewaterhouseCoopers (the liquidators); • Dr Angela Downes, representing the Depositors' Action Group; and. • Hon Anne Craine MHK, Treasury Minister.
12. We would like to note the contribution to the inquiry by our two advisers Mr Phil O'Shea and Mr Roger Rawcliffe. We are grateful to them for their assistance in the course of our work.
4 IL EVENTS AFTER 8TH OCTOBER 2008
Background
13. The first part of our inquiry on which we reported in June 2010 established that KSF (IoM) transferred funds (E185m) to Kaupthing Singer and Friedlander UK in April 2008, following discussions with the Financial Supervision Commission. The funds came from Kaupthing Bank hf (KBhf) in the form of a secured equity Repurchase Agreement (Repo). According to the directors, in June 2008 the Financial Supervision Commission indicated that it required that KSF (IoM) should remove all remaining potential exposure to KBhf and as a consequence it was agreed that £175m could be transferred from KBhf to KSF UK by KSF (IoM) .
14. KSF (IoM) collapsed primarily because it was prevented from accessing funds in its sister bank, Kaupthing Singer and Friedlander UK, following UK government intervention by court order. KSF (IoM) had positive net assets at the time of its collapse, but a large proportion of these were suddenly frozen in the UK. Once it was deprived of liquidity, with the UK and Icelandic entities unable or unwilling to transfer funds to meet local repayment commitments KSF (IoM) was forced to cease trading.
15. According to the directors of KSF (IoM) "at all material times leading up to the 8th October KSF (IoM) was a solvent and viable business. It was fully in compliance with its regulatory obligations and licensing requirements." The evidence which we have seen supports this conclusion.
Chronology of events - after 8th October 2008 to date 16. The chronology of events after 8th October is as follows: 2
• On the evening of the 8"10ctober 2008:
o KSF (loM) board realized that it could no longer rely on its parental support. Both the Financial Supervision Commission and the board of KSF (IoM) concluded that
See paragraph 157 of the Committee's First Report: PP 92/10 2 Appendices 1 and 3 5 KSF (IoM) could no longer continue as a going concern. The Commission determined to suspend KSF (IoM)'s banking licence. A joint application to Court was prepared overnight.
® 9th October 2008:
o The joint application to the Court was filed. The Commission and the KSF (IoM) Board petitioned for the appointment of joint liquidators and in the interim (i.e. prior to the substantive Winding Up hearing) provisional liquidators, which was granted. The joint provisional liquidators of KSF (IoM) were granted a deposit taking licence under the Financial Services Act 2008 to assist them in carrying out their functions with the bank.
October 2008:
o The Chief Minister set up a Steering Committee to examine possible avenues for managing the KSF (ToM) case. Treasury and the Financial Supervision Commission were represented on the Committee. 3 Alix Partners and Gough and Co were appointed as advisers to the Treasury. The Treasury engaged the services of its legal advisers through the recommendation of the Attorney General and also engaged Alix Partners through their introduction by the Financial Supervision Commission to advise on possible solutions. Alix Partners are a well regarded global business advisory firm offering services and advice on business solutions, including financial restructuring and bankruptcy reorganization. The engagement of Alix Partners was approved by the Steering Committee.` The members of the Steering Committee were: Hon J A Brown, MHK, Chief Minister; Hon A R Bell, MHK, Treasury Minister; Hon W E Teare, MHK, Minister for Health and Social Services; Mr W J H Corlett, Attorney General; Mrs M Williams, Chief Secretary; Mr M Shimmin, Chief Financial Officer; and M
3 The Committee first met on 29 October 2008. 4 Appendix I. 6 J Spelman, Director of Isle of Man Finance. Mr J Aspden, Chief Executive, Financial Supervision Commission also attended regularly. In addition, Mrs D Fletcher, Director of External Relations and Mrs C Hunter, Head of Communications attended as required. Other officers attended periodically.
e 24th October 2008:
o Following the first hearing on 9th October 2008, the Winding Up Proceedings came back before the Court. Many parties appeared, some at that stage seeking an adjournment whilst others asked the Court to make a Winding Up Order immediately. The Treasury asked the Court for a stay of the Winding Up Proceedings (the Court was advised at that stage negotiations were still progressing between the Isle of Man Government and other parties) and further time was required. The Court decided to adjourn the Winding Up Proceedings to 27th November 2008.
• 27th November 2008:
o The Treasury sought an adjournment and presented its evidence in support (including an affidavit from Mr Lovett of Alix Partners). The Court considered the evidence and granted a stay to 29th January 2009 essentially to allow time for the Treasury (in conjunction with Alix Partners) to investigate the options available.
O 29th January 2009:
o The Court considered the options and heard the further evidence presented to it, in particular by Alix Partners on behalf of the Treasury, setting out the rationale behind the implementation of the proposal for a Scheme of Arrangement. 5 The Court gave judgment on the 29th
Under section 152 of the Companies Act, a Scheme of Arrangement can be entered into between a company and its creditors, or any class of its creditors, which will bind the 7 January 2009 and agreed to an adjournment to 19 4i February 2009 to allow the Scheme of Arrangement process to develop.
• 19th February 2009:
o Further evidence was filed before the hearing and having heard the evidence and considered all parties submissions, the Court determined to stay the Winding Up proceedings further until 9'h April 2009 to allow the provisional liquidators in conjunction with Treasury and its agents Alix Partners to consider, prepare and promote a Scheme of Arrangement.
• 9th April 2009:
o In advance of the hearing the provisional liquidators and the Treasury filed a Joint Petition seeking to obtain an Order from the Court to call a meeting of creditors and contributories (shareholders) to vote on a Scheme of Arrangement which had by now been formulated and prepared in draft. The Court granted the Order and as a consequence adjourned the Winding Up proceedings to 27th May 2009.
® 27th May 2009:
company and all of the creditors concerned, whether or not they vote in favour or against the Scheme and whether or not they voted, if: a majority in number representing three-quarters in value of those creditors voting (in person or by proxy) vote in favour of the arrangement at a meeting convened by the High Court for the purpose of considering the arrangement; and
the High Court sanctions the arrangement.
Therefore, the Scheme had to be approved by a majority in number representing three- fourths in value of each class of creditor: i.e. Protected Depositors with claims of up to £50,000 in the case of individuals and £20,000 in any other case (to the extent of the value of their Eligible Protected Deposits); Protected Depositors with claims greater than £50,000 in the case of individuals and £20,000 in any other case (to the extent of the value of their Eligible Protected Deposits); and all other creditors (i.e. creditors in respect of claims other than Eligible Protected Deposits). Even if the creditors had voted for the Scheme the court had to be satisfied that it should proceed and might have set conditions. 8 o The Court heard evidence that the proposed Scheme of Arrangement had not obtained the necessary statutory majorities for the approval of the Scheme and therefore the Court decided that no further stay should be granted. The Court then heard the evidence in relation to KSF (loM) affairs and made an Order winding up KSF (IoM). The vote by the depositors ended any further possibility to investigate alternative options to liquidation.
17. The method of appointment of the professional advisers to the Government show clearly how urgent the atmosphere was in the immediate aftermath of the collapse of KSF (loM). Alix Partners were introduced to the Steering Committee through the Chief Executive of the Financial Supervision Commission who had recommended their association on the basis of previous experience in the field of bank reconstruction. The principals of Alix Partners attended the Steering Committee on 6th November 2008 and provided a presentation outlining their credentials and experience in this area. On the basis of the presentation the Steering Committee agreed to the engagement of Alix Partners who would be accountable to the Group reporting through Treasury. It was accepted that time was of the essence and that there was no alternative available to appointing them. The Minutes of the meeting held on 6th November 2008 concluded that Alix Partners should be appointed subject to approval of fees, which was subsequently endorsed. The Steering Committee likewise endorsed the appointment of Gough & Co. as legal advisers, as recommended by the Attorney General, which was approved at the meeting held on 19th November 2008. 6
18. The lines of communication between the Treasury, the liquidators, the Financial Supervision Commission and other official bodies and depositors are set out in the chart below.'
G Appendix 1. 7 Appendix 1 (Annex) 9 au 0_
satm JO
uoD unun o! e uoR
0
(t) O (f)
19. The Chart sets out the primary bodies with which Treasury had established communication lines, the majority of which were represented through direct contact. The inter-relationship amongst these bodies was often complex, depending upon the specific nature of the task in hand. After the appointment
10 of the provisional liquidators, communication between the Treasury and others was almost exclusively routed through the Steering Committee established by the Chief Minister. Communication between the Treasury and the Financial Supervision Commission was in relation to a mixture of the Financial Supervision Commission's role as Regulator and subsequently its role as Scheme Manager for the Depositors' Compensation Scheme. The more recent appointment of KPMG as Scheme Administrator by the Financial Supervision Commission in its capacity as Scheme Manager of the Depositors' Compensation Scheme added a further layer of communication, largely in respect of funding reconciliation and accounting for the Depositors' Compensation Scheme.
20. The Treasury was active in answering individual depositors' (and their representatives') queries but also became involved in detailed discussions with depositor groups. The Minister and Officers met a number of parties lobbying for their particular interest group. Treasury was represented on the Chief Minister's Steering Committee and through that group made representation to the UK Parliament Select Committee, KSF UK, the Icelandic KSF Resolution Committee together with other parties which emerged throughout that time. 8
Actions of the Isle of Man authorities 21. From 9th October 2008 until the Winding Up Order was finally made on 27th May 2009 the matter was before the High Court and it was a decision of the Court when the Winding Up petition should be substantively heard and whether KSF (IoM) should be wound up or not. On the evidence presented to it and for the variety of reasons set out in a number of judgments the Court ordered a series of stays. The Court was convinced of the possible merits of exploring options open to the authorities to deal with the matter.
22. Notwithstanding that the matter was before the courts and that the Government and other authorities were only able to petition for particular courses of action to be allowed, in the same way as other interested parties,
8 Appendix 1 11 both the banking industry and depositors looked to the authorities on the Island for coherent action.
Actions of the Treasury
23. In response to a request from us to set out the actions of the Government, and in particular the Treasury, we were told that:
• The Treasury was represented on the Steering Committee established by the Chief Minister. The Committee met very regularly over the period from October 2008 to May 2009. • The Treasury worked alongside the Financial Supervision Commission, which was Scheme Manager of the Depositors' Compensation Scheme. The Depositors' Compensation Scheme was activated on 27'h May 2009 when an event of default was finally declared under the Compensation of Depositors Regulations 2008. The Treasury promoted the financial modelling of the funding required for the KSF Depositors' Compensation Scheme and sought the necessary Tynwald approval to the financial motion that allowed the accelerated payout of full compensation to nearly all qualifying claimants under the Depositors' Compensation Scheme (about three quarters of the total number of creditors). This was done by providing Government funding in advance of the levies paid by contributing banks together with providing an additional loan secured against liquidation proceeds. • The Treasury dealt with a very large number of depositors' queries, especially in the period between October 2008 and May 2009 during its administration of the Early Payment Schemes (EPS). • The Treasury published information for depositors on its website and established a dedicated helpline and e-mail address not only for its EPS but also more general enquiries on the KSF collapse. • The Government (with Treasury in the lead) tried to establish a Scheme of Arrangement as a preferred option for the relief of creditors, in conjunction with the support of the provisional liquidators who recommended that creditors vote in favour of the Scheme.
12 • The Treasury communicated with the Scheme Manager and liquidators mainly in relation to the reconciliation of relative claims made in the EPS/Depositors' Compensation Scheme and liquidation and in monitoring the return of funding to the Treasury as the liquidation dividends were recovered and distributed.'
24. The efforts made by Government to save the bank and therefore to protect depositors involved attempts made at salvage and to find a buyer, to introduce a Scheme of Arrangement and latterly, to assist accelerated funding for the Depositors' Compensation Scheme, once the creditors had determined that liquidation was their preferred solution. The Treasury was involved in the evaluation of bids put forward by the parties who had expressed interest in acquiring parts of, or the whole of, KSF (IoM). to
Actions of the Financial Supervision Commission 25. The Commission worked immediately with the provisional liquidators after their appointment where necessary to help them discharge their functions. There were a number of immediate issues to resolve or clarify at the early stage just after 9th October, the most critical of which were:-
• the impact of the Depositors' Compensation Scheme changes that were passed by Tynwald on 9th October 2008 (and amended on 23"' October 2008) and how these would be applied to depositors of the bank; ▪ "in-flight" transfers (i.e. those payments which were in the course of being processed when the provisional liquidators were appointed); and • the position of KSF in the UK (in administration). 26. The Commission told us that it had endeavoured to keep depositors informed as best it could on the position of the Depositors' Compensation Scheme at this stage. The provisional liquidators also provided information on the position of the bank.
9 Appendix 1 10 ibid 13 27. The Commission has held periodic meetings with the joint liquidators to discuss the position of depositors, the progress in realising assets and, in its capacity as Scheme Manager, to take forward the liquidation and the liquidators' connection with the Depositors' Compensation Scheme.
Conclusion
It is clear that the Treasury, the Financial Supervision Commission, the liquidators and the directors of the bank were all hampered by the lack of useful information from the United Kingdom administrator, who was debarred by direction issued by the United Kingdom authorities from providing any information. 11 The United Kingdom administrator was unable to take any action that did not directly relate to the transfer of deposits to ING in respect of KSF UK retail depositors. This clearly disadvantaged Isle of Man clients and was an extraordinary departure from the normal principle that all depositors are treated equally when an insolvency is declared.
Alternatives for administering the assets of KSF (IoM) Bank
28. After 8th October the Treasury, working as part of the Chief Minister's KSF Steering Committee, first attempted to find a buyer for KSF (IoM) and thereafter pursued the opportunity of promoting a Scheme of Arrangement before the Court finally made the Winding Up order. All options for resolving the position of the bank were considered with liquidation being the option of last resort. Whilst the Isle of Man Government attempted to find a buyer for KSF (IoM) (which was not possible because the underlying assets were locked in with KSF UK) and explored whether a Scheme of Arrangement was a possible solution, the Treasury implemented the Early Payment Schemes. This was done with the support of Tynwald and the application of its Reserves in order to bring financial relief to the depositors: 2
29. According to the Treasury possible other alternatives to a Scheme of Arrangement were considered:
it See First Report, especially paragraph 134. 12 Appendix 1
14 • a move by the Government to acquire the bank (very briefly
mooted at one stage but quickly dismissed); .13 • a sale or merger of the entire business; • a sale of different parts of the business; • salvage by way of restructure supported by third party or Isle of Man Government assistance; • a loan work-out arrangement (possibly involving new money to sustain relationships with existing, sound borrowers while loans were worked out); and • a liquidation.14 30. The respective scenarios were first presented to the Standing Committee by Alix Partners on 21st November 2008. The Treasury did not alter its opinion about the range of possible options with hindsight, although the attractiveness, or feasibility, of the options changed as new information became available, especially in relation to the eventual level of return of assets which was forecast during our inquiry to be up to 97%. 15
Scheme of Arrangement
31. The provisional liquidators and the Treasury worked together in order to present the Scheme of Arrangement to the creditors. The Treasury agreed to be bound by the terms of the Scheme of Arrangement if it was approved in its
current form.' 6
32. The main objectives of the proposed Scheme were:
• to enable the liabilities of the Company to be ascertained with certainty;
• to ensure that a moratorium, similar to one which would be created if the Company was liquidated, was established, thereby ensuring that all creditor claims were dealt with in accordance with the terms of the Scheme; and
13 See Q 1067 14 Appendix 1 15 ibid 16 See Explanatory Memorandum on the Scheme of Arrangement sent to depositors: http://www.kaupthingsingers.co.im/Pages/Scheme0fArrangement.asp 15
e to ensure that all of the assets of the Company could be distributed to all of the creditors of the Company in a similar manner to liquidation, but more quickly)'
33. Under the terms of the Scheme the Treasury would:
e provide funding to enable Top-Up Payments to be made to Protected Depositors (i.e. those with a deposit with the Company who would be entitled to receive payment under the Compensation of Depositors Regulations 2008). The Top-Up Payments made by the Treasury would ensure that by the first anniversary of the Scheme becoming effective, each Protected Depositor would receive an amount which was at least equal to the amount which that Protected Depositor would have received pursuant to the Depositors' Compensation Scheme Regulations had the Company been placed into liquidation on 9th April 2009;
O defer its right to receive payment on the claims assigned to it as a result of the making of the Top-Up Payments to enable quicker payments of dividends to all Scheme Creditors of up to 70% of their Scheme Claim, after which point the timing and amounts of dividend payments to Scheme Creditors would be the same as in a liquidation of the Company; and
a subordinate its pre-Winding Up petition unsecured claim against the Company (of approximately £2,800,000)) 8
34. The key features of the Scheme were:
a the Provisional Liquidation would continue throughout the term of the Scheme;
• the provisional liquidators would also act as the Scheme Supervisor; the provisional liquidators will continue to collect in and realise the assets of the Company. They would also retain the power to bring claims against third parties;
17 ibid 18 ibid 16 • the Scheme Supervisor would be responsible for distributing the assets of the Company to its creditors;
• to the extent that there were claims which could only be pursued by liquidators of the Company, then the Scheme provided that the provisional liquidators might apply to the High Court to place the Company into liquidation. Before doing so, the provisional liquidators would have been obliged to consult with the Creditors' Committee and the Treasury and reasonably consider that a liquidation is likely to increase the value of assets which might be available for distribution. If the Company was liquidated for this purpose, the Scheme would continue and any assets realised by the liquidators would be distributed in accordance with the Scheme;
• as would be the case if the Company was placed into liquidation, all of the assets of the Company would be realised and converted into cash and distributed to all of the unsecured creditors of the Company on a pan passu'9 basis;
* Top-Up Payments would be provided by the Treasury in two instalments with the first instalment falling due for payment between 90 and 100 days after the Scheme became effective and the second payment due on the first anniversary of the Scheme becoming effective, Top-Up Payments would be applied for the benefit of Protected Depositors (being any Scheme Creditor who would have benefited from a payment as a result of the operation of the Depositors' Compensation Scheme Regulations). The Top-Up Payments would ensure that every Protected Depositor received an amount equal to the lesser of (i) its claim against the Company and (ii) £50,000 in the case of a Protected Depositor who is an individual and £20,000 in any other case;
• each Scheme Creditor would, as a minimum, receive the same amount that it would have received had the Company been
t9 i.e. equally and without preference, in proportion to the amount owed. 17 placed into liquidation and had compensation been paid under the Isle of Man Depositors' Compensation Scheme;
• any creditor who received a Top-Up Payment would assign its Protected Scheme Claim to the Treasury. Scheme Creditors who had assigned their Protected Scheme Claim to the Treasury would continue to be paid on their Scheme Claims (as a result of the operation of irrevocable payment directions from the Treasury to the Scheme Supervisors) provided always that no Scheme Creditor would be entitled to receive payment in excess of the full amount of its Scheme Claim;
• because Protected Depositors would be entitled to receive both (i) pari passa distributions from the assets of the Company and (ii) Top-Up Payments, any Protected Depositor who was an individual would be paid in full if the entire amount of their claim was £50,000 or less and any other Protected Depositor would be paid in full if the claim was £20,000 or less. This would also be the case, had the Company been liquidated and payment been made under the Depositors' Compensation Scheme Regulations; and
O the Top-Up Payment mechanism would also benefit other Scheme Creditors as the Treasury would agree in accordance with the Scheme to defer its right to receive payment on the claims assigned to it as a result of the making of the Top-Up Payments until such time as all Scheme Creditors had received a distribution of 70 pence in the pound on their Scheme Claims. The Treasury would receive no payment under the Scheme until all Scheme Creditors had been paid to that level. Treasury's waiver of its own right to receive payment sought to provide that all other Scheme Creditors had the opportunity to receive payment more quickly and in larger amounts than would otherwise have been the case."
20 See Explanatory Memorandum on the Scheme of Arrangement sent to depositors: http://www.kaupthingsingers.co.im/Pages/Scheme0fArrangementasp
18 35. The key benefits of the Scheme were considered to be:
e all creditors would receive an amount equal to the amount they would have received had the Company been placed into liquidation;
* there would be certainty as to the timing of the first two distributions in the first year after the commencement of the Scheme; and
• under the Depositors' Compensation Scheme Regulations, Protected Depositors would be paid pari passu. By contrast, under the Scheme, Protected Depositors who were individuals with claims of £35,000 or less would be paid in full at the time of the first distribution, which was to be made within 100 days of the Scheme becoming effective. Protected Depositors who were individuals with claims of £50,000 or less would have certainty that their claims would be repaid in full on or before the first anniversary of the Scheme becoming effective. If the total distribution paid to Scheme Creditors was less than 70%, Scheme Creditors would benefit. This is because the payments that would otherwise have been made to the Treasury if Top-Up Payments ranked pari passu with other Scheme Creditors would be available for other Scheme Creditors. 21
36. The depositors were told that if the Scheme was not approved and sanctioned by the Court then the Company would be placed into liquidation, all other options not being realistic. The provisional liquidators (finally) agreed that the Scheme would be in the best interests of the general body of creditors of the Company and recommended that the creditors vote in favour of the Scheme.
37. The Court eventually allowed the Scheme of Arrangement to be pursued and voted upon. Creditors' interests were represented at all hearings and individual creditors took the opportunity to make their own individual representations — some for, some against. The Scheme of Arrangement was proposed by the Government as an alternative to liquidation. The depositors
21 ibid 19 were given the opportunity to accept or reject the Scheme by voting on the relative merits being promoted under the Scheme which indicated a higher potential return and more timely distribution for depositors.
38. Overall, across the 3 classes, about 68% of all creditors voted in favour of the Scheme of Arrangement.
The voting split by class was as follows:
Small depositor class: approx 84% by number representing 85% by value in favour.
Large depositor class: approx 47% by number representing 65% by value in favour.
Non-protected class: approx 93% by number representing 9% by value in favour.
Accordingly, the necessary statutory majorities were not met in the second and third class and the Scheme of Arrangement was not approved.22
39. We considered the question of how the Scheme of Arrangement was publicised and whether there was adequate and effective consultation with key parties from an early stage. In addition, we asked which stakeholders had expressed positive support for the Scheme of Arrangement during the discussion/evaluation period. In advance of the Court hearing on 9th April 2009 the provisional liquidators and the Treasury filed a joint petition seeking a Court Order to call a meeting of the creditors and shareholders to vote on the Scheme of Arrangement, which had been formulated and prepared in draft. 23 Once the necessary Court Order was obtained the provisional liquidators sent a letter of explanation to all depositors giving details of the voting arrangements and the steps to be followed. 24 The depositors also received a summary of the Scheme of Arrangement proposal as well as the
22 Appendix 2: see footnote 5 above for an explanation of the law relating to Schemes of Arrangement.
23 ibid
24 ibid 20 full documentation. Road shows were held in the IOM and the UK to explain to depositors about the Scheme of Arrangement. Information was posted on the provisional liquidators' website. There was also an e-mail and telephone helpline published that depositors could use if they had any queries. 25 All of this was to prepare for the court application to allow an alternative to the Winding Up Order.
40. According to the Treasury's evidence the Steering Committee established by the Chief Minister supported the Scheme of Arrangement during the discussion/ evaluation period as it was considered that it would provide a better managed administration of the asset realisation exercise from the bank's asset and loan portfolio and provide the opportunity to plan an accelerated release and distribution of dividends to depositors during what was an extremely uncertain time for the financial markets. 26
41. Some other parties' views on the appropriateness of a stay of the Winding Up proceedings varied from Court hearing to Court hearing. However the Court was satisfied at the various hearings that the development of the Scheme of Arrangement had enough creditor support to progress. The relative support given to the Scheme of Arrangement by each class of creditor was not measured, in absolute terms, until the creditors' meeting of 22na May 2009 determined to reject the Scheme of Arrangement and the matter was referred back to the High Court on 27th May 2009.
42. It was not clear what the motivation of depositors was in opposing or supporting the Scheme of Arrangement - whether depositors wished to progress the Scheme of Arrangement as a means of achieving full recovery or that it should deliver tangibly higher return than Liquidation/Depositors' Compensation Scheme. Despite informal groups and contacts with a number of influential depositors, the Treasury found it difficult to judge the individual or general mood of motivation held by depositors towards the Scheme of Arrangement objectives. It thought that it was possible that some believed that by objecting to the Scheme of Arrangement then the Government might offer some alternative improved arrangement, which was
25 ibid 26 ibid 21 not the case. (This interpretation was not supported by Dr Downes in her oral
evidence). 27
43. In the case of the non protected class of creditor it is clear that one creditor within that class held very large value claims and therefore was able effectively to veto approval of the Scheme of Arrangement.
44. The costs incurred in pursuing Scheme of Arrangement are already a matter of public record. On 3rd November 2009, the then Treasury Minister, Mr Bell, informed the House of Keys of the total costs incurred by both the Treasury and the Financial Supervision Commission in attempting to obtain a Court Order to provide for a Scheme of Arrangement in respect of KSF (IoM):
... the work involved necessitated the aid of external specialists, firstly in an attempt to save and rescue the Bank through some form of restructure and latterly in seeking to provide for a Scheme of Arrangement, which was a complicated and costly measure, which involved the appointment of specialist advisers and legal counsel.
There were various work streams associated with the objective of delivering the Scheme of Arrangement together with ancillary matters which made up the bulk of 3rd party costs incurred by Treasury and the Financial Supervision Commission which totalled some £1,798,730.
Of this amount £1, 719,623 was spent by the Treasury and a further £79,107 was incurred by the Financial Supervision Commission. These amounts exclude any internal costs which have not been separately allocated and charged to this exercise. 28 45. In the event that the Scheme of Arrangement had been successful the administration of the Scheme would have replaced the requirement of both activating the Depositors' Compensation Scheme and commencing liquidation. According to the Treasury it was generally considered that the effective implementation of the Scheme was likely to have been more cost efficient but that this was marginal to the overall cost to the tax payer. Whilst the profile of cash flow advances and returns to Government might have been
27 Q 1303 28 Hansard, House of Keys, Question 17 22 somewhat different under the Scheme of Arrangement it was not possible to determine exactly whether the outturn position to Government would have been any different under the Scheme of Arrangement as opposed to the Depositors' Compensation Scheme. 29
46. The costs to Government in the administration of the Depositors' Compensation Scheme for the KSF (IoM) failure will be presented in an annual report prepared by the Scheme Manager and laid before Tynwald each year. It should be acknowledged that the costs arising from the scheme management of the Depositors' Compensation Scheme are quite separate from the costs of the Winding Up arrangement and administration of the liquidation being undertaken by PWC.3()
Conclusion
47. One possible criticism of the action of the Isle of Man Government was that it pursued the alternative option of Scheme of Arrangement for too long. Dr Downes was forthright in her oral evidence to us. The Depositors' Action Group did not ask for liquidation until February 2009. Before then, she said, "For a certain time, I think everyone was wanting to wait and see if something better could be done, and that would be normal." 3 ' However, she continued:
At the January hearing ... we were getting very doubtful about what was seen to be possibly going to be proposed and feeling probably we would be better with liquidation, but still said, 'Okay, we'll hang on for another adjournment.' An adjournment was granted until 19th February for the Scheme to be tightened up. When it seemed quite clear that very little was done and there was no more detail and it did not seem to be going anywhere, it was on 19th February that the Action Group asked to go into liquidation. That is actually the history of it. So I do not think it would have happened before about then, anyway. The horror of it was that, on 19th February, the court, having given something like three weeks from the previous hearing for the Treasury to get their act together and make this proposal, when they came back on 19th February and it still was not really
29 Appendix 2 30 ibid Q 1334 23 there and it could not be put to the vote, there was then an adjournment until 9° April. We were absolutely knocked back by that because that was another much bigger adjournment because they had not come up with the goods on 19th February, and I think that is when things got really stressful. 32
48. The tangible benefits of the Scheme of Arrangement remain unclear. We have noted that in circumstances where the level of recovery was slow, the Scheme of Arrangement would have transferred risk to the Treasury from the depositors. This would, of course, have benefited depositors. In addition, a Scheme of Arrangement in such circumstances would have provided a welcome level of certainty in deciding the way in which funds would be disbursed to those with a claim. Treasury (and FSC) both stated in evidence their concerns about a "fire sale". 33 Mr Simpson emphasised when giving evidence to us that the proceeds of sale of the assets under the Scheme of Arrangement would have been the same as under liquidation. 34
The Scheme of Arrangement was predicated on a slower realisation of assets than was in fact the case. It also assumed a lower level of recovery and greater uncertainty of recovery than has turned out.
The Scheme of Arrangement was well-intentioned but its benefit was eroded as the rate of recovery rose. It is a matter of difficult judgement when the Government should have given up on the Scheme of Arrangement, but it is clear that it should have done so.
We note that the provisional liquidators agreed to recommend a vote in favour of the Scheme of Arrangement, at least from March 2009. However the question remains whether the Depositors' Compensation Scheme should have been invoked when it was clear that insufficient data would be available from UK for a number of months after October 2008.
49. In the difficult atmosphere of the early months after the collapse of KSF (IoM) it is entirely possible that the Government's attempts to create a Scheme of Arrangement were perceived by the depositors as in some way a delaying
32 Q 1334 33 See Q 1079 and Q 1159 34 Q 1254 24 tactic. The Depositors' Action Group feels strongly that the primary motivation to delay invoking the Depositors' Compensation Scheme and, therefore, to pursue other options which bought time to develop a potential funding solution was to protect the reputation of the Island, rather than to act in the interests of affected depositors. We asked the provisional liquidators whether this was part of the objectives of setting up the Scheme of Arrangements, as far as he was aware and he confirmed that it was not. 33
We accept that it was not especially in the Government's financial interests to pursue the Scheme of Arrangement and that this alternative to liquidation was pursued because it was seen as being in the interests of depositors. On the basis of the information available at the time it was a reasonable option and, in the early months after the collapse of the bank, was not opposed by the Depositors' Action Group. The fact that it was possible to place an unfortunate interpretation on what was a sincere effort to improve the situation for depositors is a significant comment on the difficulty surrounding communication between the Isle of Man Government and depositors.
The Government failed to convince stakeholders that the perceived benefits of the Scheme of Arrangement materially improved returns compared to the Depositors' Compensation Scheme, which was a model which was understood by many depositors and, indeed, the banking industry.
Communication with depositors 50. One of the hardest issues to examine was the question of communication with depositors. When we asked Mr Simpson, one of the joint liquidators, about feedback from depositors about the quality of communication with them, he pointed out that:
... as a starting point, creditors are never going to be happy with anything the Liquidator says to them. All they want to hear me say is, 'Here's all your money back right now, with interest.' Given that that is not going to happen, fundamentally they are going to be disappointed and unhappy with anything
35 Q 1253 25 that I do say to them - understandably. It is all part and parcel of insolvencies. I have had a lot of feedback about communication, some of it good, some of it bad. It is a problem. You need to find the right balance between communication and the cost of communication, which is ultimately borne by the creditors. Whereas some creditors are happy with less frequent communication, some want more. So, particularly when you are dealing with such a large body of creditors, you are never going to get a consensus.36 51. We specifically asked Treasury what action was taken to communicate and consult with depositors, and whether, with hindsight, this could have been done better. Treasury told us that once provisional liquidators for KSF (IoM) were appointed, the bank moved under the aegis of the Court. At that point the provisional liquidators became mainly responsible for communicating with the depositors.
52. Treasury was, however, responsible for communicating with the depositors with regard to the Early Payment Scheme. The Early Payment team dealt with more than 7,000 e-mail and letter enquiries and over 5,000 telephone calls regarding the Early Payment Scheme and the situation in general. The Treasury claimed that the helpdesk worked extremely hard to ensure the best possible, timely communication with the depositors. Members of the team had to deal with communications, telephone, letters and e-mails, from around the globe often from depositors who did not speak English as their first language.
53. Information regarding the Early Payment Scheme and regular updates were posted on the Government website and the Financial Supervision Commission website. Depositors were also advised to check the websites of the provisional liquidators and latterly that established for the Depositors' Compensation Scheme by the Scheme Manager. The Treasury view was that depositors often expressed their frustration with the lack of communication when really they were referring to the lack of new or definitive information which was a result of the attempts to find a solution other than liquidation. 37
Q 1272 37 Appendix 1 26 54. The Treasury told us that the Chief Minister's Steering Committee was concerned to ensure that depositors were kept informed as best it could on the position of Depositors' Compensation Scheme from the earliest time after the collapse. A number of Government agencies including the Treasury, the Chief Secretary's Communications Unit, and the Financial Supervision Commission each contributed to that objective. The provisional liquidators also provided information on the position of the bank and more pertinent guidance for its creditors and depositors alike, often by way of weekly updates to the Internet site.
55. The Treasury held periodic meetings with the joint liquidators to discuss the position of depositors, examine the progress in realising assets and, together with the Financial Supervision Commission in its Scheme Manager capacity, also kept abreast of the progress with the liquidation in relation to the funding provided by way of the EPS and interface with the Depositors' Compensation Scheme. 38
56. We received no evidence that depositors with large claims were particularly targeted by the Government. There was one large creditor whose voting rights effectively gave a veto over any Scheme of Arrangement. We would have assumed that such creditors would have been more actively contacted by the Isle of Man authorities to explain the perceived benefits of the Scheme of Arrangement than was actually the case. Some representative depositors were contacted by the Chief Minister's Steering Group in order to communicate information about the proposed Scheme of Arrangement. Dr Downes was not part of this group and told us that those who were, were asked to maintain confidentiality. 39 She said:
we knew was that there were people... and we took of a lot of hope from that, there was a group of people who were discussing with the Treasury, but who could tell us very little of what was going on in this discussion. 40
She continued:
38 Appendix 1 39 Q 1299 '10 ibid 27 Subsequently, when things could come out, talking to the people who were in this informal committee, they complained all the time that they were not given information they needed in order to be able to assess whether the Scheme of Arrangement could be of benefit or not, and they actually got the feeling that they were not there to help to develop a plan, but they were rather got there to give support, and when they did not support they were regarded as being effectively hostile to the Treasury.'"
She concluded:
I think this is partly where comes the feeling, which became very strong, that the depositors' interests were not necessarily at the top of the list, as far as the Treasury were concerned.42
57. Specific difficulties arose in relation to communication with depositors or other interested parties, especially in connection with the distribution of voting papers. The liquidators were responsible for the distribution of the voting papers. The Treasury pointed out that its experience in relation to administering the Early Payment Scheme showed that the dispersal of depositors across the globe presented an extremely challenging logistical exercise in the delivery of correspondence and validation of eligible depositors' claims.' 13
We acknowledge the considerable difficulties involved in communicating with a wide range of different depositors who have nothing in common except that they have placed money with a particular bank. Some depositors will be easily contactable through e- mail, others will not. Some have English as their first language, some do not. Some will be based either on the Island or in the British Isles, some will be based far away. We note the evidence of Dr Downes about the composition of the Depositors' Action Group, which is an informal collection of people who have banded together but who cannot be taken to be representative of depositors as a whole." Each of the creditors will have diverging interests, not least because they will be owed different
ibid 42 ibid 43 Appendix 1 44 Q 1290ff 28 sums of money - in some cases it will be their life savings and in others comparatively small amounts. Because of these differences between the various creditors, it is hard to obtain reliable information about them or to disseminate information reliably to them.
58. There is a further issue relating to communication: whether there was sufficient explanation for depositors about the difficulty of obtaining information regarding the outstanding loans to KSF UK. It is clear that many of the depositors felt that their interests were not sufficiently protected, at least in the early stages after the collapse. As Mr Simpson pointed out:
... communication with creditors is always an issue, particularly when you are dealing with creditors who are based all around the world. So it is never easy.45
59. One particular course of difficulty is the statutory framework within which the provisional liquidators had to operate. There were certain statutory notices which he was obliged by law to send out in hard copy. E-mail and a website have certainly been a very useful means of ensuring that he could communicate with a wider range of people. 46
60. Mr Simpson said:
We are working within a legislative framework which is very old: the 1931 Companies Act, the 1934 Winding Up Rules and the 1892 Bankruptcy Code. None of those pieces of legislation were designed with modern multi-national, multi-currency entities in mind, and I am sure that they did not envisage the sort of practical issues which we have had to deal with, and other liquidators have had to deal with, where we are dealing with assets and creditors spread all around the world. ...I got an order on 15th May 2009 to enable me to accept electronic copies of documents for voting purposes, which helped speed the process up so that people did not have to post documents back to me. They could download from the internet, fill them in, scan them and send them back to me, so we did what we could to enable people to vote within the timeframes. 47
'45 Q 1260 ‘16 Q1261
47 Q 1262 29 Inadequate communication represents a major threat to the reputation of the Island. In the circumstances of a bank collapse there will always be difficulties in ensuring proper communication with depositors.
At present there it is some consultation about updating the out of date legislation relating to insolvency and bankruptcy.
As part of the revision of the law relating to insolvency and bankruptcy, we recommend that the Government design a mechanism to enable depositors to access a single point of information electronically. This single point should be used for dissemination of important documents.
We also consider that the world wide offices of the liquidators should be used to improve hard copy communication where this is required.
Early Payment Scheme 61. The Early Payment Scheme was entirely separate from both the Depositors' Compensation Scheme and the work of the provisional liquidators in identifying the assets available to meet the claims of KSF (loM) creditors. The Government recognised that a number of Account Holders might be experiencing hardship as bank accounts in KSF (loM) had been frozen by the provisional liquidators. The deferral of the Winding Up Order delayed payments to KSF (Io.M) Account Holders from either the liquidation or the Depositors' Compensation Scheme.
62. The provisional liquidators had no powers to make an advanced payment or any other distribution of the assets of KSF (ToM) until KSF (IoM) was placed into liquidation. Before KSF (IoM) had been formally placed in liquidation and the Depositors' Compensation Scheme activated it was not, of course, possible for the Depositors' Compensation Scheme to make any payments. The Government therefore established the Early Payment Scheme so that eligible Account Holders could receive an advance payment of their entitlement to a payment from the liquidators, the Depositors' Compensation Scheme, or from any other source. Tynwald approved the development of the Early Payment Scheme at its December 2008 sitting. The costs of the management and administration of the Early Payment Scheme have been borne by TOM Government.
30 63. Tynwald originally approved the development of a scheme to provide an early payment to eligible Account Holders of KSF (IoM) of up to £1,000 per account holder. Funding of up to £11 million was approved from the Isle of Man Government Reserve Fund to meet the cost of these payments. The maximum payment amount per account holder was set in order to help those experiencing hardship but to avoid any adverse impact on the restructuring proposals or liquidation. The payment was available to all eligible Account Holders. The view was taken that although £1,000 was a relatively small amount for those with significant financial resources more than 30% of account holders with KSF (IoM) Ltd had deposits of £4,000 or less. This payment therefore represented a substantial advance on the payments due to many depositors.
64. The original payment of £1,000 made to account holders of KSF (IoM) was the lower of:
• the aggregate of the Sterling equivalent of the balance on all deposit accounts of an account holder in any currency including interest as at 8 October 2008; and • £1,000.
65. This original sum was increased later to £10,000 (in total). However, this Early Payment Scheme did not attract complete praise from Dr Downes, the representative of the Depositors' Action Group. Although she conceded that for someone who had a fairly small amount, £1,000 in the first payout and then subsequently an extra £9,000 were quite substantial, she thought that:
... the first £1,000 felt a bit like... I think, yes, that was not too well received. It really felt like a bit of an insult, offering people £1,000 when it really was not much. Just around Christmas time it felt like a handout for the poor. The second one, the further £9,000, was more significant, obviously. 48
66. Notwithstanding Dr Downes's comments about the Early Payments Scheme, she did emphasise the importance of paying out under any Depositors' Compensation Scheme as early as possible. She referred to the three months
48 Q 1313 31 limit on payment of compensation in the United Kingdom which she thought would be brought down to 20 days by the end of December 2010. 49
67. We regard the Early Payments Scheme as a useful and well intentioned additional action by the Isle of Man Government. It will have given a lifeline to many depositors who were left stranded and suddenly in severe financial difficulties. About 25% of depositors were fully paid back under this Scheme, which therefore ensured that they had their money returned in a matter of months after the collapse. 30 It is important that any arrangements in relation to compensation of depositors should ensure that they receive their money at the earliest opportunity. It may well be that a delay might occur for entirely proper reasons, similar to that which involved KSF (IoM). However well- intentioned action might be in order to try to save the bank, real hardship can be caused by any delay in payments.
DAG Loans Trust
68. One particular proposal made by the Depositors' Action Group was the establishment of a Loans Trust. When we took evidence from Dr Downes she was unable to be specific about the proposals. 51 Subsequently, she sent us a paper which set out the hoped-for solution. 32 The paper says:
through their advisers, the Depositors' Action Group has been in contact with Treasury officials in the UK and the Isle of Man to discuss the creation of a loan trust underwritten by both governments, allowing depositors to draw in advance their deposits, which would be largely repaid from the assets of the Bank;53
It also makes clear:
... At this stage, there is no documented proposal, but the matter has been discussed with members in Westminster and the UK Treasury "and there is expressed support for the idea".54
49 Q 1348 5° 'Tynwald Hansard 14 July 2009, column 1177 (Mr Bell) 51 Q 1337 ff 52 Appendix 10 53 Ibid, paragraph 2.1.1 54 Ibid., paragraph 2.1.3 32 69. Under the Loans Trust proposal, the UK and Isle of Man Governments would lend:
in aggregate, c. 1-£200mi to the Trust, which would be secured against the Trust and its assets. The Loan Trust Scheme would need to determine whether such lending is pre funded or draw down in instalments/on basis of claims. (Pre- funding would be administratively more convenient and avoid potential scaling back of funding arrangements during the life of the Fund);
3.3.2 Individual .Retail/Institutional Depositors would apply to the Fund, through the Administrator, for participation in the scheme. Depositors will have the choice and may choose not to participate. 55 70. We do not have sufficient information in order to make a proper judgement about this proposed solution. It appears that the consultations between the Depositors' Action Group and their interlocutors in the UK are at an early stage.
In the absence of any clear identification of interest by the UK Government it is unlikely that a jointly sponsored Loan Trust as proposed by the Depositors' Action Group would succeed.
71. The Committee discussed the possibility of having an enhanced early payments scheme specifically aimed at the remaining large depositors. The evidence from Mr Simpson indicated that it would be towards the end of 2013 before the majority of receipts were received although the current forecast was a 85%4- overall return. 56 (As at April 2011 the eventual return has been estimated to be at up to 97%). By April 2011, the liquidators had released payments to reach a 73.6 % dividend. 57
72. We considered whether the Government should fund an additional early payment of 20 pence in the pound in a new Early Payments Scheme aimed at offering high-value customers early recovery of outstanding monies. This gesture would be a comparatively cheap way of ensuring goodwill and enhance the Island's reputation as a sound place to do business. We raised this point with the Treasury Minister who thought that it was not necessary:
55 Ibid., paragraph 3.3 56 Q 1275 57 As at April 2011 33 I believe that Treasury has played its part. Three quarters of depositors have been paid out now in full and I think that the early payment scheme and the aims of that have been met. I do not think that it is necessary for Treasury to step in any further on this matter at this time.58
Given the higher speed of return, the expectation of about 97% rate of recovery and the comparatively low number of people who remain to be paid out in full, we have come to the conclusion that paying out a portion of the remaining amount outstanding would now achieve little.
However, we recommend that Government consider all options to enhance the position of and speed of repayment to retail depositors in the review of the Depositors' Compensation Scheme.
Although we appreciate that in Autumn 2008 matters were highly confused and that the outcome for depositors was uncertain, we believe that the initial low offer of £1,000 was a mistake. The subsequent distribution of a further £9,000 was considerably better and will have made a significant contribution to early settlement for many depositors. This can only have been good for the Island's reputation as a sound place in which to invest and reflected the Isle of Man Government's willingness to be part of the solution.
We recommend that the learning from the implementation of the Early Payment Scheme be included in the Depositors' Compensation Scheme review and the adoption of such principles will be important to be able to achieve timely interim payments in any future case.
Likely outturn for repayment 73. By late 2010 9,985 depositors had been reimbursed through a combination of the Early Payment Scheme and the Depositors' Compensation Scheme. 7,472 (74.8 per cent of Depositors' Compensation Scheme claimants) had received 100% return of their deposit whilst 8,757 (88.7% of claimants) had received over 75%. This was made possible by the advance of money in the form of a loan by the Isle of Man Government, agreed by Tynwald on 14 111 July 2009.
5 !4 Q 1423 34 The joint liquidators' and Joint Deemed Official Receivers' progress report to creditors for the period from 27th May 2009 to 9° July 2010 forecast the estimated dividend outcome to be between 85.3p and 95.7p in the pound. 59
74. Deloitte (the liquidators in charge of Landesbanki in Guernsey) have estimated that the best depositors should hope for is a recovery of between 81p to 90p in the pound over the next few years. A higher return in Guernsey, as here, is, in theory, possible if legal action in Iceland proves successful although Deloitte "remain cautious about the prospects of success." There is no Depositors' Compensation Scheme covering the Landesbanki depositors in Guernsey.60
75. The latest Report to Creditors and updates from the joint liquidators of KSF (IoM) confirm that:
As at 28 March 2011, 61.1 per cent of all Depositors' fiends lodged with Kaupthing Singer & Friedlander (Isle of Man) Limited have been paid out and a further dividend of at least 12% to be paid no later than 1 May 2011 has been announced;
The estimated range of ultimate recovery of Depositors' funds lodged with Kaupthing Singer & Friedlander (Isle of Man) Limited is from 91.4 per cent to 97.7 per cent. In addition, and despite the recent unfavourable ruling by the Icelandic court with respect to its validity, there remains a possibility that additional recoveries may be made in connection with the parental guarantee said to have been given to Kaupthing Singer & Friedlander (Isle of Man) Ltd by its Icelandic parent, Kaupthing hf;
The loan book of Kaupthing Singer & Friedlander (Isle of Man) Limited is in the process of being realised. This originally comprised approximately 180 loans which, as at 10 December 2010, have subsequently been reduced to approximately 90 loans. Most of these loans are expected to have been realised by the end of 2013. 61
59 ibid 60 Guernsey introduced a Depositors' Compensation Scheme in November 2008 61 www.kaupthingsingers.co.im/ 35 76. Just before completing this Report the Supreme Court of Iceland upheld the liquidators' claim that the parental guarantee was valid. It is too early to make a detailed judgment about the practical import of this decision.
Conclusion
77. We have examined carefully the actions of the Isle of Man Government, especially the Treasury, and the Financial Supervision Commission. We note the point made by Hon Allan Bell MHK in his evidence to us:
I think one of the major problems we had, for all that early period, was the lack of clear information as to what the full value of the assets were, the situation of the assets held in the UK and the length of time it was taking to identify what
the potential outcome of those might be. 62
78. We have already noted that the UK administrator of KSF UK was debarred from acting on issues arising from the Isle of Man bank for a number of months. Although we recognise that the Isle of Man Government cannot force the United Kingdom Government to take action in particular areas, it should have been possible to turn up the volume of protest and for the Isle of Man Government to have been more voluble on behalf of depositors with the bank on the Isle of Man who were disadvantaged by the actions of the United Kingdom Government.
The Isle of Man Government was insufficiently energetic in pursuing the interests of depositors in KSF (IoM) with the United Kingdom Government. More should have been done to point out the extraordinary departure from common practice in relation to insolvency that one class of depositor was being favoured over another. As we pointed out in our previous report, cooperation between the authorities in the Isle of Man and in the UK fell far short of what was normally to be expected.
79. Mr Bell also emphasized the need for the Isle of Man Government get involved at the earliest possible stage:
62 Q 1066
36 I think there was obviously a great deal of concern about the impact of this collapse, politically as well as broader, and it was vitally important - because Government had the Depositors' Compensation Scheme at the time to consider - that we got involved at an early stage to see what could be done to -rectify the
situation.63
In the time of spectacular turmoil in autumn 2008 when the integrity of the international financial system was in question the Government of the Isle of Man found itself having to rescue a bank which in normal circumstances would have been in a healthy financial situation. The Government's action was proactive in examining the various options for saving the bank. We realize that the delay caused a great deal of concern among depositors, but we consider that the Government discharged its duty to all the interested parties in the way in which it carried out a full examination of possible avenues. In retrospect, it did not succeed in saving the bank. However, it would have been negligent for it not to have attempted to do so, as KSF (IoM) was a fundamentally sound business which was solvent and successful. Failings over communication should not eclipse the fact that the Government took steps to ensure that some of the effects of the delay were mitigated by establishing an Early Payment Scheme.
III. THE DEPOSITORS' COMPENSATION SCHEME
Description of the Scheme
80. The Depositors' Compensation Scheme provides compensation for depositors in the event of a bank becoming insolvent. The Isle of Man has had a Depositors' Compensation Scheme since 1991. Normally, of course, such schemes are designed to cope with the collapse of a single bank which has failed rather than the impact of an international multi-bank crisis or an otherwise solvent businesses as in the case of KSF (IoM).
81. The question of whether or not to have a Depositors' Compensation Scheme and, if so, how it should be organized is completely influenced by an assessment of the future of the banking industry both internationally and in
63 Q 1060
37 the Isle of Man. One assumption which we make is that at present decisions made by depositors about where to place their money are primarily guided by a desire for security rather than necessarily the highest return on their deposits. For this reason, we have assumed that a Depositors' Compensation Scheme is vital if the Island is to continue to have a role as an international banking centre.
82. Partly because of the recent crisis in banking, which will have an effect on the industry over the next decade and beyond, and partly because of changing technology and regulation the banking industry is facing a major set of changes. The banking industry was in a period of consolidation before the crisis. Demands for enhanced liquidity and capital adequacy have hastened this process or led to nationalisations. The Isle of Man will need to have a Depositors' Compensation Scheme which is flexible enough to cope with the rapidly changing environment; the framework will need to cater for all types of case. It will need to be regularly reviewed.
83. Any Depositors' Compensation Scheme which is partly supported by the banking industry is going to create a difficult tension between attracting depositors who are interested in security on the one hand and on the other hand creating a financial burden on banks who trade within the jurisdiction and indeed may affect whether more banks are attracted to do business on the Island which will allow any potential Depositors' Compensation Scheme costs to be spread. There is no simple answer to this problem. Consolidation has led to an increased concentration of risk as greater potential liability is spread between fewer licence holders. As the background of the banking industry develops the balance between the conflicting interests of a secure background for deposits and a lighter burden of regulation on banks will necessarily change.
History
84. The first Isle of Man Scheme - under the Banking Business (Compensation of Depositors) Regulations 1991 - came into operation on 1st February 1991 and was approved by Tynwald on 20th February. The 1991 Regulations provided for the establishment of a fund out of which compensation was paid on
38 eligible protected deposits if a Scheme participant licensed under the Banking Act 1998 (previously the Banking Act 1975) was deemed to have defaulted. 64 The previous scheme successfully operated in respect of BCC', although not within a time scale which we would now considered to be acceptable.
85. In October 2007 Tynwald called for a review of the Depositors' Compensation Scheme Regulations and associated legislation, together with the suggestion that an increase in the Depositors' Compensation Scheme compensation levels may be appropriate. At this time there was widespread international disruption in the financial markets and the UK had increased the compensation payable to depositors to £35,000 under its equivalent scheme. Treasury agreed Terms of Reference for the Financial Supervision Commission to carry out a review of the Depositors' Compensation Scheme and other methods of depositor protection. The Financial Supervision Commission duly carried out a consultation exercise with the banks with the consultation closing at the end of March 2008; suggestions were put to Treasury on 7th May 2008. 65 We are not aware of any immediate action been taken in respect of these proposals.
86. There was little consultation with banks in the days and weeks before the amended Depositors' Compensation Scheme was invoked, which was unusual. Banks were unclear whether they would be bound by the old or the new Scheme in respect of KSF (IoM) and needed reassurance they would not be worse off under the new arrangements compared to the previous Scheme.
87. The UK increased the level of cover under their scheme to £50,000 per depositor on 3 October 2008 (which was, interestingly, the date of the first Supervisory Notices issued in London in relation to KSF (UK)). On 9th October 2008 the 1991 Regulations were revoked and replaced by the Compensation of Depositors' Regulation 2008, Statutory Document 826/08. As a result of the Financial Services Act 2008, the 2008 Regulations applied to "deposit takers" rather than banking institutions. The effect was that the scope of the 2008 Regulations was the same as the 1991 Regulations with regards to Scheme participants. 66 On 9th October 2008 new Regulations were approved
64 Appendix 1 ibid 66 ibid 39
by Tynwald increasing coverage for individuals to £50,000 but coverage for other persons ceased.
The timing of the reform of the Depositors' Compensation Scheme appeared to be rather more than just coincidence. This must have fuelled suspicions among depositors - especially among those not on the Island - that the collapse of KSF was not unexpected. Depositors, however, benefited from the amendments to the Depositors' Compensation Scheme. It would also have made local bankers suspicious, as they were exposed to increased potential liability. We are content, however, that the coincidence of the new Scheme (triggered by the worsening international crisis) and the collapse of KSF (IoM) was not foreseen.
88. On 23rd October the Regulations were amended by the Compensation of Depositors' (Amendment) Regulations 2008, Statutory Document 844/08. The amendments included the reinstatement of £20,000 cover for persons other than individuals and a reduction in the maximum levy on participants in the Scheme in any one financial year. These Regulations were further amended by:-
• Compensation of Depositors (Amendment) Regulations 2009 (Statutory Document 232/09); O Compensation of Depositors (Amendment) (No. 2) Regulations 2009 (Statutory Document 466/09); O Compensation of Depositors (Amendment) (No. 3) Regulations 2009 (Statutory Document 671/09); and • Compensation of Depositors (Amendment) Regulations 2010 (Statutory Document 192/10). 89. These four sets of amendments extended the "sunset clause" which was contained in the 2008 Regulations to ensure that the level of compensation thresholds remained available in the event of a default whilst consultation on a new Depositors' Compensation Scheme was being carried out and a new Scheme was developed. This was in pursuance of undertakings given by the Treasury to protect the interests of depositors. 67
67 Hansard Tynwald 14th July 2009 40 In the period since October 2008 there have been four versions of the Depositors' Compensation Scheme. The Isle of Man Bankers Association referred to sporadic communication with the Isle of Man Government.68 We feel that failure in communication with a key industry body is serious. It is a symptom of Government not having a collaborative approach to this important sector.
90. There is an arrangement with the Irish Government in respect of Irish banks which provides a full guarantee that takes over once the Isle of Man Depositors' Compensation Scheme is exhausted. Depositors can then claim under the Irish Scheme. This is a method which provides Government security rather than relying simply on a guarantee from the parent company as with KSF.
Review of the 2008 Depositors' Compensation Scheme
91. At the July 2009 sitting of Tynwald the Treasury Minister committed Government to a review of the Depositors' Compensation Scheme. Treasury rather than the Financial Supervision Commission carried out the review. Treasury produced a consultation document entitled "Consultation on Options for Change to the Isle of Man Depositors' Compensation Scheme" and invited views on various options outlined regarding a future Depositors' Compensation Scheme. Treasury undertook the consultation exercise with the Financial Supervision Commission, the Isle of Man Bankers Association, related financial service participants and the general public. The standard Government consultation process was followed and the consultation closed on 23rd October 2009. The response was, according to the Treasury, disappointing - only 15 replies were received. We assume that the bankers on the Isle of Man provided a consolidated response, but there was evidently little public interest in these matters, despite the well-publicised difficulties of the international banking system.
92. In February 2010 the Council of Ministers approved in principle changes to the Depositors' Compensation Scheme Regulations taking into account the consultation feedback and best practice of various jurisdictions. It is unclear,
68 Q 1191 ff and Appendix 4 41 however, how much proactive dialogue took place between the Government and key stakeholders in the period immediately prior to tabling the new regulations.69 The new Depositors' Compensation Scheme Regulations 2010 (SD 683/10) were put to Tynwald and agreed in October 2010.
93. One of the key concepts put forward as a result of the consultation exercise was to change the status of depositors in any default event and make depositors a "preferred creditor". However, such a fundamental legal change will require changes to primary legislation. The required legislation is being developed by a Treasury Working Group which involves the Chamber of Commerce, the banking industry and members of the Law Society supported by the Attorney General's Chambers. It is likely that the necessary legislation will not be ready until at least the 2011/2012 programme; in the meantime the new Depositors' Compensation Scheme Regulations agreed at the October 2010 sitting will stand alone.
We do not believe that introduction of the "preferred creditor" status will have a significant influence on the speed or amount of repayments to retail creditors. We have serious doubts about the principle of this change.
94. We considered whether the Isle of Man had not missed an opportunity when it revised the regulations without adopting the €100,000 ceiling for its Depositors' Compensation Scheme before other jurisdictions. This could perhaps have delivered a competitive advantage to the Island, although we acknowledge that the arguments for this are finely balanced.
We note that all of the European Union, including the United Kingdom, advertised the introduction of the €100,000 (E85,000) protection for depositors with effect from 1 January 2011. The Island could have introduced this increased limit earlier than that and taken advantage of the considerable promotional opportunity which this would have offered. It would have been the first jurisdiction, ahead of United Kingdom even, to have offered this limit of protection. Notwithstanding the fact that the arguments are finely balanced, we think that the
69 Appendix 4. 42 Government should still consider this option as an effective marketing point for banking on the Island.
It is a serious matter that responses to the consultation about such a fundamental part of consumer protection should have been so poor. Although bank collapses are mercifully rare, the existence of a Depositors' Compensation Scheme is an important part of selling the Island as a safe place for funds. We conclude that more should be done to ensure that the banking industry on the Island is kept closely in touch with Government plans for regulation and liability for the Depositors' Compensation Scheme and that a constant and constructive bilateral dialogue is maintained. The fact of a poor response by banks and consumers should not entirely be blamed on others - the Government must be more proactive in ensuring that all key stakeholder groups including the public are encouraged to engage with respect to such significant issues.
How it works: scope; who contributes; when it operates 95. The current Depositors' Compensation Scheme is governed by the Depositors' Compensation Scheme Regulations 2010 (in operation from 23rd October 2010). To pay compensation to depositors, a fund is created when a bank fails. The fund comprises contributions from other deposit takers (banks and building societies) in the Isle of Man (to a maximum of £100 million over a 10 year period) and money from the Isle of Man Government (also to a maximum of £100 million from reserves in any 10 year period). The maximum levy is £500,000 a year per licence holder. Therefore the amount contributed by deposit takers and Government together is limited to £200 million outstanding at any one time, no matter how many defaults may take place. The Scheme Manager may (but does not have to, or may not be able to) borrow money to increase the fund value. 70
96. There is no time limit for payment of compensation. The amount of compensation paid and the timing of compensation payments will depend upon the size of the deposit taker which fails and the speed and size of the
FSC's website. 43 recovery as well as the amount of funding contributed. The payment period will also vary according to whether, and to what extent, the Depositors' Compensation Scheme borrows, the timing of the contribution from the
Treasury and the timing of levies from participants. 71
97. The Depositors' Compensation Scheme compensates people who have money in current and deposit accounts in banks and building societies licensed in the Isle of Man. The maximum compensation is calculated per depositor, in respect of all the accounts a depositor holds with any one deposit taker. The maximum compensation is £50,000 of net deposits per individual or £20,000 for most other categories of depositor. (Net deposits mean that loans with the failed bank may be netted off against any deposits held with the same bank). If two or more individuals share a joint account, they are each entitled to up to £50,000 in compensation. 72 Clearly, in each case, the maximum amount of compensation actually paid will be restricted by the amount in the Depositors' Compensation Scheme fund.
98. The Isle of Man's Depositors' Compensation Scheme covers depositors irrespective of which country they live in or are incorporated in. All licensed deposit takers in the Isle of Man are members of the Depositors' Compensation Scheme, except those few which are listed in the Schedule at the end of the Depositors' Compensation Scheme Regulations. The banks listed in the Schedule do not take deposits in the Island from the general public. Money with each bank holding its own licence is covered separately under the Depositors' Compensation Scheme, even if a depositor has accounts with more than one bank in the same group. However, if a single deposit taker operates under more than one "brand" (or business name) under one
71 Ibid: up to £500,000 per year (previously £350,000) from each deposit taker is collected to pay into the Depositors' Compensation Scheme fund once it is activated. 72 FSC website: So, if a depositor has a joint account with one other individual which contains £80,000, you may each claim compensation of 1/2 of £80,000 ie £40,000. If a depositor also had £25,000 in a sole account, the total balances apportioned under the Depositors' Compensation Scheme would be their share of the joint account (ie £40,000), plus the £25,000 of their own, giving a total of £65,000. As this exceeds the maximum covered by the Depositors' Compensation Scheme, they would be entitled to claim the maximum compensation of £50,000. If there are sufficient funds on liquidation of the failed bank, they may receive the remainder from the liquidation proceeds. If a depositor has total credit balances of £80,000 and also a mortgage of £50,000, the mortgage could be netted off against their credit balances, to leave a net total of £30,000. They would therefore be entitled to claim £30,000 from the Depositors' Compensation Scheme. 44 licence, they are only covered once and not once per brand (e.g. as was the case with Kaupthing Edge). In order to claim compensation a depositor will have to assign their rights to all their deposits with the bank or building society to the Depositors' Compensation Scheme manager. The Treasury is responsible for the Depositors' Compensation Scheme, although it may appoint another person or body to administer the Scheme. 73
99. Compensation in respect of KSF (IoM) continues to be handled under the 2008 Regulations as these were in force at the time of that bank's default. That coverage extends to sterling and foreign currency deposits of resident and non-resident depositors, with a maximum compensation of 100% of deposits up to £50,000 per individual depositor and £20,000 for businesses and other depositors. The compensation payments by the 2008 Scheme were funded through compulsory levies on all licensed banks that are members of the Scheme with a maximum amount payable in any one year. The total amount that can be levied on Scheme participants was capped at £200m. The Government liability was capped at £150m. 74
Most banks on the Island upstream to parent banks in other jurisdictions - and some do this to a high degree. The parent banks need the deposits in order to fund their broader operations which this source provides. We note that depositors with the Irish banks have the additional cover of the Irish Credit Institutions Eligible Liability Guarantee Scheme as well as the Government of Ireland Financial Support Scheme in addition to the Depositors' Compensation Scheme on the Isle of Man. We recommend that the Treasury consider negotiating with major partners off the Island in order to get a similar tie-in for banks based here but headquartered elsewhere with the objective to support the level of protection for retail depositors above the amount of the cap placed on the Isle of Man scheme, recognising that each group benefits materially by the deposits raised in the Isle of Man.
ibid 74 Appendix 45 Other jurisdictions
100. Until recently the Isle of Man was in a far better position than Jersey and Guernsey as neither of them had a Depositors' Compensation Scheme. Jersey introduced a Depositors' Compensation Scheme in November 2009, with Guernsey having introduced a Depositors' Compensation Scheme one year earlier in November 2008. The compensation levels for individuals are the same as the Isle of Man Depositors' Compensation Scheme.
101. Guernsey's Depositors' Compensation Scheme has a compensation limit set at £50,000 and includes a liability cap of £100m in any five year period. There is no standing fund but the States of Guernsey Government has agreed in principle to assist the scheme by guaranteeing an insurance policy of £20m funded by a levy on the banks to provide liquidity to the scheme. Levies to the banks are capped in any one year at a maximum of £1 million or 50% of the average of the previous three years' profits (whichever is the lesser). The scheme has a clear objective to make an interim payment within three months of invocation with annual payments to depositors thereafter.']
102. Jersey introduced a Depositors' Compensation Scheme in November 2009. The compensation limit is £50,000 per person, for local and international depositors. No protection is afforded to deposits held by companies, small and medium enterprises, partnerships or trusts. The maximum liability of the Depositors' Compensation Scheme is capped at £100m in any 5 year period although the States have sought to cap their direct liability to £35 million. The majority of the cost of compensation will be borne by the banking industry but levies are capped, although large banks could be liable for up to £10 million each in any five year period with other banks being liable up to £5 million. Annual contributions from banks are up to a maximum of £2 million p.a. The Jersey scheme states that interim payments of £5,000 will be paid within 7 days with the balance within 3 months. The States of Jersey then make up any shortfal1. 76
73 ibid. 76 ibid 46 103. Bermuda and the Turks and Caicos Islands are considering the possibility of introducing similar schemes. 77 However neither of these jurisdictions, nor the Cayman Islands, have a Scheme.
104. The position in the United Kingdom is that the Financial Services Compensation Scheme (FSCS) is the UK's statutory compensation fund of last resort for customers of authorized financial services firms, which includes banks, building societies and credit unions (deposit takers). It may pay compensation if a firm is unable, or likely to be unable, to pay claims against it usually because it has stopped trading or has been declared in default. The maximum level of compensation for bank and building society claims is the higher of £85,000 or €100,000 per person per firm (for claims against firms declared in default from 30th June 2009). 78 We have previously noted that expatriates have difficulty in opening UK bank accounts, which is one reason why they bank in the Crown Dependencies.
Credibility of the Depositors' Compensation Scheme
105. We considered three questions when examining the extent to which the Depositors' Compensation Scheme is credible:
• the level of funding available; • whether it was at an appropriate level in comparison with competitor jurisdictions; and ▪ whether it would be useful to link it to the Authorised Collective Investment Schemes' Compensation Scheme (ACISCS).
i Level of funding available
106. The Depositors' Compensation Scheme does not have a prefunded cash reserve. There is no money collected from participants in advance of any bank failure. Subject to the availability of resources it is Treasury's intention to build up a fund to serve as earmarked financing for any future event. If a bank collapses the Depositors' Compensation Scheme would be funded in
77 ibid 78 Ibid: replacing the previous amount from 1 January 2011 47 part by annual levies from the participating banks on the Island. However, the maximum future contribution from a combination of both Government and the banking industry is to be capped at £2.00m over any 10 year period subject to potential borrowing. Therefore in the event that there was another bank failure while KSF (IoM) is still "live" or in the future any systemic or major bank in default, it is highly unlikely that there would be sufficient funds to compensate depositors to the full value of the threshold limits. The Treasury Minister made clear that the Depositors' Compensation Scheme was aimed at a single bank's default, rather than a systemic failure. 79
107. There is little appetite among the banks to devote funds to pre-funding a Depositors' Compensation Scheme which would potentially represent a significant inroad into their resources as they would have to devote money which would attract little return. From their point of view this is not a good solution since a great deal of effort would be devoted to dealing with the rare event of a bank collapsing.
108. A key issue will be whether there is a "level playing field". If the Isle of Man demands higher thresholds from banks compared to its competitors then the banks will examine whether they should consolidate their operations and move to the jurisdiction where operating costs are lower, notwithstanding the need to be fully supportive of steps to improve consumer confidence and the concept of protection.
In order to be able to guarantee swift payout, it is clearly useful to have some element of pre-funding of the Depositors' Compensation Scheme. We recommend that the Government make efforts to devote some reserves to supporting a fund as this would greatly assist in creating confidence among depositors (and their advisers) that the Depositors' Compensation Scheme is both reliable and can deliver early payments in any future default.
Although the banks in evidence did not support the concept of pre- funding we recommend that the Treasury examine ways of encouraging banks to take part. For example, they might be permitted to make their
79 Q 1367 48 contributions to the Depositors' Compensation Scheme fund count towards their Tier 1 capital holdings.
ii Competitor jurisdictions
109. The extent to which the Isle of Man's Scheme is at a level which is similar or better than competitor jurisdictions will change, possibly quite rapidly. At the moment depositors on the Isle of Man have a guarantee which is similar to or better than competitor jurisdictions. However, there is no room for complacency. This situation can rapidly change and needs to be (and no doubt will be) kept constantly under close scrutiny.
The balance to be struck between having a successful and competitive banking industry and higher levels of depositor protection is a delicate one - a balance which, if allowed to swing too far in either direction will have a significant negative impact for the Island.
We conclude that the Isle of Man Depositors' Compensation Scheme compares very favourably to those in other neighbouring offshore jurisdictions, as it has a higher cap and greater government contribution and therefore provides better overall depositor protection.
iii Union with other Schemes
110. The Isle of Man also has a scheme to compensate investors in authorised collective investment schemes. A summary of the cover provided by the Authorised Collective Investment Schemes' Compensation Scheme (ACISCS) is as follows:
• The ACISCS partially compensates an investor if an authorised collective investment scheme in which they have invested fails to pay when money is due.
• Compensation may be paid if a manager or trustee of an authorised collective investment scheme fails to repay when required by the terms of the scheme.
49 • Compensation payable is as follows : 100% of the first £ 30,000 90% of the next £20,000 up to a maximum compensation of £48,000.
•Compensation is paid out of levies collected from other authorised scheme managers and trustees ("authorised persons") in the Isle of Man. There is no "standing fund" of compensation (i.e. money is not collected in advance).
• All authorised persons in the Isle of Man are members of the ACISCS. 111. We raised the issue with the Treasury of whether it would be possible or advantageous to unite the Depositors' Compensation Scheme with the similar insurance protection scheme in order to broaden the body of support for both schemes. The Industry Trade Association and the Treasury thought that because the various financial sectors on the Isle of Man had different customer bases and financial imperatives for consumer protection any attempt to group them together would need to be considered very carefully as this could generate a commercial disadvantage. 80
Conclusion
The current scheme has a level of compensation per depositor lower than UK/Europe and also has a £200 million cap which dilutes the "guarantee" in the case of a large multiple bank collapse. The potential inability to support fully the headline level of compensation is a cause of concern and remains a continuing issue even though the cap in relation to the Depositors' Compensation Scheme in both main Channel Islands is lower than in the Isle of Man.
We note that there are some considerable variations in all of the key factors between the Isle of Man and its competitor jurisdictions. The major key factors to be considered in respect of future viability of a Depositors' Compensation Scheme, taking account of affordability, commerciality and the need to remain competitive, are:
80 Appendix it 50 • The total cap on contributions to the Depositors' Compensation Scheme;
6 The amount of the annual levies from contributors;
• The scope of protection offered (i.e. applying only to retail deposits, perhaps?);
• The degree of early payment guarantee, e.g. by way of pre- funding and/or agreed lines of liquidity;
• The headline level of coverage offered (E50,000 or some other sum, possibly in line with the European Union?).
We recommend that the method of calculating payments and the lower and upper annual limits for participating banks be reviewed bearing in mind that the speed of return of funds will be the main criterion on which any Depositors' Compensation Scheme will be judged.
We recommend that the review of the Depositors' Compensation Scheme arrangements look carefully at the existing level of cap on the annual levy to each bank, taking due account of different levels in the Channel Islands' schemes.
Financial Supervision Commission and the banking model
112. It is clear that the relatively positive expected outcome in respect of the return to depositors of around 97% by the liquidators of KSF (IoM) was made possible by the policy of the directors of Singer & Friedlander and subsequently KSF (IoM) of keeping a material amount of their capital and reserves with a spread of bank counterparties as well as making loans to outside parties, either to companies or individuals and as sub participations in subordinated loans. This was done with the approval of the Financial Supervision Commission. This policy spread the risk but also allowed some greater margins of profit on interest to the subsidiary.
113. As KSF (IoM) showed, benefit for depositors can be obtained by placing part of any monies for investment with outside banking institutions other than the parent or fellow subsidiaries. The Chairman of the Bankers Association, in
51 evidence, rejected the suggestion that this should be mandatory, however, as unprofitable and impractical.st He cited potential lower returns and increased counterparty risk. 82
114. In any case, the Isle of Man depositors with branches of UK and other banks, rather than subsidiaries, receive no additional protection of their deposits in contrast to subsidiaries who will use their own assets towards claims of their own depositors before returning any surplus to their parent. However the parent, subject to any guarantee or letter of comfort, is likely to have an obligation towards its subsidiary as a general creditor in any liquidation of the parent.
We recommend that the Financial Supervision Commission examine the banking industry model on the Island, in particular the question of spread of loans made by subsidiaries, and the question of branches versus subsidiaries as protection both for depositors on the Isle of Man and its compensation scheme; and further, if necessary after due consideration and discussion, modified regulations should be introduced to cover these matters.
IV CONCLUSIONS 115. As we concluded in our previous Report, management of KSF (IoM) had evidently done a good job in running the bank, not least because it had obtained supporting collateral in relation to the upstreamed funds.
116. 8th October was a day of utter turmoil. There was little information available to authorities on the Isle of Man, not least because of the Statutory Instrument issued by the United Kingdom relating to cooperation with ING.
117. It was clear that the depositors were increasingly frustrated with continuing delays in commencing payments in the months after October, when the potential Scheme of Arrangement was being discussed. The situation was a bizarre one, where there was talk about restructuring the bank with very little information being available. There was some concern that assets were locked away and out of touch as part of the UK orders and this has not been
St Q 1207ff g2 Q 1210 52 explained enough. It was possible that the informal committee structure might have contributed to the sense of paranoia among the depositors given their diversity and lack of understanding of the issues.
118. Although the Government was instrumental in delaying the Depositors' Compensation Scheme, it was genuinely seeking a positive alternative. It is now clear that the large majority of depositors have received all their money and a significant amount of the overall money had been paid out. In difficult circumstances the Isle of Man has acquitted itself well in terms of protecting depositors.
119. As far as the future was concerned, the Isle of Man has a credible Depositors' Compensation Scheme. However, the current scheme has a £200 million cap which dilutes the "guarantee" in the case of a large multiple bank collapse. This is a cause of concern and remains an continuing issue, even though the caps in relation to the Depositors' Compensation Scheme in both Jersey and Guernsey are lower.
53 IV. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS (FROM BOTH REPORTS)
First Report
Conclusions
1. The decision not to save [Lehman's], which was taken at the highest political level (principally in the United States), remains controversial. This decision was one of the three unforeseeable political decisions which are relevant to the KSF (IoM) collapse. [paragraph 24]
2. The demise of Lehman Brothers was a key event in the process of undermining public and business confidence in financial institutions. This led to the disappearance of available liquidity which in normal circumstances would have kept banks in business. Any judgement of behaviour of governments and individuals needs to be seen in the context of how close the international banking system came to complete worldwide collapse. This very real threat preoccupied banking and financial authorities throughout the developed world and in the UK in particular, which found itself more exposed than most jurisdictions because of the high proportion of its economy which was dependent on the financial sector. !paragraph 27]
3. As a reaction to the overwhelming and disastrous events affecting Iceland, the Icelandic Government made a political decision which was interpreted by the UK Chancellor as seeking to protect Icelandic depositors before external ones. This was the second major political decision which was both unforeseeable and had a significant impact on events as they played out in October 2008. As we will describe in greater detail below, it provoked a reaction from the UK Government which brought a final end to KSF. [paragraph 38]
4. We are satisfied due process was followed with the taking of the KSF guarantee. We are content that the parental guarantee given by Kaupthing to KSF (IoM) was an extra method of demonstrating solid
54 backing for the expanded Isle of Man subsidiary. Although not all banks have a parental guarantee, it did not indicate any underlying uncertainty in respect of the subsidiary and to conclude that the guarantee showed in some way that KSF (IoM) was perceived by the regulator or anyone else as unsound would be perverse. In fact, KSF (IoM) was - on paper - rather more securely based than many other companies in that it was a subsidiary in its own right, rather than a branch, with no dividends paid away and in excess of £100 million in assets kept locally. [paragraph 77]
5. We note that FME did not have as part of its remit the duty of monitoring consolidated group liquidity. This is a fatal flaw which contributed to the collapse of the Icelandic banks, as FME had no duty to rein in the aggressive policy of expansion and relate expansion of the Icelandic banks to the ability of the Icelandic authorities to provide adequate support for them. In fact, no one had the responsibility to undertake this crucial role for Kaupthing as a group. The management of Group's Treasury function was divided between London and Reykjavik. [paragraph 83]
6. [...] the FSC should publish attendance by appointed Commissioners at its meetings and establish a process of regular review of the effectiveness of the Board and its Commissioners, including independent assessment at regular intervals.[paragraph 103]
7. The UK Chancellor's perception that the Icelandic Government had decided to protect only Icelandic savers was the second unforeseeable political decision which affected events. (This perception was disputed later by the Icelandic Government). [paragraph 145]
8. The UK Chancellor's decision to use powers under the Banking (Special Provisions) Act 2008 to transfer most of KSF (UK)rs retail deposits to ING and to put the rest of the business into administration was the third and final unexpected political act which dominated events. [paragraph 146]
55 Recommendations
1. We wholly endorse [the Public Accounts Committee's recent recommendation in relation to record keeping by public bodies], which was approved by Tynwald. We would extend this to cover more than where significant costs are likely to accrue, such that all exchanges with third parties by public sector organizations (including different departments and agencies, including the FSC) should be noted or recorded. This is for the protection of officials and to assist future referencing when issues arise. [paragraph 17]
2. The FSC not only regulates banks but also Trusts, Funds and Corporate Service providers. Until recently, the FSC also managed the Companies Registry. However, it is the view of this committee that the complexities and reputational risks associated with managing banks are much greater than the other categories of financial businesses. On this basis, there should not be any ability for individuals to be Directors of banks if they are appointed as an FSC Commissioner and vice versa. [paragraph 101]
3. The Treasury should restructure the oversight model to create separate Commissioners' Boards in one organization: one covering banking; the other covering the other sectors. This would enable a pool of suitably talented and qualified individuals to oversee the banks to be drawn from other parts of the financial services sector and for Commissioners of the FSC overseeing banks to be able to hold Directorships of Trust, Funds and Corporate Services businesses but they would be barred from being a director of a bank in the Isle of Man. [paragraph 102]
4. Despite the steps taken to which we referred above, and taking account of the FSA remit in the UK, we recommend that the FSC (or other responsible agency on the Island) should take a much more active role in ensuring that bank customers can gain access to proper information about banks and their parents via links from the FSC website and that they are given every opportunity to learn how to research risk properly, with appropriate links to relevant ratings and other published economic data. We note that it is now a mandatory requirement that Isle of Man subsidiaries should publicise the
56 production of their annual accounts and these should be highlighted as accessible via a clear website link. [paragraph 106]
5. We conclude that the lack of a legally binding Memorandum of Understanding without a corresponding duty of care between regulators has been shown to be insufficient in times of crisis. Whilst the Isle of Man is a very small part of the global financial markets, we recommend that the Isle of Man Government declare its willingness to enter into legally binding exchange of information agreements, similar to Tax Information Exchange Agreements, with other regulators so that there is a duty of care to disclose material facts to other regulators. [paragraph 1081
6. It is our view that the Isle of Man Government should lobby strongly (not least with UK) that a clear international standard should be established which will insist that one regulator (in the case of KSF Group this would have been either Iceland or United Kingdom) must undertake consolidated supervision of liquidity matters. The adoption of legally binding Memorandums of Understanding would underpin the consolidated oversight role since all necessary feedback on liquidity issues would have to be forwarded to/exchanged between impacted locations. [paragraph 1101
7. We acknowledge that a balance has to be struck between business objectives and prudence. However, we feel that in future such compromises should be recorded in reported minutes and that suitable fall back conditions should be established at that time in the event that trading and/or economic conditions worsen. Accordingly we recommend that in circumstances where the FSC identify specific risks and agree an action plan to mitigate those risks with a regulated entity, it should also agree contingency plans in the event of a deterioration. [paragraph 1681
8. It would be helpful if the Isle of Man Government, in conjunction with the FSC, produced some consumer friendly literature which summarised the liquidity and capital safeguards in place for regulated entities in the Isle of Man. This might help existing and prospective customers to understand the steps being taken to reduce the future risk of another failure. 'paragraph 1701
57 9. We note that banks have established policies covering staff and Directors dealings in shares and that banks have differing policies about encouraging staff/directors to maintain accounts. It is our view that there should be specific policy requirements covering withdrawals of deposits held in the bank by its directors. For example, it would seem appropriate that any significant withdrawal, or withdrawal at times of turbulence requested by a bank director should have to be reviewed and counter-signed by another Director or authorised official. This will ensure there is some independent oversight of such transactions which can protect the bank from the risk of defalcation as well as poor practice. [paragraph 174]
Final Report
Conclusions
1. It is clear that the Treasury, the Financial Supervision Commission, the liquidators and the directors of the bank were all hampered by the lack of useful information from the United Kingdom administrator, who was debarred by direction issued by the United Kingdom authorities from providing any information. The United Kingdom administrator was unable to take any action that did not directly relate to the transfer of deposits to ING in respect of KSF UK retail depositors. This clearly disadvantaged Isle of Man clients and was an extraordinary departure from the normal principle that all depositors are treated equally when an insolvency is declared. [paragraph 27]
2. The Scheme of Arrangement was predicated on a slower realisation of assets than was in fact the case. It also assumed a lower level of recovery and greater uncertainty of recovery than has turned out. [paragraph 48]
3. The Scheme of Arrangement was well-intentioned but its benefit was eroded as the rate of recovery rose. It is a matter of difficult judgement when the Government should have given up on the
58 Scheme of Arrangement, but it is clear that it should have done so. [paragraph 48]
4. We note that the provisional liquidators agreed to recommend a vote in favour of the Scheme of Arrangement, at least from March 2009. However the question remains whether the Depositors' Compensation Scheme should have been invoked when it was clear that insufficient data would be available from UK for a number of months after October 2008. [paragraph 48]
5. We accept that it was not especially in the Government's financial interests to pursue the Scheme of Arrangement and that this alternative to liquidation was pursued because it was seen as being in the interests of depositors. On the basis of the information available at the time it was a reasonable option and, in the early months after the collapse of the bank, was not opposed by the Depositors' Action Group. The fact that it was possible to place an unfortunate interpretation on what was a sincere effort to improve the situation for depositors is a significant comment on the difficulty surrounding communication between the Isle of Man Government and depositors. [paragraph 49]
6. The Government failed to convince stakeholders that the perceived benefits of the Scheme of Arrangement materially improved returns compared to the Depositors' Compensation Scheme, which was a model which was understood by many depositors and, indeed, the banking industry. [paragraph 49]
7. We acknowledge the considerable difficulties involved in communicating with a wide range of different depositors who have nothing in common except that they have placed money with a particular bank. Some depositors will be easily contactable through e-mail, others will not. Some have English as their first language, some do not. Some will be based either on the Island or in the British Isles, some will be based far away. We note the evidence of Dr Downes about the composition of the Depositors' Action Group, which is an informal collection of people who have banded together but who cannot be taken to be representative of depositors as a
59 whole. Each of the creditors will have diverging interests, not least because they will be owed different sums of money - in some cases it will be their life savings and in others comparatively small amounts. Because of these differences between the various creditors, it is hard to obtain reliable information about them or to disseminate information reliably to them. [paragraph 57]
8. Inadequate communication represents a major threat to the reputation of the Island. In the circumstances of a bank collapse there will always be difficulties in ensuring proper communication with depositors. [paragraph 60]
9. We also consider that the world wide offices of the liquidators should be used to improve hard copy communication where this is required. [paragraph 60]
10. In the absence of any clear identification of interest by the UK Government it is unlikely that a jointly sponsored Loan Trust as proposed by the Depositors' Action Group would succeed. [paragraph 70]
11. Given the higher speed of return, the expectation of about 97% rate of recovery and the comparatively low number of people who remain to be paid out in full, we have come to the conclusion that paying out a portion of the remaining amount outstanding would now achieve little. [paragraph 72]
12. Although we appreciate that in Autumn 2008 matters were highly confused and that the outcome for depositors was uncertain, we believe that the initial low offer of £1,000 was a mistake. The subsequent distribution of a further £9,000 was considerably better and will have made a significant contribution to early settlement for many depositors. This can only have been good for the Island's reputation as a sound place in which to invest and reflected the Isle of Man Government's willingness to be part of the solution. [paragraph 72]
13. The Isle of Man Government was insufficiently energetic in pursuing the interests of depositors in KSF (IoM) with the United
60 Kingdom Government. More should have been done to point out the extraordinary departure from common practice in relation to insolvency that one class of depositor was being favoured over another. As we pointed out in our previous report, cooperation between the authorities in the Isle of Man and in the UK fell far short of what was normally to be expected. [paragraph 78]
14. In the time of spectacular turmoil in autumn 2008 when the integrity of the international financial system was in question the Government of the Isle of Man found itself having to rescue a bank which in normal circumstances would have been in a healthy financial situation. The Government's action was proactive in examining the various options for saving the bank. We realize that the delay caused a great deal of concern among depositors, but we consider that the Government discharged its duty to all the interested parties in the way in which it carried out a full examination of possible avenues. In retrospect, it did not succeed in saving the bank. However, it would have been negligent for it not to have attempted to do so, as KSF (IoM) was a fundamentally sound business which was solvent and successful. Failings over communication should not eclipse the fact that the Government took steps to ensure that some of the effects of the delay were mitigated by establishing an Early Payment Scheme. [paragraph 79]
15. The timing of the reform of the Depositors' Compensation Scheme appeared to be rather more than just coincidence. This must have fuelled suspicions among depositors - especially among those not on the Island - that the collapse of KSF was not unexpected. Depositors, however, benefited from the amendments to the Depositors' Compensation Scheme. It would also have made local bankers suspicious, as they were exposed to increased potential liability. We are content, however, that the coincidence of the new Scheme (triggered by the worsening international crisis) and the collapse of KSF (IoM) was not foreseen. [paragraph 87]
16. In the period since October 2008 there have been four versions of the Depositors' Compensation Scheme. The Isle of Man Bankers Association referred to sporadic communication with the Isle of Man
61 Government. We feel that failure in communication with a key industry body is serious. It is a symptom of Government not having a collaborative approach to this important sector. [paragraph 89]
17. We do not believe that introduction of the "preferred creditor" status will have a significant influence on the speed or amount of repayments to retail creditors. We have serious doubts about the principle of this change. [paragraph 93]
18. We note that all of the European Union, including the United Kingdom, advertised the introduction of the €100,000 (E85,000) protection for depositors with effect from 1 January 2011. The Island could have introduced this increased limit earlier than that and taken advantage of the considerable promotional opportunity which this would have offered. It would have been the first jurisdiction, ahead of United Kingdom even, to have offered this limit of protection. Notwithstanding the fact that the arguments are finely balanced, we think that the Government should still consider this option as an effective marketing point for banking on the Island. [paragraph 94]
19. It is a serious matter that responses to the consultation about such a fundamental part of consumer protection should have been so poor. Although bank collapses are mercifully rare, the existence of a Depositors' Compensation Scheme is an important part of selling the Island as a safe place for funds. We conclude that more should be done to ensure that the banking industry on the Island is kept closely in touch with Government plans for regulation and liability for the Depositors' Compensation Scheme and that a constant and constructive bilateral dialogue is maintained. The fact of a poor response by banks and consumers should not entirely be blamed on others - the Government must be more proactive in ensuring that all key stakeholder groups including the public are encouraged to engage with respect to such significant issues. [paragraph 94]
20. The balance to be struck between having a successful and competitive banking industry and higher levels of depositor protection is a delicate one - a balance which, if allowed to swing too
62 far in either direction will have a significant negative impact for the Island.
We conclude that the Isle of Man Depositors' Compensation Scheme compares very favourably to those in other neighbouring offshore jurisdictions, as it has a higher cap and greater government contribution and therefore provides better overall depositor protection.[paragraph 109]
21. The current scheme has a level of compensation per depositor lower than UK/Europe and also has a £200 million cap which dilutes the "guarantee" in the case of a large multiple bank collapse. The potential inability to support fully the headline level of compensation is a cause of concern and remains a continuing issue even though the cap in relation to the Depositors' Compensation Scheme in both main Channel Islands is lower than in the Isle of Man.
We note that there are some considerable variations in all of the key factors between the Isle of Man and its competitor jurisdictions. The major key factors to be considered in respect of future viability of a Depositors' Compensation Scheme, taking account of affordability, commerciality and the need to remain competitive, are:
• The total cap on contributions to the Depositors' Compensation Scheme;
e The amount of the annual levies from contributors;
• The scope of protection offered (i.e. applying only to retail deposits, perhaps?);
e The degree of early payment guarantee, e.g. by way of pre- funding and/or agreed lines of liquidity;
ei The headline level of coverage offered (£50,000 or some other sum, possibly in line with the European Union?). [paragraph 111]
63 Recommendations
1. As part of the revision of the law relating to insolvency and bankruptcy, we recommend that the Government design a mechanism to enable depositors to access a single point of information electronically. This single point should be used for dissemination of important documents. [paragraph 60]
2. We recommend that Government consider all options to enhance the position of and speed of repayment to retail depositors in the review of the Depositors' Compensation Scheme. [paragraph 721
3. We recommend that the learning from the implementation of the Early Payment Scheme be included in the Depositors' Compensation Scheme review and the adoption of such principles will be important to be able to achieve timely interim payments in any future case. [paragraph 72]
4. Most banks on the Island upstream to parent banks in other jurisdictions - and some do this to a high degree. The parent banks need the deposits in order to fund their broader operations which this source provides. We note that depositors with the Irish banks have the additional cover of the Irish Credit Institutions Eligible Liability Guarantee Scheme as well as the Government of Ireland Financial Support Scheme in addition to the Depositors' Compensation Scheme on the Isle of Man. We recommend that the Treasury consider negotiating with major partners off the Island in order to get a similar tie-in for banks based here but headquartered elsewhere with the objective to support the level of protection for retail depositors above the amount of the cap placed on the Isle of Man scheme, recognising that each group benefits materially by the deposits raised in the Isle of Man. [paragraph 99]
5. In order to be able to guarantee swift payout, it is clearly useful to have some element of pre-funding of the Depositors' Compensation Scheme. We recommend that the Government make efforts to devote some reserves to supporting a fund as this would greatly assist in creating confidence among depositors (and their advisers) that the Depositors' Compensation Scheme is both reliable and can deliver early payments in any future default. [paragraph 108]
6. Although the banks in evidence did not support the concept of pre- funding we recommend that the Treasury examine ways of encouraging banks to take part. For example, they might be permitted to make their contributions to the Depositors'
64 Compensation Scheme fund count towards their Tier 1 capital holdings. [paragraph 108]
7. We recommend that the method of calculating payments and the lower and upper annual limits for participating banks be reviewed bearing in mind that the speed of return of funds will be the main criterion on which any Depositors' Compensation Scheme will be judged. [paragraph 111]
8. We recommend that the review of the Depositors' Compensation Scheme arrangements look carefully at the existing level of cap on the annual levy to each bank, taking due account of different levels in the Channel Islands' schemes. [paragraph 111]
9. We recommend that the Financial Supervision Commission examine the banking industry model on the Island, in particular the question of spread of loans made by subsidiaries, and the question of branches versus subsidiaries as protection both for depositors on the Isle of Man and its compensation scheme; and further, if necessary after due consideration and discussion, modified regulations should be introduced to cover these matters. [paragraph 114]
Juan Watterson MHK (Rushee) (Chairman)
John Houghton MHK (Douglas North) Alan Crowe MLC
June 2011
65
EARLY PUBLICATION (3.10 p.m., 15th November, 2010)
PROCEEDINGS OF THE SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER & FRIEDLANDER (ISLE OF MAN) LIMITED AND THE DEPOSITORS' COMPENSATION SCHEME
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Douglas, Monday, 15th November 2010
Morning Session: 10.30 a.m. — 11.46 a.m.
The Cmmnittee sat in public at 10.30 a.m. in the Legislative Council Chamber, Legislative Buildings, Douglas
/MR WATTERSON in the Chair/
Procedural
The Chairman (Mr Watterson): Good morning, everybody. Welcome to this /West session Of the Select Committee on Kaupthing Singer & Friedlander. As many of you know, we were established on 16th July 2009 with the remit to look at the cause of the collapse of Kaupthing Singer & Friedlander (Isle of Man) Limited, the role of the Financial Supervision 5 Commission in ensuring the proper management of KSF (Isle of Man) Limited to protect depositors' funds, the credibility of the Depositors' Compensation Scheme, and any other relevant matter, and to report hack by the March 2010 sitting of Tynwald. The first part of the Committee's work has already been reported on, and that report went to the July sitting or Tynwald. We are now turning our attention to the second part of the inquiry and the credibility of 10 the Depositors' Compensation Scheme and any other relevant matter. Part of the inquiry will focus on the action to try and save Kaupthing Singer & Friedlander. We are, therefore, this morning, taking oral evidence from the Hon. Allan Bell, MHK, Minister for the Treasury at the time, and the Chief Financial Officer, Mark Shimmin. Further evidence sessions will take place in November Published by © the High Court of Tynwald, 2010
67 SELECT COMMITTEE, MONDAY, 15th NOVEMBER 2010
with the Liquidator and representatives of depositors' groups. 15 For those of you who are unfamiliar, I will just go around the table and do the introductions. To my far right is Mr Roger Rawcliffe, adviser to the Committee, Mr Phil O'Shea, adviser to the Committee, Mr Alan Crowe, who has just joined the Committee to replace Eddie Lowey, who has since joined Treasury. I am Juan Watterson, the chairman and, to my left, Roger Phillips, the Clerk to the Committee, and, to my far left, John Houghton, MFIK, a member of the Committee. 20 I have already reminded people to turn their telephones off . Could I ask if, Minister, and Mr Shimmin, you would like to make an opening statement, or would you like to go straight on to questions?
Mr Bell: I think it would probably he wise if we just go straight on to questions, Mr Chairman. 25 The Chairman: Okay.
Mr Bell: To begin with, I just want to apologise this morning. I have been for the last few days and I am still pretty ill this morning, so I might have to refer some of the questions to the only one of us who can 30 speak at the moment.
The Chairman: Sorry to hear that. Thanks very much for joining us, anyway.
35 EVIDENCE OF HON. A. BELL AND MR M. SHIMMIN
Q1060. The Chairman: Basically, looking to some structure this morning and a few main themes. Firstly, the efforts that were made to ensure that KSF remained a going concern, despite the turmoil of 8th October: 40 the efforts to ensure a [00% recovery for the depositors. Then we would like explore in a bit more detail the Scheme of Arrangement and then look at the Depositors' Compensation Scheme. So that is our plan, if you will. If E can open up, then, by asking: why did the Government get involved after 8th October? The Liquidator Provisional had been appointed, Kaupthing Singer and Friedlander was heading into liquidation, why did the 45 Isle of Man Government get involved?
Mr Bell: I think there was obviously a great deal of concern about the impact of this collapse, politically as well as broader, and it was vitally important - because Government had the Depositors' Compensation Scheme at the time to consider - that we got involved at an early stage to see what could be done to rectify the 50 situation.
Q1061, The Chairman: And after the collapse, and various authorities came to the fore - the Liquidator Provisional, the directors of the company and Government - who was in charge of managing the whole situation? 55 Mr Bell: Well, shortly afterwards, the Chief Minister set up a steering group, and he chaired the working group, which consisted of representatives from Treasury and our various advisers.
Q1062. The Chairman: So the key decisions were being made by the Chief Minister - 60 Mr Bell: By the Chief Minister and his working group during that period, yes.
Q1063. The Chairman: Okay, I am conscious of the fact that we are not going to get into names of potential bodies that came forward at that time to rescue the Bank, for reasons of commercial confidentiality, 65 but what discussions were held immediately following the collapse to find a buyer? Where did that process start?
Mr Bell: There was a belief - and one we still hold, in fact - that the Bank itself was solvent at the time it went under, It was brought about by a set of circumstances off island which ultimately led to its demise.
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SELECT COMMITTEE, MONDAY, 15th NOVEMBER 2010 70 Therefore, there was a belief commercially that there were elements — if not the whole Bank, certainly elements within the Bank — that could be salvaged& therefore discussions started, I think, or contacts were made, at a very early stage to see whether there was an option to consider&
Q1064. The Chairman: And these were bodies on and off Island — 75 Mr Bell: Y es.
The Chairman: — who credibly could have taken the Bank on'? 80 Mr Bell: On and off, yes.
Q1065. The Chairman: And how were they identified? Was there a bit of a Treasury trawl of picking up the phone, or were people knocking on your door, just waiting to buy a piece of KSF? 85 Mr Shimmin: 1 think the latter is more accurate. It was a case of people who saw an opportunity to either buy the Bank or look at the assets of parts of the Bank and approach Government with proposals.
Q1066. The Chairman: What were the major obstacles to that happening in a timely manner? 90 Mr Bell: I think one of the major prohlems we had, for all that early period, was the lack of clear information as to what the full value of the assets were, the situation of the assets held in the UK and the length of time it was taking to identify what the potential outcome of those might be.
Q1067. The Chairman: It Government felt that this was a solvent bank that was just having a few 95 difficulties because of its relationship with a sister company that& with the well•known relationship of the UK government, did the Isle of Man Government give consideration to nationalising the Isle of Man entity, with a view to selling it on later, as was the model adopted in some cases of the UK'?
Mr Bell: I do not think that was ever a serious issue under discussion. 100 Mr Shimmin: I think the question at that time was not to close down any options, but to have as many options considered as possible. There was a range of options that could he considered, one of which would be that possible scenario, but at that time we were looking to run as many scenarios as possible. So I would not give it any extra weight above other options. 105 Q 1068. The Chairman: I am judging the mood here, but it was one that was ruled out very early on.
Mr Bell: Sorry, perhaps I was not quite so clear. It was obviously one that was& We had to consider all options at that point to see what the best way forward was, but I think the feeling was that, if it was possible to 110 get a commercial buyer expressing general interest, that would have been the best way forward. That was the area, ultimately, that was concentrated on.
Q1069. The Chairman: Was there a feel at that time just how much that would have cost? 115 Mr Shimmin: I think it is fair to say that l do not think detailed costings were raised at that point, In the circumstances we were dealing with, we were faced with the same levels of uncertainty as anybody looking at putting together options.
Q1070. The Chairman: Were the discussions that you were having with the other banks, which were 120 potentially looking to take over KSF, predicated on a 100% return to the depositors or were they based on an element of discount?
Mr Shimmin: I think, generally, an element of discount. 125 Q1071. The Chairman: So there was not a clear commitment at that stage for the depositors, that they
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were going to get a 100% return.
Mr Shimmin: No, and I may emphasise this a number of times but, in terms of what we were dealing with at that time, there was a high degree of uncertainty and lack of definitive financial information on which both 130 ourselves and prospective interested parties could be making decisions. So you were looking to identify, as best you could, the financial information available.
QI072. The Chairman: In terms, then, of building a model or something to go forward with, were you constantly in touch with key creditors and representatives from the action group and such people? 135 Mr Shimmin: Yes, we were very conscious, and very aware, of the issues and interests of depositors and there were both direct meetings, I think, between the Minister and representatives of depositors, plus a lot of phone and e-mail contact with depositors.
140 Mr Bell: There was a great deal of activity round that time, particularly to do with the depositors. Naturally, they were very concerned about the plight of what had happened to the Bank. We were doing our best, on the one hand, to try and find out exactly what the situation was, to see what steps we could take to restore their fortunes. Also, there was a great deal of time spent in communicating with the various depositors' groups. I have 145 met several individuals and groups. We had almost round-the•clock e-mail and telephone contact with them, and John Spehnan was one of our key advisers at the time, who met with them even more regularly, I think. So there was a very high level of contact at the time..
Q1073. The Chairman: So are you content that you were doing what you could to manage, expectations 150 with the depositors about the recovery of their funds, in terms of timing and the amount that they were possibly likely to see back?
Mr Bell: The big difficulty we had, through all the early days, though, was that we ourselves did not have accurate information as to exactly what the value of the outcome might be and, therefore, what the potential 155 Outcome for the depositors might ultimately be. Quite understandably, I think a lot of the depositors got frustrated in some respects because they were not getting the answers they were hoping for. It was not through any lack of communication; it was just we did not have the information at that time to give.
Q1074. The Chairman: I appreciate if you have not got it, you cannot pass that on but, in terms of a 160 liquidation, of course, 100% return is and, I think, as far as I am aware, would be, unprecedented. Was that message getting out clearly enough early on to say that there was no guarantee, other than the DCS?
Mr Bell: We could not give them any other figure in the early days because, as I say, we had no idea what that final outcome might be and I think this was probably the cause of frustration and, in some cases, anger, 165 think, that we were not able to give them that comfort that they could get 100% back.
The Chairman: Mr Crowe.
Q1075. Mr Crowe: Thank you, Chairman. 170 The Chief Minister's steering committee: can you just expand a bit on the steering committee and how often it met and who was advising you as to what was going on, because you have mentioned lack of information. In the minutes, there was this ELM Treasury Order, which actually restricted the amounts of information, so could you expand on the make-up of the committee, your advisers, the daily meetings and so on. Just paint 175 a picture of the background of events at the time because we have the benefit of hindsight, where you were actually in the cauldron, shall we say, at the time — just painting a bit of a picture on that might just help the Committee.
Mr Shimmin: If I may, Chairman, if I could pick that up, the committee effectively met daily, certainly 180 for, effectively, the first month or two of the situation. It, I think, came into being on 28th October. The committee was made up of the Chief Minister, the Treasury Minister and Mr Teare 1V11-1K. The advisers to it
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were the Chief Secretary, the Attorney General and myself. We also had the Chief Executive of the FSC attending to give technical advice, as also Mr John Spelman, providing technical advice and expertise. That was the main body of the committee. We would call in people as and when thereafter. 185 Fairly early on, it became clear, as we were needing to consider in more detail our options that might he put forward, that we would need further expertise and the committee agreed to employ a firm called AlixPartners to provide the advice and expertise they brought from restructuring — so they were brought in at a relatively early stage. 190 Q1076. The Chairman: The UK select committee recommended that the UK and Isle of Man Governments work together to resolve the KSF (Isle of Man) issue. What approaches did the Isle of Man make to the UK government and what responses were you getting hack? We are obviously talking about this period specifically after 8th October. 195 Mr Shinanin: The key at that point was to clarify the extent to which the UK would assist in negotiating directly with the Icelandic government.
Q1077, The Chairman: In terms of how time progressed, and how the picture cleared, you must have been looking, at the start, at scenarios anywhere between 30% and 80C/0 to 90% recovery. When did you start 200 getting a hit of certainty about what the recovery rate was likely to look like?
Mr Shinman: The key problem throughout the period was the extent to which one could get certainty as to the moneys held in banks in the UK. That was an issue of regular frustration through that period, in terms of getting definitive information from the administrators in the UK. So, throughout the period, there was a 205 difficulty in getting any further certainty around those areas. As we were able to gain information from that source, then it started to help coalesce thoughts.
Q1078. The Chairman: Are there any particular milestones in terms of obtaining a degree of certainty over things such as the Repo agreement, a minimum rate of return from the UK, in terms of knowing what 210 you had available on the Isle of Man? Are there some key milestones there about what you knew and when?
Mr Shininan: I think that information is reflected accurately in the minutes of the KSF Steering Group, so as that information started to become clearer it was reflected into those minutes and reflected in the work that was done with AlixPartners, but I do not think you can say, at any point, there was one digital tipping point 215 from not having information to having information. It was a development.
The Chairman; I suppose that brings LIS neatly into the formulation of the scheme of arrangement, then. Mr Crowe, if you would like to&
220 01.079. Mr Crowe: I think, even looking at the minutes, it was as early as 14th November 2008 that the scheme of arrangement was being considered, so it seemed to be quite an early stage that the option of a scheme arrangement was being looked at. It was a case of a rescue sale, as was at the time, or restructuring of a scheme of arrangement or liquidation. So I think it was considered at an early stage. I would just like to ask for your thinking on the benefits of the scheme arrangement over liquidation, 225 because you have talked about sale as a going concern, but there must have been this difficulty of the lack of information from KSF(UK) as to what you could actually generate. The reason for focusing on the scheme of arrangement: you might like to expand on that a bit, please, and the benefits of such a scheme.
Mr Shimmin: The reality of the situation, in terms of a liquidation, is that assets will he sold at a fire-sale 230 type price, in all likelihood. The issues were around seeking to identify a way of getting the best return we could for the depositors etc, and one is looking at what alternatives might avoid that sort of position. A scheme of arrangement, in a general concept, is one way of trying to do that and provide a more orderly result. So, at that stage, as a concept, it is very much one that needs to he borne in mind. You then start to flesh that out as to whether or not that concept can work, and that was the work that went on from that point. 235 Q1080. Mr Crowe: But you were hampered by the lack of knowledge of the assets of KSF(UK).
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Mr Shimmin: I think all parties involved in it, whether it was looking at it from the Liquidator Provisional's point of view or ourselves, were always hampered with that. 240 Likewise, people who were looking to put& The advisers, in terms of getting sufficient financial information upon which to advise, had those difficulties. Those who might be interested in other alternative solutions had the difficulties of getting adequate levels of confidence in relation to the financial information. It was a fact of life at the time and one that we were not able to control.
245 Q1081. Mr Crowe: Did this cause difficulties when you went to court, making applications for the courts? There were, f think, three applications to court. Was there difficulty in preparing the papers for court, shall we say, with the lack of information?
Mr Shimmin: We had to prepare on the basis of the best information we could get and, clearly, that was 250 never as certain as we would wish it to he. So the simple answer is yes, it made it harder to do.
Q1082. The Chairman: There was, when this was all mooted, an informal committee established — referred to in the papers of the IC — which was made up of various depositors representing different groups. How many members of that committee were there? 255 Mr Bell: Of the Depositors' Action Group?
The Chairman: No, there was an informal committee that was established, as a consultation body, in order to get feedback. Is this something that you were aware of? 260 Mr Shimmin: I think we need to review the files to give you specific numbers. It is not one that I —
The Chairman: Okay. I was just looking to try and get a feel for how broad its membership was, who was invited on in order to be represented and which groups were identified. You don't — 265 Mr Shimmin: I would need to —
Q1083. The Chairman: One of the issues that was raised by the depositors, certainly, was the suggestion by Treasury that legal costs might he covered by Treasury — both sides' legal costs. Is this something that 270 sounds familiar to you, in terms of the discussions that were being held with depositors'?
Mr Shimmin: My recollection was that, at a later stage of the consideration of the scheme of arrangement, certain depositors were suggesting that Government should be meeting the legal costs in effectively assessing the scheme of arrangement. Is that the& 275 The Chairman: I was wondering if Government gave an undertaking that it would, or would consider, meeting those costs — the other side's legal costs, the depositors' legal costs.
Mr Shimmin: l think there are two elements. I think it would consider that request, because the request 280 was made. I think the result was that the decision was taken that Goverment would not meet those costs.
Q1084. The Chairman: Was that decision communicated to the depositors, inasmuch as there seemed to be an expectation, until very late in the clay, that the Treasury would still be meeting their legal costs? 285 Mr Shimmin: My understanding is that that was communicated. I would need to check the detail about that.
Mr Bell: I think there was an element within the depositors themselves, or they were pushing constantly 290 information that they were given from the Chief Minister's steering group or from the —(Interruption/ — Treasury, but they felt they had a responsibility to keep pushing for this, even after the information had been given to them.
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Q1085. The Chairman: In terms of the scheme of arrangement, was there, again, a suggestion from 295 Government that if this informal committee was not on side with it, then it would not be pursued by Government, inasmuch as there would be unlikely to be a basis of support for it'?
Mr Shimmin: I think the way I would refer to it is clearly, if Government was seeking to move a scheme of arrangement, if the view was taken that it felt it was unlikely to get sufficient votes in favour, then why 300 progress it? But it is a question of identifying that view, so one was picking up a feel for what the different classes of depositors may or may not he deciding.
Q1086. The Chairman: How, then, did you go about targeting and giving information to the relevant classes to ensure that you knew, group by group, everyone was going to be on side in order to progress it, or 305 sufficient numbers?
Mr Shimmin: There was the required information to be supplied to all creditors in relation to the court& [Interruption] supplying an explanatory memorandum, details of the calculations etc. I believe there were a series of meetings. Particularly, I think John Spelman met a number of the depositors' representative groups 310 and sought to explain in more detail the rationale for the scheme of arrangement.
Q1087. The Chairman: One of the arguments that has been put to us is that, actually, there was one large unsecured creditor that, single-handedly, could have brought down the whole group, and it does not appear that that individual group was targeted in a way in order to ensure that they were best informed, so perhaps 315 would you say that this was a good scheme that was marred by perhaps not doing the electoral mathematics on it?
Mr Shimmin: My view would be, no, that would be an inaccurate reflection of the situation at the time.
320 Q1088. Mr Crowe: Mr Chairman, can I just ask: there were three categories of creditors. Can you just expand on the three categories, please, that had to vote, and the percentage of them that was required to get the scheme of arrangement'?
Mr Shimmin: There were three classes identified: a small depositor class; a large depositor class; and a 325 non-protected class. The required voting was for 75% by value per class. Overall, across the three classes, approximately 68% of all creditors voted in favour of a scheme of arrangement. The small depositor class, approximately 84% by number, representing 85% by value, voted in favour. In terms of the large depositor class, approximately 47% by number, representing 65% by value, voted in favour. in the non-protected class, approximately 93% by number, representing 9% by value, voted 330 in favour — which is the point you are making.
Q 1089. The Chairman: The requirement was to meet the target by number and by value, wasn't it, sir?
Mr Bell: Yes. 335 Mr Crowe: Thank you.
The Chairman: Do you want to comment, as well?
340 Mr lloughton: No.
Q1090. The Chairman: The Scheme of Arrangement was described by the Depositors' Action Group as `sketchy and incomplete' and that was at a point in time on 19th February for the Court hearing. However, the Depositors' Action Group, as i understand it, walked away from this informal committee in 345 about mid January. Do you feel it was given a fair chance and a fair hearing'?
Mr Bell: The Scheme itself?
The Chairman: Yes.
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350 Mr Shimmin: Yes.
Mr Bell: We had several months to work with it, but we went hack to the courts. The courts recognised that, on occasions, it was still work in progress and they gave us the time to actually put more detail on the 355 Scheme to enable us to put a more detailed proposal to the depositors.
Q1091. The Chairman: Clearly, the relationship between Treasury and the depositors has been one of growing acrimony over time. Do you feel that talks between Treasury and the depositors broke down too early on, or do you feel that there was still a good relationship in place when the Scheme of Arrangement 360 went to the vote?
Mr Bell: I think there was a good relationship with certain elements of the depositors all the way through this. They understood the difficult situation we were in and were very supportive, in fact, of the steps that were taken. But other elements of the depositor group clearly had different views, different priorities, and 365 those relationships with Treasury were strained on occasions.
Q1092. The Chairman: flow were you communicating with the depositors as a group and individually? Could I just leave that as a hit of an open-ended question?
370 Mr Shimmin: There was a variety& There were direct discussions. The Minister met depositors. Mr Spellman met depositor representative groups. We were seeking to answer questions that may he supplied by e-mail or whatever. We were looking to engage and answer questions as best we could to facilitate depositors, the classes, coming to the view that 375 they wished to do. It is putting the information, as best we can, to those people for them to make an informed judgement; not for us to make the decisions for them.
Q1093. The Chairman: So there was a mixture of reactive communication, in terms of responding to people's e-mails and concerns, as they came in. 380 What was going on in terms of the proactive element and putting information out to depositors who, perhaps, were not going on the website?
Mr Shimmin: I think we were seeking to provide the information to those who require& All depositors were provided with all the information through the Scheme of Arrangement through the 385 court, in terms of explanatory memoranda and details. Where there were questions that may arise from that that we could respond to, we would respond to those. We would make ourselves available to answer questions, I think, through the Minister, through Mr Spelman or whoever, should those questions arise.
Q1094. The Chairman: But you did do a fair amount of communication through that website. Did you 390 find that a very helpful tool, in terms of collating questions and answers all in one place, in order to communicate with depositors?
Mr Shimmin: At that stage, I think there was very& We understood the importance of trying to communicate as best we could, using whatever routes we could, with depositors and the different classes, to 395 ensure that they conk[ make informed judgements themselves. It was in our interests to clarify questions that they may have, so we were trying to provide that —
Q1095. The Chairman: Do you appreciate that some depositors might have been concerned that they would have been aware, maybe — they may not have been aware — that the Bank went into provisional 400 liquidation on 9th October whereas, if their only means of communication was written communication, in terms of letters, they would not have then heard anything until 16th December to get an initial statement, and then several months later before the Scheme of Arrangement document arrived with them? Do you think that that was adequate in terms of a communication strategy with perhaps not the majority, but certainly a minority of depositors? 405
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Mr Shimmin: I think our general& We were very sensitive and very aware of the need to communicate as much as possible. We were, in a variety of ways, at different times, setting up a help-desk approach and responding to e-mails, and if you will bear with me for one moment, I will give you the scale of the level of communication. 410 This is at an earlier stage and I am conscious that it refers to a slightly different situation, but in relation to the Early Payment Scheme, a help desk was working very hard to ensure enquiries were dealt with promptly. The team there dealt with more than 7,000 e-mails and letter enquiries and over 5,000 phone calls. Some depositors were making very frequent communications and requests. We were regularly posting updates on the Government website and through the Financial Supervision Commission website. Depositors were 415 advised to check the websites of the Liquidator Provisional etc. We were seeking to ensure that we could communicate as best as possible with those depositors. We were aware that there were always depositors who were concerned and wanted to be able to communicate more and differently and we tried to address those issues. So, if you are saying 'Could we have done it better?', I think we tried the best we could at that time to ensure& and we were very focused on trying to ensure that we 420 could communicate as best we could with those depositors.
Mr Bell: I think we have just got to he a hit careful not to approach this particular issue with the benefit of hindsight. You need to understand the circumstances we were working under at the time, to try and get any information out and to get a structure in place to pass on to the depositors. 425 You also need to understand — and I am sure you do — that there was a great deal of fear among the depositors, fear of losing everything, and a number of depositors were scattered all around the world, some in quite difficult places to make contact with, as well. So there was a very volatile set of circumstances there, which put huge pressure on Treasury at the time in particular, to put this information structure together to help people. 430 Q1096. The Chairman: The nature of the question, of course, is that were we relying a bit to much on a reactive approach, in terms of dealing with the people who came in and were perhaps the loudest and the ones who were coming back the most, rather than going for a more organised proactive communication, ensuring that everybody was being kept informed? 435 Mr Shimmin: I would say that we were trying to balance both of those. Clearly, it is for the Committee to judge the extent to which we succeeded or otherwise on that. But, from our perspective, we were very aware of the need to communicate both proactively and to try and ensure that the information was available before the questions were asked, and then to respond adequately were questions asked. 440 Mr Bell: I think also it is worth pointing out that, whilst there were some depositors who have been very critical of the level of information they got, we had at the time some considerable number of compliments about the quality or information that was going Out, as and when we got it available, so there are different perceptions of the quality of the information& 445 Q1097. The Chairman: There was also criticism that there was insufficient time allowed for people to consider the documents that came with the Scheme of Arrangement, make an informed decision on that, maybe take legal advice, and then communicate that back to the Isle of Man in time for the creditors' meeting. I appreciate that there are statutory timescales around this: do you think that they are adequate and do you 450 think that, perhaps, more time should, and could, have been given?
Mr Shimmin: Ultimately, that is a view. If the views that you were expressing were accepted by the court as not having had sufficient time, then the court could define the time provided. From our perspective, I think there was adequate time provided. 455 QI098. The Chairman: Perhaps straying away from the court, which would have determined whether, legally, there was enough time, and a view politically as to whether it was felt that there was sufficient time and whether, in future, that timescale may need to be lengthened?
460 Mr Shimmin: I think, at this stage, we believed that there was adequate time in relation to the Scheme of Arrangement provided through the necessary statutory timetables that the court required.
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The Chairman: We move on to the next thing, then. 465 Q1099. Mr Crowe: Mr Chairman, could I just ask& Contact with Iceland during all this period: could you just expand a bit as to trying to& I think the parent guarantee. Can you just expand a bit on discussions or meetings with any of the Iceland bankers or government during this time?
Mr Shimmin: The key at the early stages was to ensure that the UK government represented the Island's 470 interests in direct discussions with the Icelandic government: there were discussions through the period, there was a visit to Iceland — I would need to cheek the dates — but a visit to meet the restructuring committee in Iceland — and we knew of visits that the Liquidator Provisional was making. So those contacts we were seeking to make with the various bodies in Iceland.
475 Q1100. Mr Crowe: So all avenues were being explored at the time?
Mr Shimmin: Yes, and I think I would reiterate the point the Minister is making. If you look with hindsight, it is one issue, but at the time communicating with Iceland was not the easiest of situations, given the circumstances that they were dealing with. 480 Mr Bell: You also have to hear in mind the relationship between the UK authorities and Iceland at the time, which were somewhat fraught, shall we say.
Mr Crowe: Yes. 485 Q1101. The Chairman: I think we came to some conclusions in the first part of our remit about the suitability and ability generally of the British government to represent our interests abroad and how well they were doing that. We have seen a move on from that time of the last two years: do you believe, Minis- ter, that with the new regime, certificates of entrustment and the way those developed, especially in more recent 490 months, that perhaps the Isle of Man would be more empowered to take a direct stance, now, rather than the situation we were in, constitutionally, two years ago?
Mr Bell: We have certainly moved on in the last two years and I think there is a greater willingness on the part of the United Kingdom to allow the Isle of Man to carry out its own discussions. So perhaps, looking 495 from the perspective of today, things have changed and had that situation arisen again, we may have greater freedom early on in the process to actually discuss with third parties.
The Chairman: Thank you.
500 Q1102. Mr Houghton: Was there an early view in Government that it wished to avoid invoking the DCS and, if so, why?
Mr Shhnnan: The first thing is that it is not for Government to invoke the DCS; the DCS would be invoked through an event of default. 505 Mr Houghton: But the Treasury Minister would put the motion to Tynwald?
Mr Shimmin: Sorry, if I could finish the answer. Therefore, it is not for Government to invoke the DCS; it is to look at whether there are alternatives which 510 would avoid the DCS being invoked. There is an important separation there. Why we were looking to identify what solutions were there was set out very clearly& If you would hear with me one moment&
The Chairman: If I could just ask, Mr Shimmin, if you would not mind speaking up a bit: they are having 515 trouble hearing you at the back.
Mr Shinunin: My apologies.
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I think one of the points the Minister made early in this process was that Government was attempting to undertake a number of things to protect the depositors of KSF(I0M), to explore opportunities for 520 restructuring KSF(IOM) and to make it attractive to investors, or achieve an orderly rundown to secure a good deal for creditors, whilst avoiding the triggering of an event of default that would then lead to the DCS, and to protect the Island's reputation. So at the forefront of Government's thinking was always protecting the depositors interests, but there were always also balancing these other issues as well.
525 Q1103. Mr Houghton: So what were the tangible benefits of the Scheme of Arrangement over the Depositors' Compensation Scheme? What was your involvement with the oversight through the period of the decision making, as to whether to invoke the DCS through Tynwald or to proceed by the Scheme of Arrangement?
530 Mr Shimmin: The Scheme of Arrangement was considered and moved from a conceptual stage through to the specifics through the work of the KSF steering committee. That was the body that defined and decided whether or not to take that forward. The benefits of the Scheme of Arrangement over the DCS were set out in the skeletons argument on behalf of the company and the Treasury, which was considered in the Chancery Division of the High Court on 9th April 2009. 535 So those benefits were summarised as: all creditors would receive an amount equal to the amount that they would have had, had the company been placed in liquidation; that there will be certainty as to the timing of the first three distributions in the first two years after the commencement of the Scheme; protected depositors will have certainty that they will receive the amounts which they would have received under the DCS regulations on or before the second anniversary of the Scheme becoming effective; if the total distribution 540 paid to Scheme creditors — this was at the time — is less than 60%, all Scheme creditors will benefit because the payments that would otherwise be made to the Treasury, as assignee of the claims of protected depositors, will he available to Scheme creditors; and Scheme creditors will benefit from the Treasury's agreement to subordinate its own pre-insolvency claim. So those were set out as the benefits that were seen through the Scheme of Arrangement, The Scheme of 545 Arrangement at that time was seen by the committee as giving, in the view of the committee, a better position to the depositors than the DCS.
Mr Bell: I think there was also a thought that, under the Scheme of Arrangement, there could be a more orderly sell-off of the assets, as opposed to the potential fire sale of a DCS, which may give a higher returns to 550 the depositors.
01104. Mr Houghton: The Depositors' Action Group felt very strongly at the time that the primary motivation to delay in invoking the DCS, and therefore pursuing other options which bought time to develop a potential funding solution was, indeed, to protect the reputation of the Island, rather than seeking to pioritise 555 and maximise support to the affected depositors. What was your response to that at the time?
Mr Bell: Our response was very clear. We obviously had, as paramount concern, the worry about the depositors and our desire to help them as best we could. We did, though, also have to bear in mind the reputation of the Island and, indeed, the possible financial burden which could fall on the taxpayers. 560 So we were Looking at a number of areas of concern but, ultimately, as far as the Scheme of Arrangement was concerned, we believed at the time that this offered the best opportunity to help the depositors and that is why the support was there. Had we not been convinced that the Scheme of Arrangement would have been workable, I am sure we would have allowed it to go into liquidation and the DCS would have kicked in earlier. 565 Q1105. Mr Houghton: Thank you. Consultation regarding the DCS had been under way in 2007 and early in 2008, yet no decisions were taken to propose an amended scheme to Tynwald at that time. Why was that? 570 Mr Bell: The summer of 2008, in particular — although most of 2008 — was a period of some turmoil in the banking world and, in fact, during that period, very few countries actually had a depositors' compensation scheme. Ours had been in since 1991. So the debate about whether, in fact, a more standardised international response to depositors'
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compensation should be developed, particularly through the European Union, was taking place during that 575 period. Although we considered, leading up to that summer, the wisdom of taking forward an amended scheme, it was felt that it would he better, from everybody's point of view, to wait to see what evolving standards came out of Europe, as a result of the debates which were taking place elsewhere.
Q1106. Mr Houghton: Was it coincidental that high cover under the DCS was agreed on 9th October and 580 was there adequate consultation and agreement of the amended Scheme, prior to bringing this to Tynwald?
Mr Bell: There was consultation on the Scheme. There may be criticism that it could have been more extensive, but you need to bear in mind the circumstances and conditions we were working under at that time, where the pressure was really quite intense from depositors, because of the turmoil in the banking system. 585 Therefore, we felt it was necessary to bring forward the amendment to the Scheme when we did, in response to the external concerns which were being raised. In an ideal situation, perhaps there might have been time for wider consultation, but I think circumstances dictated we took the action that we did at the time.
Q1107. Mr Houghton: Was the Treasury satisfied, though, at that time, that it had the full legal powers to 590 invoke the amended DCS in respect of KSF (Isle of Man)? Obviously, it had Tynwald support, but did it believe at the time it had those full legal powers in order to —
Mr Shimmin: Treasury believes, and believed at the time, that the Scheme that was in place& when an event of default occurred would trigger the Scheme in place. Therefore, an event of default had not occurred 595 prior to 9th October, when the Scheme was approved by Tynwald. Therefore, it was clearly of the view that the Scheme approved by Tynwald would be the scheme which would govern payments should an event of default subsequently be called.
Q1108. The Chairman: Could I just ask, when the decision was taken to put& it was well documented 600 that there was going to be a revised Scheme going to October Tynwald: obviously that was somewhat overtaken by events. When was the decision taken to recall Tynwald to put this new plan forward?
Mr Shirnmin: We could look at the dates in specific terms, but it would be shortly before the request was made and notification to Tynwald Members of the recall because we had to give notice to Tynwald Members 605 of the special sitting and then, tracking hack, it was just shortly before that point.
QI 109. The Chairman: Before or after Kaupthing went to Liquidator Provisional'?
Mr Shimmin: The basic issue here is: was the DCS that went to Tynwald on 9th October triggered simply 610 by KSF? And the question is that it was not. It was triggered by the political view of the general deterioration of the economic and financial situations at that time.
Q1110. Mr Houghton: So, on gaining Tynwald approval, why did the terms of the DCS have to he amended within two weeks of the Scheme which was therefore approved'? Two weeks afterwards, there was 615 another Scheme, or an amended Scheme, in force. Why was that'?
Mr Bell: I would need to review the minutes on that, but I think it was in response to some concerns which were expressed in relation to one part of the Scheme. Yes, 1 think I am right in saying that, because there was a limited amount of consultation: there were one or two areas which were raised after& which we 620 believed, in hindsight at the time, were fair, and therefore we brought back a further amendment to that.
Q1111. Mr Houghton: Why was it not considered from an early stage that a financial support package could be applied to the DCS, which was a model already in place'?
625 Mr S'himmin: The view at the time was that we should investigate a variety of Options to see whether the Bank could he saved, whether an alternative solution for an orderly winding down might be a preferred solution than simply the Bank going into liquidation and the triggering of the DCS. So the preference was always to see whether, realistically, there was an option for improving the position of the depositors etc by finding an alternative solution.
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630 01112. Mr Houghton: Moving on, then, what has been the real impact of the delays in payments out to depositors? With hindsight, could a process of earlier payments to those depositors, based on funding from Treasury, have been implemented much earlier than actually occurred?
635 Mr Bell: I think Treasury worked quire swiftly to bring in early payment schemes, recognising that there were cases of hardship, particularly amongst the smaller depositors, and we wanted to do our best to help them, so [ think we brought an early payment scheme forward at an appropriate time.
Q1113. Mr Houghton: When was that Early Payment Scheme proposed? Who proposed it? What were 640 the drivers to introduce such a scheme?
Mr Shimmin: I think it was something that was proposed within the KSF steering committee on or about 21st November 2008, and it was subsequently agreed by that [(SF steering committee. It was subsequently approved in principle by Tynwald in December 2008. 645 Q1114. Mr Houghton: Have you the net cost to the Isle of Man Government — the net cost — of that scheme? Do you have that to hand?
Mr Shimmin: There was a report done to Tynwald which, if you bear with me, I will get the details of, 650 which set out the position and payments of the two early payment schemes. If you bear with me for one moment, I will seek to&
Mr Houghton: Thank you.
655 The Chairman: Would you be happy for that to be followed up in writing, or do you want to hear the answer now'
Mr Houghton: I can move on, if that is what —
660 Air Bell: I think that would be easier, Chairman, if we could find that information out.
Mr Houghton: That would be very helpful. Thanks very much indeed.
Mr Bell: It is on record. 665 Mr Shimmin: It was presented to Tynwald, so&
Q 115. The Chairman: Leaving aside lost interest, the figure that springs to mind was something in the region of £5 million. Is that a figure that sounds familiar to you, in terms of the overall cost of financing of the 670 ICS?
Mr Bell: Yes, in total, our estimate at the moment, 1 think, is about E5 million — between £3 million and £5
675 Mr Shimmin: That is why I was separating the difference between& The& question was on the Early Payment Scheme. The figure that, again, will, I believe, be included within a report that is being laid before the November Tynwald, which is a half-yearly report that Treasury has done, will set out publicly the figures. Again, I can refer to those now, if you wish.
680 Mr Bell: I think, in total, Treasury released something in the region 01'1E200 million to Fund this, and it should end up with a net cost to the taxpayer of about E5 million.
Mr Houghton: Yes, it is that figure. If you could let us have that in due course.
685 Mr Shimmin: The provision made in the Government Accounts for the year ended 31st March 2010,
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which is on page 40 of what is referred to as the 'Light Blue Book', was a provision of C5 million.
Q1116. Mr Houghton: And finally, Mr Bell, what process was followed whilst you were Treasury Minister regarding a review of the 2008 Depositors' Compensation Scheme? 690 Mr Bell: Subsequent to KSF, you mean? (Mr Houghton: Yes.) Once the scheme was under way, the plan& have we got time to& Yes, we started the consultation again straight away after and I reported back to Tynwald in July 2009. In fact, we can give you this timetable, if that is okay —
695 Mr Houghton: That would be helpful. Yes, thank you.
Mr Bell: — to show you exactly what time frame and the various steps we took during that following period. But a lot of what we were doing, as I said earlier, was really trying to reflect what was going on round about us at the time and the progress which was being made in developing the possibility of compensation 700 schemes elsewhere, particularly looking at our competitors of the day, Jersey and Guernsey, who, when the problem arose here, did not have one. So we were watching evolving standards all round to see what would be the best structure for the Island.
Q1117. Mr Houghton: What, in your opinion, with hindsight, was the reason why it is felt that there 705 should have been more consultation done on putting the schemes together and the reasons for the Scheme to be amended on each occasion?
Mr Bell: It was circumstances at the time that truncated the consultation. I think, given the normal course of events, we would have taken time, as Government does On consultation 710 On matters like this. But you must always refer back to the huge pressure that we were under, during that period. It was a quite exceptional set of circumstances that came together, and that is what, in some respects, foreshortened the period of consultation that would have taken place, but it was with the express intent to make sure that the Scheme was as affordable and beneficial to depositors as we could make it.
715 Q1118. The Chairman: The DCS, as it stood in early October, was one that was put in place in 1991 and had only been used once. Was the committee satisfied that it was legally robust and would operate as it was expected that it would do, or was that a cause of nervousness within the steering group?
Mr Bell: I do not think there were any questions raised at all as to whether or not it would work. It had full 720 Tynwald approval in 1991. As you say, it had not been called on since, it had not been tested in any respect, but we were aware or the pressures that were building up to modernise the Scheme before KSF itself broke.
Q 1119. The Chairman: In hindsight, perhaps, in terms of the Scheme of Arrangement, more information 725 was coming out by the April and certainly by the final court sitting. Does Government feel that perhaps it was just too committed to the Scheme of Arrangement by that point, given that the information coming out was of a far higher rate of recovery by then? Was it felt it had to go ahead with it in order to justify the money spent on it, or is it still the view today that the Scheme of Arrangement is a missed opportunity?
730 Mr Bell: I think there was a robust discussion amongst the steering group at the time to assess on an ongoing basis how beneficial the SOA, was and although the margins of benefit were narrowing, as greater information was coming out to us, particularly from the UK, we would not have gone back to argue the case with the court, if we had not believed that still, on balance, the SOA would have been more beneficial to the depositors. It was the depositors' interests we were concerned about at the time. 735 Q1120. The Chairman: On balance, it does seem to imply that it was of marginal benefit by the time it actually went forward.
Mr Belk As you point out, Chairman, we were getting an increasing amount of information as to the 740 developing financial health of the situation and it was certainly narrowing clown the benefits but, as I say, at the end of it, we still believed collectively that that would have been the best way forward for the depositors.
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Q1121. The Chairman: I think, Mr Shimmin, you mentioned earlier about a firesale that would have taken place had the DCS been called upon in October. What significant differences would you have seen 745 between the winding clown through the Scheme of Arrangement and the duty of the Liquidator to get the best value Out of the assets that were there? Would it really have been that they would have had to sell everything within three to six months?
Mr Sharman: Sorry, t do not agree with the way you have put the question. My reference to a firesale, 750 believe, at the start, was a fairly general comment in terms of the difference between a broad liquidation position and a broad scheme of arrangement. So in a general sense, one would expect a liquidator to have to fulfil his obligations and the general view would be that that would lead to& the assets would probably get less of a return than might be the case in another situation, as a general proposition. Once we had developed beyond that, which was a general kind, into the specifics of our Scheme of 755 Arrangement, that was worked through very much on the basis of what would be the realistic return that we could expect from that.
Q1122. The Chairman: I was perhaps seeking to test just how marginal the differences between the two& and what was seen as being the big advantage of a wind clown over five years, as a wind down over a 760 shorter period under a liquidation, and what the expectation of that was?
Mr Sharman: The general expectation would be that a more orderly wind clown will give you a better return on the assets.
765 Q1123. The Chairman: I was looking for something a bit more specific in terms of an amount or an estimation, or how much actually we felt that difference was going to be worth early on.
Mr Bell: The cash value you are talking about? 770 The Chairman: Yes.
Mr Sharman: I do not think, at that stage& At the early stage, you are not looking or able to put a cash value on that in a general sense, other than going through the exercise and identifying what the — you used the terminology 'a firesale' — value might be. At the stage that we were looking at that, you were raising the 775 concept of the Scheme of Arrangement. Once you go beyond that and you are looking at whether the Scheme of Arrangement is a solution that is going to be beneficial, you are working up as much detail of that, but not necessarily referring it back to a direct comparison to a firesalc under a figure. So the bottom line to that is I cannot give you a figure.
780 Q1124. The Chairman: Okay. As we understand it, the contract with AlixPartners to come up with the Scheme of Arrangement was one that was based on billed time, rather than the completion of a deliverable. Do you think that in any way hampered efforts to try and solve it more quickly?
Mr Shinunin: No, I do not think so. I think our experience was that AlixPartners were very focused on 785 trying to deliver a solution to us in as cost-effective way as we could, and they shared the frustrations that everyone had, in terms of getting sufficient financial certainty to allow them to arrive at a recommendation.
Q1125. The Chairman: Is it fair to say that Treasury would have come out financially better off from a Scheme of Arrangement than under an immediate liquidation? 790 Mr Sharman: We have not done that as a calculation to that effect, in terms of judging it. That is with hindsight, one could look hack on that, but&
The Chairman: You must have had an idea of what Treasury's recovery was, when you put this forward, 795 though?
Mr Sharman: In terms of& 1 am sorry, could you perhaps go through the question again?
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The Chairman: Yes. In terms of had we pursued a liquidation either early on, or even had the Scheme of 800 Arrangement been passed in& Perhaps the April is the best place to differentiate this. If it came down to there is the Scheme of Arrangement being put forward by the Isle of Man Government in April, and there is the liquidation, which is the alternative, which one was it felt that the Isle of Man Treasury would come out better from?
805 Mr Shimmin: I think, at the time, the question would be that one could have more certainty as to the figures on the DCS, but that the view remained that, overall, the Scheme of Arrangement was viewed as the preferred solution. In terms of, at April, doing a figure exercise to quantify that in the way you are putting forward was not —
810 Q [126. The Chairman: You had not assessed as far as Treasury was concerned, which one would have been better for Treasury?
Mr Bell: If you are suggesting that we supported the Scheme of Arrangement just because it was financially better for Treasury, that was not the concern, 815 Q1127. The Chairman: I am just asking the question, which one was better, but you do not have that assessment. Okay. It is also fair to say that, as time has proceeded, and as the recovery rate has risen, that has been a major undermining factor for the Scheme of Arrangement. So, as more information has come out, as the recovery 820 rate has risen, the Scheme of Arrangement's attractiveness has declined.
Mr Shimmin: With hindsight and 20:20 vision, one would accept that. Would that have changed the situation at the time'? I do not think& We did not have the benefit of that hindsight.
825 Mr Bell: I have to stress just how difficult it was to get accurate information at that time, to make a value judgement. As Mr Shimmin says, it is easy, now today, to sit back and look hack and say we would have been better doing one course than another. It was, right across the board, very, very difficult to get any information out to put a fair structure on any of these schemes, so that we could actually be 100% confident about them.
830 Q 1128. The Chairman: I do not think there is any doubt that that was certainly the case in October 2008; perhaps the question is how near to that tipping point we were in April 2009, when the Scheme was put to the court.
Mr Shimmin: It is a general statement. 835 The factors that Treasury was taking into account were not& To respond to your question directly, presumably Treasury would have been criticised, equally, had it simply taken a decision purely on the basis of the consideration of the taxpayer implications, at that stage. I go hack to the general point, that Treasury was looking to balance all the interests of all the parties in arriving at a solution at that point.
840 Q1129. Mr Crowe: What you are saying, then, is you wanted to ensure that you had the greatest realisation of assets when you were looking at the whole situation, so you were trying to get the best deal, shall we say, for the depositors and creditors?
Mr Shimmin: That was always at the heart of what Treasury and the& finterruptimq committee of KS F 845 was trying to achieve.
Qt 130. The Chairman: We have talked a lot about the Depositors' Compensation Scheme. In reality, this is a Scheme that does not provide compensation; it provides a guarantee. Is it perhaps fairer to call this a depositors' guarantee scheme, rather than a Depositors' Compensation Scheme'? 850 Mr Shimmin: 1 do not think so. I think the terminology is adequate.
Q1131. The Chairman: You do not think it gives rise to concerns about actually being able to receive
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compensation in terms of other losses, other than immediately what was lost and what is therefore 855 guaranteed?
Mr Shulman: It seems to me it is a terminology that has been in use for a period of time and, broadly, is understood and accepted. One can always change terminology. I do not believe that the terminology is creating a problem that needs to be solved. 860 Q 1132. The Chairman: One of the matters that was put to us in the DAG submission was that they felt that Treasury were promoting the interests of local depositors over others. Can you think of any reason why they would think that?
865 Mr Bell: None whatsoever. Treasury have been very fair, I think, in trying to recognise the rights of all depositors.
Q1133. The Chairman: Did you find, as you were weighing up the differences between the liquidation argument and the Scheme of Arrangement, that there were hurdles and problems, in terms of our Manx 870 insolvency law, that made either one of them difficult to pursue?
Mr Bell: I think there is certainly a recognition that Manx insolvency law needs modernising. That has been recognised for quite some time, but whether it caused a particular problem in our discussions& I do not recall it having been raised as a problem. 875 Mr Shimmin: Likewise, I do not recall it being raised as a specific problem in this context.
Q11341. The Chairman: One or the other scenarios for the Depositors' Compensation Scheme, going forward, is that it be pre-funded. What is, was, the view from Treasury on that'? 880 Mr Bell: It is an issue which certainly has been debated, and so far has been not deemed to have enough support to take it forward. In future discussions, that may well be something which will be on the agenda.
Mr Shimmin: I would simply say, Tynwald has approved the Scheme as it is very recently. That Scheme 885 is one that we would accept introduces greater flexibility which could provide means of front-ending money into the Scheme to assist payments to depositors earlier. Pre-funding is only one possible solution in that route.
Mr Bell: Any move in that area, of course, would also reflect on what international standards towards 890 these types of schemes might consist of, and what competitor jurisdictions might do.
Q1135. The Chairman: The Depositors' Compensation Scheme and the actions taken in respect of KSF are very specific to one situation. They represent a mid-tier bank on the Isle of Man. In terms of a large-scale bank, if anything happened there, would you still feel the DCS is fit for purpose 895 or do we need a more graduated approach to —
Mr Shimmin: I think the view we take is that the Scheme, as put to Tynwald most recently, is fit for the purpose.
900 Q1136. The Chairman: 1 suppose, really, that just brings me to lessons learned and what would you do differently, if this ever happened again in the future?
Mr Bell: That is a good question. I think, given the frenetic conditions at the time, Treasury and the Isle of Man Government performed an honourable option to try and help the depositors. Whether we would have 905 done it any differently, looking hack, it is difficult to say. 1 cannot really reflect on that at the moment.
Mr Shimmin: I think we have tried to learn lessons, particularly in relation to some of the changes introduced into the latest Depositors' Compensation Scheme. I think we would need to consider the extent to which we have a greater co-ordination of communication, if that is possible, between the different parties, for
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910 looking at the practical lessons in that context.
The Chairman: Anything?
Mr Houghton: No, thank you. 915 The Chairman: Last chance. Alan?
Mr Crowe: No, thank you, Chairman.
920 The Chairman: Roger?
The Clerk: No, thank you.
The Chairman: in which case, thank you very much for appearing before us this morning. 925 Mr Bell: Thank you, Chairman, and apologies again for the state of my health.
Mr Shimmin: I will submit those requested papers to you.
930 The Chairman: Thank you very much.
The Committee sat in private at 1 1.46 a.m.
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PROCEEDINGS OF THE SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER & FRIEDLANDER (ISLE OF MAN) LIMITED AND THE DEPOSITORS' COMPENSATION SCHEME
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Douglas, Thursday, 2nd December 2010
Afternoon Session: 2.30 p.m. — 3.50 p.m.
The Committee sat in public at 2.30 p.m. in the Millennium Room, 5 Legislative Buildings, Douglas
[MR WAYTERSON in the Chain]
10 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 15 Man) Ltd; the role of the ['SC in ensuring the proper management of 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 20 the action taken to try and save Kaupthing Singer & Friedlander Ltd. Today, we have Mr John Aspden, Chief Executive of the Hnancial 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. 25 In case anybody is not aware of the members of the Committee: from my far left, rather ironically, John Houghton MHK; the Clerk, Roger Phillips; and to my right, Alan Crowe, MIX. f am Juan Watterson, MHK,
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Chairman.
30 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? 35 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. 40 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 1 ask you 45 when plans for the potential recovery of KSF were 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. 1 think, looking back, or thinking back, to that time, on the evening of the 8th, by which time, of course, 50 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 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. 55 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 that very early stage, we 60 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 (I0M) deposits — were, and how we should respond to that. 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. 65 The Chairman: Okay.
Ql139. Mr Crowe: Can I just ask Mr Aspden, on the evening of the 8th, who was actually present for these discussions? 70 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 Catlin Wild. It included a number of senior colleagues in the office, but that was really it. We made one or two additional phone calls hut, in terms of personalities, that is who was there. 75 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 phone calls. 80 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 he the
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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 primarily around that subject. 85 Q1141. The Chairman: Can I ask you, at this point, why it was felt that joint submission would he better; why the FSC would he involved as part of the submission for a liquidator provisional, as opposed to just the directors putting in a winding up& ? 90 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.
Q1142. The Chairman: So, when was an early view established that a sale of all or part of the business 95 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. 1 think as you, of course, will know yourself, liquidations of banks are highly complex and, in particular, the reason they are highly complex is because, when one liquidates a bank, typically one is unwinding a lot of 1 00 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 1 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 oversight committee for all of this — at that stage 1 think it was only logical that a number of options quickly came on the table because, as 1 said a moment ago, the whole purpose of having a 105 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 he viable or not but, very clearly, we were dealing with an entity that had a banking licence, that had raised a number of deposits — and even a mere hook of deposits has value in the market — that only had — and 1 say 'only' because as we've subsequently all found out, it has been 1 10 very relevant — 50% , or roughly 50%, of its assets upstream, the rest were in independent& [Inaudible J. It had a client base, and part of its independent assets comprised a higher end mortgage portfolio in the UK. So all of these had 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.
115 Q1143. The Chairman: Really, as far as the regulator is concerned, it seems that the options that would he 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 ESC's involvement seems to be more than just making either of those options possible?
120 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 ESC, 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, apart from that, actually particularly in terms of 125 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 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, 130 should the DCS he 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.
Q1144. The Chairman: So this just brings me on to whether you felt it was appropriate that you should 135 actually have gone along to the meeting with AlixPartners and had that extra level of involvement. 1 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 Minister's committee and the introduction to AlixPartners in particular, do you feel that it actually was really appropriate for you to have
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been quite so involved in that? 140 Mr Aspden: I think, Chairman, so far as MixPartners 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 outset, it was all hands to the pump. So far as MixPartners 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 145 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 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 150 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 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 t. Number 2: as the committee went forward, all the different options they were considering, including the 155 Scheme of Arrangement, had regulatory dimensions, because if the Bank was going to be sold, we would have had to have been involved; if assets were going to he sold, we would have to he 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 licence holder 160 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 future of the company, and being part of that. 165 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. 170 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 be reconstituted and everything. 175 Sot 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 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 180 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 dealing with, or was that something that you were consulted about and gave a view on in that Committee? 185 Mr Aspden: No, I was not involved in that.
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? 190 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 — 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.
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195 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 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, bat I did 200 not detect any sense of 'another option must be found at all costs'. It was more of a process of looking at all viabilities.
Q1148. Mr Crowe: Sorry, Chairman. So you were looking at a wide range of options concurrently. 205 Mr Aspden: Yes.
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 210 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 'financial support', but I think, essentially, the PSC 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 215 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 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 220 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.
The Chairman: Okay, Thank you. 225 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 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 hut, essentially, the 230 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 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. 235 So I think I am right in saying, to the best of my knowledge, that they were the ones that put 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 240 on that basis& We can discuss it separately, but there were various 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 of 245 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, ultimately, a solution for all creditors. 250 1 suppose one or two or the benefits that were identified on this were that, first of all, a scheme of
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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 more protracted hut, nonetheless, perhaps at the end of the day, a fuller rate of recovery. Now, I am not saying that, in fact, in this 255 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. 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 260 arid, 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 hook 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 265 AlixPartners as an advantage of a scheme of arrangement over a formal liquidation.
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?
270 Mr Aspden: Right, well, I think it is very fair to say that we were& It was something that we 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 275 brought before, the court in scenarios in which all parties had an opportunity to make submissions and for the court to hear all views. 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. 280 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 therefore 285 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 think the initial estimate of the likely level of repayment, once the DCS was invoked, was a bit cautious? 290 Mr Aspden: First of all, to he 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 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. 295 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, 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. 300 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 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 305 involved in publicising it and are you aware of adequate and effective consultation with key parties from an early stage?
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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 clone through this Committee, 310 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 no involvement in day-to- day liaison with some key depositors who might have been particularly interested in what a Scheme would offer. 315 Q1156. Mr Crowe: So you had no direct involvement with depositors.
Mr Aspden: No direct involvement, no.
QI 157. Mr Crowe: You were in a slightly strange position because you were a member of the Chief 320 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?
Mr Aspden: The critical decisions on some of this were not actually taken on the committee. The committee, l think, was... I would term it as more of an advisory committee rather than a decision-making 325 body, so these were all the issues being discussed and everything but, at the end of the clay, some of the final decisions on these sorts of things would have been decision-making 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. 330 Q1158. Mr Crowe: We are aware and you will he aware, of course, that in the UK liquidation or the administration, the UK Treasury imposed an order that most activity had to be concerning 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 335 committee from getting the information needed to make 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, :340 and so forth, because there were some that came in place even before the 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. 345 We also, at that stage, became aware or 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 news to us. 350 Q1 159. 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 accepted or not?
355 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 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 360 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 you look at a bank,
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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 365 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 Eire sale or asset ratio liquidation mode. 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 370 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. Those were the sort of challenges that one was dealing with in those times.
375 Q 1160. 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 juncture to ask whether things have improved.
380 Mr Aspdetz: 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 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. 385 So as much as it can, within the way that the ESA is going to be changing over the next couple of years, it is business as usual.
Q1161. The Chairman: I do not particularly want to push the issue, but did you ever get an apology for the actions of the ESA at the time? 390 I14r Aspden: No, no -- no apology!
The Chairman: I will not force the issue!
395 Mr Crowe: That was all, Chairman.
Watterson: John.
Q1162. Mr Houghton: Thank you. Thank you, Mr Aspden. 400 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 support of the affected depositors. What would your comments be on that?
405 lllr 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 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 410 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 considerations that you mention.
415 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 would not have been any separation between the Liquidator and the DCS manager, would there?
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420 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 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 425 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 clay, these were not short-term assets that could just be sold into the market.
Q1164. Mr Houghton: Thank you. 430 What overall lessons have been learnt by the FSC and changes been made, in light of the KSF experience?
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. 435 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 440 good example of that also is what is happening in the Eurozone at the 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 445 regulators and so forth — all of them, since we last met, have 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. 450 Q1165. Mr Houghton: Thank you very much. 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 455 banking sector. 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. 460 I think the key issue is that what has happened is, in the light of the crisis, expectations of 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 (lid not even really have regard to its own depositors' compensation scheme. The Chancellor said, we will bail out or we will make sure nobody 465 suffers any loss, so even 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. Governments... the Isle 470 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, which these governments have got to go through to re-educate. We here have
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475 got our DCS, it is E100,000 — 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 hut, 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 countries have been elevated. So that is an issue which probably we might not do anything about hut, nonetheless, is something that, no doubt, 480 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 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 485 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 that, of course, the Scheme in that situation... the chances of it being able to raise large amounts of money might be quite difficult. 490 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 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. 495 That is the sort of dilemma that I think exists at the moment.
Q I 166. The Chairman: If I can just probe you a bit further on our present DCS, then: if KSF 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 500 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 from the recoveries from the bank. So, if a gap then arises, where does the liability lie for that?
505 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 — 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 510 would have had to have been different. So there is an issue there. Flow might the DCS borrow? I agree with you, as a banking proposition, to lend clean to the DCS might be very 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, 515 and that is the extent to which any borrowings could he secured against future receivables, from the known realisation 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. 520 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 ESC or is it Treasury, inasmuch as when the consultation came out in 2008, that was an FSC 525 consultation and, of course, they are all moved in 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'?
Nlr Aspden: I think the answer to that, Chairman, is evident and can best he described from the chronology. You are quite right that a large amount of the consultation was conducted by the FSC. We have 530 the figures, we went out with scenarios, we put scenarios before Treasury. In terms of the policy of how the
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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 he — never put before the Commission board for approval or anything like that. 535 Q1168. The Chairman: But in the early 2008 consultation, am 1 right in thinking that the ESC actually made a recommendation to Treasury that they not change things and wait and see? So this policy recommendation came from the ESC?
Mr Aspden: I would have to, if I might... I am not fudging it: if you are now talking about the results of 540 consultations in the early part of 2008, 1 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 .C20,000 coverage for non-individuals. We felt because affordability for a DCS is one issue — and 1 realise this is a political decision — hut, from the ESC's viewpoint, we felt it would have been quite adequate to offer £50,000 to individuals. So you are right, that is a 545 recommendation or a suggestion.
Q1169. The Chairman: Under the current Scheme that we have, in terms of the recommendation that informed the present Scheme that is approved by Tynwald, what parts of that do represent ESC policy advice or recommendation? 550 Mr Aspden: I think--
Q1170. The Chairman: And what parts were, by implication, politically driven afterwards?
555 Mr Aspden: I agree, and I think, Chairman, if l 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:
`To what extern was Me Commission involved in preparing ror a change to the DCS? When did work on apdatinp, the DCS become 560 argent?'
So that was the question put to us and we gave a fairly full response to that, in particular the fact that some of the discussions that took place, but ahead of the first DCS in October 2008, the 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 565 in our response.
Q1171. The Chairman: The Commission did not see the first draft of 23rd October regulations until 5 p.m. on 22nd October and the Ode 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 570 carefully consider such an important document?
Mr Aspden: Well, the FSC, I like to think, Chairman, then and now, has a very good 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 575 policy to he 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 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 580 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.
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 585 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.
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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 he bridged between an overall large depositor failure, with few assets and the cap that is put in place, 590 and where that liability lies, or is it a pro rota reduction in everyone's payments? What is that scenario? How does that pan out?
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 595 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 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. 600 If we did not have enough money, then, yes, we would have had to have looked at a pro rata scheme in which compensation then would have had to have been shared out pro rata. Bow that 'pro rota-ing' would have been done, we have not done any detailed modelling on that.
Q1.173. The Chairman: Again, perhaps l am conscious that I am very much putting you on the spot here, 605 but this is, after all, the Depositors' Compensation Scheme that we have in place at the moment, so it is particularly relevant. Perhaps I could ask if you want to get back to inure 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 he very much appreciated, if you are happy to provide that information?
610 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, l think, the Treasury Minister agreed 615 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 )'SC support that, as a party to the court case and, if so, why? 620 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 certain that, for most of calendar 2009, our position was to stay entirely neutral and we said as much at the court. 625 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, appointed the Liquidator provisional, it was down to them to either trigger one or the other, that was a judicial decision.
630 Mr Aspden: Exactly.
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 pie-funded model, as I think some jurisdictions, such as Canada and the United Kingdom have, to a 635 greater or lesser extent, deposit insurance or a pot of money to draw from. What arc your views on a pre- funded model?
Nlr 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 640 E190 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 a range of figures. I think pre-funded models, particularly where resources may he limited and so forth, can be useful in
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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 645 level that we are talking about& and as I say, the KSF(TOM) 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 he very much larger, so we would not want to get ourselves in the 650 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 fully funded, 655 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 incorporated into the 660 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 contemplating that sort of regime here is that we are dealing with a finite number of contributors — 665 The Chairman: As is everywhere.
Mr Aspden: Yes, but if you actually think — I forget the precise figure — we have got a banking system of over £52 billion and if you look at the — 670 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 numbers of those, in terms of actual banking groups, are considerably smaller than that. 675 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? 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 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 680 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 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 685 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-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 he more 690 capable of withstanding a crisis.
Q1178. The Chairman: What, potentially, would you say about the cross-fertilisation or compensation schemes, such as blending the insurance of compensation schemes in, as is the case basically in the UK?
695 Mr Aspden: I think that is certainly something that could he looked at. If one looks, at the moment, in terms of the funding of those schemes, particularly the insurance scheme, it is very different from the DCS, so presumably one would actually have to find a common basis on which funding could he& I think that, for a jurisdiction our size, that has been a challenge, but it is something that one can revisit, yes.
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700 QI [79. The Chairman: It is not something that has been discussed in circles so far, in the 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 clone any detailed modelling of that, no. 705 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 terms of giving certainty to depositors, in 710 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 experience with KSF(.10M) — you know what the timetable is for the liquidation, because the Liquidator has given some 715 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. 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 720 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 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. 725 Q1181. The Chairman: Of course, one in four people who have money with Kaupthing 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? 730 Mr Aspden: Let me make a comment, which I know is a little hit controversial, but I think the 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 735 not got their money back, but the fact is that the Government funded fully the DCS and three quarters of depositors, very roughly, have 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 or 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 740 liquidation of the Bank, I would& and this is the more controversial comment, but I think it is reasonable. 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 complex institution with lots 745 of cross-relationships and everything, I do not think that is too bad an outcome.
Q 1182. 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 or?
750 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 have had one of our banks go clown. One of the benefits of the DCS I think we should be thinking about is that the Isle of Man
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98 SELECT COMMITTEE, THURSDAY, 2nd DECEMBER 2010 755 actually has a DCS that was triggered, kicked in, paid everyone out and, subject to the figures working out, I think, hack in the beginning of this year, in the Budget forecast then, with a net loss to Government of .E5 million. I think that was the figure the Ministry included in the Government accounts. 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 clone as best as possible. 760 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 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 765 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 of Man Government in declaring its willingness to enter into such an agreement?
770 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 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 775 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 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, 1 would just think that one might want to he cautious about making a recommendation that, at the end of the day, might be 780 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 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 785 you in court.
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 790 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 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. 795 So the question is, would we be happy to give up that element of, if I may call it, 'regulatory 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 hook or vary its supervisory methods in the light of the recommendation we made with regard to 800 directors' access to their own deposits. Could you perhaps give us some of 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 business of the bank or the 805 institution. So the way, in fact, we felt that, rather than us mandating that on what is one particular point, we felt that would he 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 or a formal requirement. That was the view that we have come to so far. 810 Q1186. The Chairman: In other words, you are dealing with it in practice but not in regulation.
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Mr Aspden: We are looking to see& We felt this was an area which we felt, like a number of 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, 815 Q1187. The Chairman: It is not something you are intending to give guidance on, then, as to what is and is not appropriate action; you will just opine on what they have put?
Mr Aspden: tf I may quote an analogy, it is rather like provisions. We, as a regulator, do not tell a hank 820 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 assess that. We would apply the same concept to this particular issue.
The Chairman: Okay. 825 Mr Crowe.
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 830 problem with this. This is riot something that& but I think we already have extensive, fairly extensive, expectations in terms of conflicts of interest and so forth and we felt that this sort of issue would he 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 835 risk, managing liquidity, how they run the bank, the type of business they want to do? The answer is yes; hut, at the end of the day, the important point is that, although all their systems may be different, we arc all working towards the same ultimate objective — in this case, in particular, it comes under the heading of conflicts of interest.
840 Mr Crowe: Thank you, Chairman.
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. 845
Procedural
850 The Chairman: The next evidence session, just to confirm, is lOth December, where we hope 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 he 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. 855 The Court adjourned at 3.50 p.m.
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PROCEEDINGS OF THE SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER & FRIEDLANDER (ISLE OF MAN) LIMITED AND THE DEPOSITORS' COMPENSATION SCHEME
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Douglas, Thursday, 10th December 2010
Afternoon Session: 3.00 p.m. — 5.51 p.m.
The Committee sW in public at 3.00 p.m. in the Legislative Council Chamber, Legislative Buildings. Douglas 5
[MR WATTERSON in the Chair]
10 Procedural
The Chairman (Mr Watterson): Welcome, everybody, to the latest session of oral evidence for the Select Committee on Kaupthing Singer and Friedlander. 15 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. Part of its inquiries will focus on action taken to try and save Kaupthing Singer and Friedlander (Isle of Man) Ltd. We have invited three witnesses today: Mr John Coyle and Clive Parrish, representing the Isle of Man Bankers Association; Mr Mike Simpson of PricewaterhouseCoopers, the Liquidator; and, in addition, we have 20 Dr Downs, on behalf of the Depositors' Action Group, who was unable to attend last week because of the snow. Further evidence will be taken next year. For those who do not know the Committee, from the for right: Mr Roger Rawcliffe advises the Committee; Phil O'Shea advises the Committee; Alan Crowe iVILC, member of the Committee; our Clerk, Roger Phillips; and to my far left, John Houghton MEEK, member of the Committee. My name is Juan
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101 SELECT COMMITTEE, THURSDAY, 10th DECEMBER 2010
25 Watterson and I am the Chairman. 111 can just ask you to make sure your mobile phones are off, rather than on silent mode, because it does interfere with the recording equipment.
30 Statement by Mr J Coyle
QI189, The Chairman: Mr Coyle, would you care to come forward? Before we start, do you have an opening statement, or are you happy to go straight to questions? 35 Mr Coyle: If I may make just a brief opening remark, which is to say that the Isle of Man Bankers' Association is a trade —
The Chairman: Sorry, if you could just introduce yourselves for the tape, and then give your opening 40 remarks.
Mr Coyle: Apologies. John Coyle of the Bankers' Association. My opening statement is simply for the purpose of clarification, to inform the Committee that the Isle of Man Bankers' Association is a trade association. It has no executive powers. It is simply a focal point for the 45 players of the banking industry to come together and debate matters of common interest. As the President of the Bankers' Association currently, I do not exert any power or any special influence over any of the banks who comprise its membership.
The Chairman: Thank you. 50
EVIDENCE OF MR .1- COYLE AND MR C PARRISH
55 The Chairman: Mr Crowe.
Q1190. Mr Crowe: It is Mr Clive Parrish, is it?
Mr Parrish: I am the Secretary of the Bankers' Association. I have been since 2008. I am paid on a part- 60 time basis to do that job. I am here in support of the President, really.
Q1191. Mr Crowe: Thank you very much. If I can just open up with a few questions. I can see the main plank of your evidence was in your letter of 65 20th September, in which I think you responded to the Chairman's queries on certain issues and we will largely be picking up points that are within that submission you have made. If I can start by asking about the Depositors' Compensation Schemes of 2008 and 2010: when and how were you consulted about these schemes, what timescale was set for the consultation and do you think you were given sufficient time to respond? I know it is a three-part question, but if you could go through those 70 points, please.
Mr Coyle: I will take the first one and if 1 have forgotten your multiple part question, please remind me. To the first question about the 2008 DCS, obviously that has to be seen in the context of everything which was happening in the financial world, specifically about the time of September and October 2008. So the 75 reality is that there was very little consultation on the DCS amendment of 2008 that was being brought forward in early October. There had been momentum gathering, certainly I think there had been political momentum gathering in the liouse, because, I guess, constituents of MI-IKs were becoming more concerned about the Island's depositor compensation, when comparing it to arrangements that were being changed in the UK at that time. 80 So some work had been clone by the FSC many months before on potential options for changing the DCS,
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but very little had actually happened to take the results of that exercise and to transform it into a piece of new legislation to update the old 1991 DCS Effectively, we found ourselves, in October 2008, with the financial world in the greatest of turmoil and the Government response, at that time, was to propose, with quite short notice, a revised DCS that gave much improved levels of cover for certain classes of depositor, but it really 85 did come in with little or no pre consultation on its exact nature.
Q1192. Mr Crowe: So for that 2008 Scheme, because of the financial crisis in the world, you were given very little notice, or no notice at all, hardly, to comment on the Scheme — although, as you say, there had been some consultation earlier in the year, because of comments made in Tynwald, in Questions and so on. 90 Mr Coyle: 1 think it was recognised by all stakeholders that the 1991 Scheme, with limits of compensation cover, which had not changed since 1991, really was overdue for review and for change, so the general principle that changes were necessary and appropriate was well understood.
95 Q1193. Mr Crowe: So the Bankers' Association were quite comfortable that change was due and was probably necessary.
Mr Coyle: I think the reality is, if you go back a couple of years pre-crisis, there would have been a school of thought that said, did the Isle of Man, in fact, need a depositor compensation scheme at all, because our 100 closest competitor jurisdictions — i.e. Jersey and Guernsey — saw no need to follow the Isle of Man's lead back from the early 1990s. But that wisdom of 2006... Certainly everything changed after the Northern Rock meltdown in the UK and, all of a sudden, depositor compensation was no longer a hypothetical issue; it became a real issue in people's lives, so the banks were as alive to that as any other stakeholder, and knew that a degree of change 105 would he required. We were playing a part in giving views as to what that change might be — I think, in fact, round about February 2008 — but ultimately it got overtaken by the events of the later part in 2008, which saw the Government wish to act in real time, almost, to the situation that was unfolding.
QI 194. Mr Crowe: But the latest Scheme, the 2010 Scheme, which has been amended slightly, as well — 110 Mr Coyle: Yes.
Mr Crowe: Can you give us a little bit of a timetable and the consultation on that 2010 Scheme and your involvement in that. 115 Mr Coyle: Yes. The Government issued a paper — I would need to check my records, but I believe in mid to late 2009. After everything that had subsequently been going through with the 2008 Scheme and with the whole Kaupthing demise, it was known that there would need to be further changes. If I recall comments made by the Chief Minister at the time the 2008 Scheme was going through, it was 120 about doing something which was required in the moment and it was always going to be the intention to revisit it when we were 'in calmer waters', I think was the phrase actually used at the time. So everyone knew that there would he a need to revisit once again the 2008 Scheme in due course. A consultation document was put out to ourselves and others in 2009, to which we responded and individual banks responded for their own account and took into account their particular view of the market. I also put forward, really, a combined 125 response on behalf of the banking industry at that time and, obviously, that went into the melting pot as part of the consultation process. There were little hits of tentative updates coming through, but nothing formal until, really, 1 think the September. The actual legislation, I think, went to the October 2010 Tynwald. It was always the banks' view that, with schemes which are as complex as the Depositors' Compensation Scheme, the devil would be very 130 much in the detail, so we had been consulted and we had given views as to the generality of the Scheme, but we were very keen to see what it looked like on paper as it was, because these things often come down to matters of law and of legal interpretation, and a small change of interpretation can have quite a profound financial impact, so we were very keen to see that, and that emerged, I think, round about the twenty- something of September, several weeks before it then ultimately moved through into the actual Tynwald 135 process.
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01.195. Mr Crowe: It led to a slight revision in the last Tynwald because of the comments from the Bankers Association? 140 Mr Coyle: Yes, I think there was an unintended consequence the way that one aspect of the wording — and this is exactly the point about how a very small difference can have, perhaps, unintended — but a profound effect was that the change in wording had, potentially, a different financial consequence for banks, which was not the Government's intention and it was a most unwelcome potential change to banks, which was what led to the minor revision —or minor on one hand, but important enough to the bankers to he fundamental. 145 01196. Mr Crowe: The banks obviously have benefits as well as costs in the Scheme, but what would you see as the objectives in a bank being a contributor to the Depositors' Compensation Scheme?
Mr Coyle: The Scheme — 150 Mr Crowe: What benefits does the bank get out of being part of the Scheme?
Mr Coyle: Obviously, you only become a contributor in the event of another major bank defaulting. What is, essentially... if you are in the market to compete for personal deposits, then the law of the land in the Isle 155 of Man is that you do not really have a choice about whether you are in the Scheme or not. If you attract, or seek to attract, the type of deposits which the Scheme covers, then you cannot actually operate from the Isle of Man and not be in the Scheme. There are certain exemptions, certain banks on the Island which are not in the Scheme, but they are specialised businesses which do not actually seek to take deposits from the public at large. 160 So there is an element of it being a compulsory aspect of banking, of operating a banking business in the Island hut, by the same token, there is a benefit there for banks, because it is part of the overall reassurance to clients and it is one of many things that a client is able to obtain assurance from and that is a mixture of the banking brand that the client has chosen. Really, the client, their first motivation to buying with you is, presumably, because they feel that, as a 165 bank, you are a safe bet in their minds, so your own bank brand's image and reputation is paramount, but there is also the fact that the Isle of Man itself is a quality jurisdiction and has got AAA rating. Those aspects also attract banking to the Island and the third leg is that, even if it almost goes horribly wrong with your choice of hank brand, or whether the Island's creditworthiness may take a dip, you then still would have recourse, in the event of an unexpected event, a bank failure... that Depositor Compensation Scheme there is .170 a bit of a safety net. I think banks do benefit. Each individual bank may have a view as to whether it benefits to a greater or lesser extent from that Compensation Scheme being there, but I think, across the board, we recognise that, at some degree, all banks which compete for those types of deposits, there is a benefit of sorts to having the Scheme in place. 175 Q1197. Mr Crowe: Thank you for that. What are the key principles which the banks wish to observe in signing up to a DCS scheme? What would you see as the key principles?
180 Mr Coyle: I covered this, to an extent, in the omnibus reply to the consultation on the construction of the 2010 Scheme, which we gave to the Treasury in late 2009. The key parameters for the banks were, first, that any scheme must be affordable — and, by 'affordable', that means having a financial cap on the scheme. The banks were very much against any scheme that would have an open ended financial exposure for their groups. The other key aspects that we felt were required were that there had to be some element of both public- 185 private funding in the event of a hank calamity, because I think that process had been established throughout the developed world, that governments themselves have not been able to stand back and not financially contribute in the event of a bank failure, so that element of both government and bank participation in the scheme was important to us — an overall aim of affordability for all the participants in the scheme. The third one was to make sure the scheme was broadly comparable with the protection afforded in other 190 jurisdictions where clients who would bank in the Isle of Man might otherwise bank: in particular by that, we meant Jersey and Guernsey, where either clients could elect to move to if, for some reason, the Isle of Man scheme was out of kilter or, alternatively, if it was out of kilter the other way, that banks would and could
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direct business away from the Isle of Man to those other similar centres. 195 Q1198. Mr Crowe: You talked, in your submission in October 2009, about a pre-funded reserve, which you were happy for the Government to do this. But what are your views on the banks contributing to a pre- funding arrangement?
Mr Coyle: think pre-funding is a concept... and this is not unique to the Isle of Man. Banks generally are 200 not in favour of pre-funding because it represents... At one level, it is a very inefficient use of capital, so to the extent that banks... In the event of a bank failure, there will he a number of banks which are left standing and required to foot a bill of sorts to help cover the effect of any particular bank failing. The banks which have to then contribute to that failure would rather do so using reserves which they have retained and managed to best effect, rather 205 than find themselves having to pay into a scheme on a pre-funded basis, where, effectively, that becomes almost dead capital. Indeed, there is also a question mark around what does one do with the cash that has been put in and pre-funded. That has to be banked somewhere. What if the wrong choice is made around where that is banked? So the bankers of the Isle of Man view... It is not a unique Isle of Man view. I think, generally speaking, 210 amongst banks, there is much more of a preference for a post-funded scheme than anything which involves the banks in pre-funding. The idea of Government doing pre-funding was not in any way to suggest that we would like Government to do something that we would not choose to do ourselves, but it was more recognising that Government finances are in such a way that the Government has pockets... which it can attribute to different purposes, and one might say whether Government chose to attribute some of its current 215 reserves and call that a pre-funding scheme. That is something that is entirely within Government's remit to do and potentially it has different consequences for Government and its accounting than it would do for banks and their accounting in the private sector.
Q1199. Mr Crowe: Thank you for that. 220 Can we just turn to look at the Scheme of Arrangement or the proposed Scheme of Arrangement. To what extent were you consulted about the tangible effects of a scheme of arrangement over the Depositors' Compensation Scheme? Were the benefits seen as being clear and supportable? How much were you involved in discussions with the Scheme of Arrangement, or the proposed Scheme of Arrangement?
225 Mr Coyle: I think it would he fair to say we were partly involved, because the banks... It must be understood that we were not the target audience of the Scheme of Arrangement. The Scheme of Arrangement was not being constructed for the benefit of the banks in any way. The Scheme of Arrangement was Government's response, as a way of trying to improve the fortunes of the depositors of the failed Kaupthing Bank. So the banks, as stakeholders, we certainly knew that we would be obligated to pay into... 230 whether it would be the Scheme of Arrangement or whether it be an activation of the Depositors' Compensation Scheme. So on the one hand, we were almost interested spectators, as opposed to actual participants, because we were not... for example, the banks were not going to be asked to vote. The people who would vote on this thing would be the depositors, and it was really for Government to propose how it wished to react in that set of circumstances. 235 So Government were definitely keen to try and make sure the banks were on side, and not diametrically opposed to what the Government was trying to accomplish. That led to some meetings which gave us a high level view of the Scheme of Arrangement, but it really did not get much beyond that, to be honest.
Q1200. Mr Crowe: Having a straw poll of your members, was there general support for a Scheme of 240 Arrangement or was it neutral, or how would you say the discussions took place during this interim period?
Mr Coyle: It started off that the Scheme of Arrangement was, to an extent, the only show in town. The Government's energy was in trying to create a Scheme of Arrangement and present that to the depositors. There was not really much discussion with the banks at that stage as to explaining this is what would happen 245 for banks under the Scheme of Arrangement, and this is what would happen under the Depositors' Compensation Scheme. ft was very much the Scheme of Arrangement is the route the Government would like to go down and, of course, in the background here, there was still hope that the money would come hack from the UK and the Isle of Man would he made good and maybe the whole thing would all sort of fade away. Of
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course, those hopes faded as the weeks went by, but the original context was a Scheme of Arrangement is 250 where Govern ment wishes to go. The banks' view, as time went by, was that we were definitely supportive of what Government was trying to do and would have supported them, on the basis that it did not, in fact, leave the banks worse off than it would have done under invocation of the DCS. Ultimately, that was the basis on which the banks' support was given, because — 255 Q1201, Mr Crowe: There would he a better end result. Is that...?
Mr Coyle: Well, not so much a better end result, because it was not particularly clear whether there would he a better end result. There would certainly have been slightly more structure and regularity to some of the 260 payments that different classes of depositors would have received.
Q1202. Mr Crowe: So there would be more certainty in the timeframe?
Mr Coyle: Potentially, there could have been more certainty under the Scheme of Arrangement, but the 265 banks... I think it would be fair to say, this was not really a matter that the banks themselves were particularly vocal about, because we were unaffected in that sense. Our effect upon banks was our role as having to help fund either the DCS or the Scheme of Arrangement, because it was clear that part of the funding for the Scheme of Arrangement would also come from a similar levy on banks as would have been made under the DCS. Generally speaking, the hankers who operate on the 270 of Man try to work productively with Government and we would be generally supportive of things which are to the greater benefit of Isle of Man plc, one might say. But the reality is that each of those banks has a head office in other jurisdictions, and the discussions around exactly how the Scheme of Arrangement or the DCS would impact banks would become a slightly more dispassionate internal discussion within each individual bank, back with their head office. That is why the banks ultimately came to a perspective that said 275 that the industry would support the Government in its Scheme of Arrangement, on the understanding that, financially, each hank would he no worse off than it would have been, had the DCS actually been invoked,
Mr Parrish: I think it is worth it to say that the Banking Association's view at that time, or the members, were that it was certainly the indication, or there was a hope, that the Scheme of Arrangement would result in 280 the depositors getting their compensation back earlier, and that, in fact, the potential result was more favourable for everybody. The banks at that time were very supportive in principle, because, as always, the devil is in the detail and, as the President has said, the support was given in that principle, on the basis that the banks would be no worse off than they would otherwise he under the DCS. 285 Q1203. Mr Crowe: You did mention about the deposits with KSF, with the parent company — I think it was between ,C250 million and £550 million — which brings us on to this streaming model, which obviously has been criticised for that banking model. Do you have any thoughts on that upstreaming model and as to whether the banks are working on a better model for the future of banking on the Island? 290 Mr Coyle: I think there are a few different perspectives that have to be taken into account here. Many of the banks which are on the Isle of Man are here because the Island, effectively, is a money huh. There are excess deposits available on the Isle of Man, a mixture of deposits by residents of the Isle of Man and moneys which are administered by professional companies on the Island, such as trust companies etc. So 295 banks are here to tap into that source of excess funding precisely so that they can generally upstream that to other parts of their group where that liquidity will become useful to offset against loans that are being made elsewhere in the group. That does not describe the operating model of every bank on the Island, but it would certainly describe the operating model of the majority of them. From the banks' perspective, that works well and that, fundamentally, is why many banks operate from 300 this Island. To the individual banks themselves, that model works well, but it is understood that what it does give you is what is known as a concentration risk, where you have got this exposure to one borrower, if you like, which happens to be your sister bank or your parent bank in another jurisdiction. But if you look at the Opposite to that model, one of where banks are, again, taking client moneys and lending it out in different
directions, that is not a risk - free model, either.
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305 Just going from memory, but I think that was noted in the IMF's report, which said that, yes, whilst the Isle of Man's banking system does have this issue about concentration of risk and about where banks lend, or lend deposits, to their parents, that actually removes many other types of risks of banks making had loans and doing other things, again with client deposits, which could also lead to unhappy outcomes. So I do not think we can characterise upstreaming as a bad model, because not only does it remove local banks from a variety 310 of other rash decisions they could make with clients' money hut, generally speaking, the quality of the banks that they do upstream that money to is generally high. So accepting, of course, we had the Kaupthing failure, and elsewhere there have been countless discussions as to how that bank found itself in that position, generally speaking, one of the roles of the ESC as the regulator, I guess, is to look at the quality of the banks who are on the Island and collecting deposits, and 315 also the quality of the banks to which the banks pass their cash, and they can set direction and influence what Isle of Man banks do with that cash if they need to so do. So it is a very delicate balance between trying to make sure that appropriate controls are there, such that the risk of upstreaming is felt to he an acceptable risk, and at the same time whether the Isle of Man, in fact, wants to have a banking industry which is one which is above and beyond that which is needed simply to 320 serve the Island's domestic banking requirements. It really is a difficult question to answer.
Q1204. Mr Crowe: There is no ideal model?
Mr Coyle: Two responses to that. There is no one model on the market, anyway, but the dominant model 325 is one of upstreaming. As a personal view, and I think the view of the banks generally, the principle of upstreaming is fine, provided there is adequate control over the quality of both the bank taking those deposits and the bank to which those deposits are going.
Mr Crowe: Thank you. That is all, Mr Chairman. 330 Q1205. The Chairman: Following on from that last point, there is quite a vibrant debate going on about upstreaming funds and whether they should be treated as retail or wholesale deposits. Do you have a view on that?
335 Mr Coyle: Yes I do. That decision is actually, in a sense, being made for the Island, because the ESA have formed the view that, in certain circumstances, any deposits which come from, say, an offshore subsidiary or sister company of a UK bank to the extent that those funds are placed at less than 92 days' notice, will effectively he regarded as wholesale deposits and therefore of no greater benefit to the related bank in the UK, than as if it had been put with any other bank, so there is another dynamic at the moment in play, which is the 340 FSA's reaction to all that has happened affecting banks in its jurisdiction, as well as its relationship with banks in the oftshores.
Q1206. The Chairman: That certainly is where the FSA is at. What is your view on it?
345 Mr Coyle: I think it is unfair in the sense that, again, the reality is that much of the liquidity which is gathered in the offshore islands is retail in nature. For many years it has been recognised as retail in nature in the hands of the upstreamed hank in the UK, and I think the FSA are being particularly harsh in this revised treatment, which is to say that the UK bank must regard it as being able to be completely withdrawn at a moment's notice, which is to say that, potentially it would, which is further to say that the behaviour of every 350 single underlying depositor would be identical, which is not the case.
Q1207. Mr Rawcliffe: I have two questions on this question of upstreaming. The first is, if the supervisor were to require you, as the banks in the Isle of Man, to restrict the amount that you upstream and deposit it with other banks, whether here or in England, there is a certain amount of 355 mutuality as the same amount of money will he going and they will be going to the same institutions, that if one of these institutions were to get into difficulties, this would be that much reduced. What is your opinion on that?
Mr Coyle: I think, factually, that is correct. There are issues for banks. All banks have limits as to how 360 much they wish to see exposed to other banks. So, for example — I will give you a personal example — in my
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bank we will have limits as to how much we want to see against Barclays Bank or other banks around the world and this is For our entire global group, we have a limit to say that with bank .r, my particular banking group is happy to have £500 million worth of exposure to that name. There are many things that groups want to do with those other banks, and if the banks in the Isle of Man 365 all of a sudden start to eat up those entire limits with other banks, that causes wider groups a problem, so it is, on the one hand, what you are proposing is simple and elegant and, on another hand, it actually has behind- the-scenes complications For banking.
Q1208. Mr Rawcliffe: Although there may be some provision for set off, if you are doing mutual 370 deposits?
Mr Coyle: Potentially, but there are still... one might say you know more about what is happening in your own banking group than you do on what is happening in other banks so, as a custodian of my depositors' funds, I am likely to feel more confident about upstreaming to a bank which I am well sighted as to the 375 current issues outstanding — the dynamics of what is going on in that bank right now — whereas, if I was to make a decision to place 50% of funds at hank B or hank C, l am probably relying on public information that might be I0 months out of date: I do not have any particular insight to what is happening inside that bank.
Q1209. Mr Rawcliffe: It would not necessarily be 50%, would it? It might he 10% and 10% there, small 380 amounts.
Mr Coyle: It might well be, but I would not necessarily say that even 10% from many of the banks is necessarily a small amount. It is still a material amount and it would still be problematic if that bank went into di fficulty. 385 Q1210. Mr Rawcliffe: Can I ask a second question, which is one of quality. You are happy with the quality of your parent, sister companies. There may he another bank, parallel with you, of equal standing, which is happy with the quality of its parent. So we are, in a sense, in a sort of game, almost, of judging the quality of other people's banks, where you, because you have some knowledge, believe, without being 390 necessarily any better informed than the other people's bank, that your bank is a safer place for your funds to go. If you are the supervisor, you have this problem, of course, writ large, with many banks, and it stand to reality, if you were to spread it about, which I believe Jim Noakes attempted to do at one time, in the event of a difficulty, you have got a first line of defence if you spread it about. I am not saying it is not... (Inaudible —
395 Mr Coyle: 1 am not sure as to your question, however.
Mr Rawcliffe: Well, I am wanting your opinion as to whether that was a reasonable point for the supervisor to take, the regulator to take, to insist that, in the absence of... He has no knowledge... He has not got your knowledge about your bank, any more than the next hank's knowledge about its bank. 400 Mr Coyle: Well, I think that the —
Mr Rawcliffe: What is the objection — you, in a sense, touched on it in the first question — to being happy with the regulator asking that a certain amount should be placed with other institutions of a similar standing? 405 Mr Coyle: A couple of —
Mr Rawcliffe: Your objection to it so far has been that you do not know about the other banks — and I do understand about the banking limit because I have been a director of a bank. 410 Mr Coyle:1 would make just a couple of comments there. I think, firstly, the regulator is in a very powerful position to obtain information about any given bank's related bank, either from that hank... They can procure all of the information that the Island bank has, as to its counter party, and often they deal with the regulator of that other hank and, indeed, meetings can be held 415 between officers of the receiving bank with the Isle of Man FSC. So they are, actually, in... to your point about, am I in a better position to take a view as to the bank which I want to put liquidity towards than the
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FSC, I am not so sure that that is the case. I think the FSC can get quite close to that, and I think they do get quite close to that. I think our case is where they do set directions, to different extents. They already do direct banks to limit 420 the amount of upstreaming that they are prepared to see being placed to elsewhere within that banking group. So I think that is my comment as to the ESC and their view. There is one other aspect to placing monies around with other banks, which is a question. This is not just now about the return of the cash; it is about the return on the cash, which is that when you are placing cash with other hanks, you will receive differing rates of reward for that, depending on how that bank's own 425 liquidity needs are, and that may interfere with the economics of your overall pricing model. So, for example, if to attract deposits from a client, you are having to pay a rate of x , if by spreading your cash around in lower sums into different banking names, you may or may not be able to achieve enough return on the placement to continue to attract. 430 Q121.I. Rawcliffe: Unless you co-operate in a manner as between the different... !Inaudible/
Mr Coyle: I think that would remain to be seen. I think, in banking, the price for cash is the price for cash. I do not think it is a matter of co-operating. I think banks are more hard nosed. 435 Q1212. The Chairman: Could I pick up on that point about the Depositors' Compensation Scheme. It is a one-size-fits-all scheme, whereas the implications of a small bank failure versus a large bank failure are very different. Do you believe that a one-size-fits-all scheme is fit for purpose?
Mr Coyle: As the President of the Bankers' Association, I would have to say that, amongst the banks, 440 there are divided views as to, not so much the level of protection afforded to clients, I think there is a consensus around £50,000 per person and it is broadly comparable with what exists in the UK and Europe, certainly today. even though that is a moving sort of landscape. So, is it fit for purpose on the client's side? Yes. Is it fit for purpose on the funding side is a matter of great debate between the banks, where you have the smaller players, or those banks which do not really attract 445 personal deposits, but if you have any exposure to personal deposits you are paying into the scheme as if your entire business was personal deposits. Obviously, the impact on a smaller bank is, in percentage terms for funding etc, more profound, than of a large bank. So there are divergent views, where the small players feel they are disproportionately affected. On the other hand, you have the large players who would see a move towards increasing their liabilities as almost 450 being a penalty for success. So the more successful you are, the more you find yourself with a contingent risk towards the Scheme. I do not think those tensions will ever be fully reconciled and, as with most things, it is about finding a consensus point that all the banks can live with, which is not unduly different and uncompetitive relative to other places those banks could manage their business from.
455 The Chairman: Mr Houghton.
Q1213. Mr Houghton: Yes, thank you. Just a few small details, Mr Coyle, if I may. How does the Bankers' Association operate, as far as the negotiations with the Treasury on the DCS? Do you negotiate on behalf of all banks, or are the negotiations and consultations done with each bank 460 separately?
Mr Coyle: We collaborate as an industry, so how the Isle of Man Bankers' Association is formed is we have the general membership comprising all banks in the Island. We then have an executive council, and within that executive council, which comprises [0 of the main players in the banking industry that represent 465 the wider membership, we have a number of subcommittees. One of our subcommittees is the Depositors' Compensation Scheme, and therefore we have a sub-group with whom Treasury engage over this particular matter.
Q1214. Mr Houghton: And whatever is agreed there then carries out across all the banks, obviously on a
470 percentage-wise or on behalf of all? Because I know —
Mr Coyle: Certainly, the negotiations would start... It comes hack to the banking industry in general at a
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wider meeting. The sub-group would come hack and say the proposals are this. Whether the Council support them to the members or do not... and, generally speaking, assuming that the proposals are not just 475 unacceptable, they would then just be... Government would just enact them in due course.
Q1215. Mr Houghton: Without your agreement? Without the agreement—
Mr Coyle: Well, Government... The DCS.,, Those are regulations and only the Government can put them 480 in. I guess it would be quite unusual for them to reach Tynwald and ask to be approved if the banks were actually opposed to a point. We have never had that situation but, at the end of the day, yes, the banks would be consulted, as would other stakeholders, in designing the DCS, but I do not think it is a case of saying that what the banks want goes, in any way. I think Government must set the rules by which the banks must 485 conform.
Q1216. Mr Houghton: And the banks must conform once they set the rules?
Mr Coyle: Correct. 490 Mr Parrish: If they wish to continue doing business on the Isle of Man.
Mr Coyle: Yes.
495 Mr Parrish: I think it is important to go back to what the President said at the start of it: we are, in effect, a trade association. We can only represent and collect the views of our members and communicate that as best we can, as these are the views of the banking profession. Each bank then has its own right of... not right of veto over what we say, but over whether... It obviously has to abide by the regulations when they are actually put in place, but it has, obviously, the 500 option to vote with its feet.
Q1217. Mr Houghton: But surely, to protect the banks' interests, you must have some robust negotiators on those particular subcommittees. 505 Mr Coyle: Yes.
Mr Parrish: Yes, and we have got the heads of most of the large banks. Well, we have got representatives from all... from the small, medium and larger banks on the Island, and hopefully they are people with influence within their organisations. But we cannot, as an organisation... We do not have a remit to hind the 510 banks in any way whatsoever. That is important to stress that point.
Q1218. Mr Houghton: Did you sit on that sub-group, Mr Coyle?
Mr Coyle: No. Because I am the President... As the President... We have five sub-groups and, to share 515 the burden, our members of the executive council lead the sub-groups and then I would be fed in with the happenings.
Q1219. Mr Houghton: Who sat on the sub-group?
520 Mr Coyle: 'the sub-group for the latest iteration of DCS — and I suppose I should maybe make this more clear. These sub-groups, this is the way that we operate now. We have not necessarily always operated in this way, but certainly during my period of presidency, we have had a mechanism which says there is too much on the radar for one person to do everything, given that we all actually have a clay job, on top of an industry role. So there is a sub-group which is led by a council member and it so happens that the current sub-group lead 525 and council member is Mr Nigel Gautrey, who is of Duncan Lawrie Private Bank.
Q1220. Mr Houghton: And is that one person on that sub-group? Flow many are in the sub-group?
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Mr Coyle: There would be a variety of input from various other member banks. 1 do not have the detail in 530 front of me, but I think there would be four other banks involved generally in discussions around the bankers' view on the DCS.
Q1221. Mr Houghton: And do they discuss with all the other members of the Association as to how their meetings are going? 535 Mr Parrish: We have a membership meeting once every two months, as a very minimum, and a council meeting in the other alternating month. So there is regular...
Q1222. Mr Houghton: And these are all reported back, these matters? 540 Mr Coyle: It is a standing agenda item.
Mr Parrish: Going back to 2008, because of the issues in the DCS, the then President, Mike Hennessy, took responsibility in terms of that, so it was actually very much at the forefront of the council. It was not a 545 subcommittee; it was actually looked after by the President, Mr Mike Hennessy.
Q1223. Mr Houghton: I have just got a couple more, if I may, Mr Chairman, because I just want to see if... There are a number of vagaries that I just cannot understand from the background paperwork that we have got, and so on, and I would be grateful just to get a few more points, if I could, across. 550 What I am trying to find out is, from 2008 and the number of times the Depositors' Compensation Scheme has been amended, have they been properly consulted upon, do you believe, with the Association, and have you been happy with the consultation?
Mr Coyle: That is quite easy to answer. There were two revisions in 2008. There was the one on 9th 555 October and then 23rd October.
Q1224. Mr Houghton: What about the one on 9th October, the one that arrived from nowhere, presented before Tynwald and was supposed to be disassociated with the KSF circumstance. What were your feelings about that? Were you around at that time, Mr Coyle'? 560 Mr Coyle: Yes, I was. I was the Vice President of the Bankers' Association at that time.
Q1225. Mr Houghton: What were your concerns and your colleagues' organisations' concerns?
565 Mr Coyle: We were... Against the backdrop where the moon was practically falling out of the sky — and we could not have characterised it better — there was a meeting at very short notice to discuss what was going before Tynwald the next day. The meeting was more informational and consultative, that this is happening. So there it was.
570 Q1226. Mr Houghton: So it was forced upon you, in that regard? This is a .fitit accompli, as far as the Treasury's attitude to you?
Mr Parrish: No, I think it would he unfair to say that. Certainly, Mike Hennessy was involved in a number of meetings right up to the 2008 revision being done, and then we had the meeting in your offices on 575 the Sunday, if I am recalling the meetings correctly.
Mr Coyle: Yes, but I think the reality is that, in terms of the devil being in the detail, the Scheme only saw the light of day at that meeting... We had a meeting at the FSC's offices, as I recall, I think on the 8th, and that was also, I think, the day that Kaupthing was going into its final throes. 580 Q1227, Mr Houghton: Members of Tynwald were told that that Scheme was not connected in any way, shape or form, even though Tynwald was recalled — as you will recall — had no relevance whatsoever to the issue to do with Kaupthing. Was that your understanding of it?
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585 Mr Coyle: That was our understanding of it and we were given a similar assurance at that time.
The Chairman: Thank you. Mr Coyle, Mr Parrish, thank you very much for your evidence today. You are free to stand down. 590
Mr Simpson was called at 3.54 pm
EVIDENCE OF MR M SIMPSON 595 Q1228. The Chairman: Mr Simpson, if you would like to come forward. Thank you very much for coming in today. Do you have anything to say and if you would not mind introducing yourself for the purposes of the tape. If you have an opening statement, we are ready to hear it.
600 Mr Simpson: Okay, my name is Michael Simpson and t am a partner in PriceWaterhouseCoopers and I am a joint liquidator of Kaupthing, Singer and Friedlander (Isle of Man) Ltd. I do not have any statement to make to the Committee, but I will be very pleased to assist you.
Q1229. The Chairman: To what extent were you consulted about financial support that could be 605 allocated from Treasury to support a sale of assets or a transfer of deposits from Kaupthing Singer and Friedlander to a new model?
Mr Simpson: Well, that was an internal matter for Treasury and I was not consulted at all. I know that there were some potential purchasers who were looking for financial support from Treasury but, again, that 610 was a matter of direct negotiation between them and Treasury, so I was not involved in that.
Q1230. The Chairman: In hindsight, so you think that the initial estimate of the likely repayment, once the DCS was invoked, was too cautious; what is your current estimate of the recovery from the bank?
615 Mr Simpson: No, I do not think we were too cautious. We had to go with the information that we had available at the time and, as we know, that information was limited and, for example, we could not second- guess the recovery from KSF(UK), when they were not coming out with an estimate themselves. We were certainly cautious, as any liquidator would be, because we certainly would not want to create unrealistic expectations amongst the creditors. The creditors were trying to plan their lives and needed an honest 620 assessment, rather than hopeful fantasy.
Q1231. The Chairman: What is your current estimate of the return to be expected now?
Mr Simpson: Our current estimate is a range between 85,3% and 95.7%. We have so far paid out 51.1% 625 and we have announced this morning that we are going to pay a further distribution of 10% during the course of next week, and that is largely on the back of a distribution which we have received this morning from KSRUK).
Q1232. The Chairman: Thank you. 630 In paragraph 3.33 of your memorandum, in the evidence you submitted to us, you refer to a puzzling remark by the Attorney General at the meeting on 30th January, that politicians wanted the relationship between you and Alix and the Treasury to start again -. the quote 'start again'. Can you explain what was meant by that and where this request came from?
635 Mr Simpson: Well, I guess if you want to know what the Attorney General meant, you should probably ask the Attorney General. My interpretation of it was that 1 thought they had been told by their advisers that, potentially, we were withholding information, which was completely not the case. The only information which we held hack was information which we had to hold back because it was legally privileged and it would have been detrimental to creditors to do so. 640 Government's advisers were clearly frustrated. Treasury was frustrated because they could not get the
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information they needed. I was frustrated because we wanted it as well, but we could not get the information, primarily From the administrators of KSF(UK), because of the limitations imposed upon them by the overriding objective and the transfer order under which they were operating.
645 Q1233. The Chairman: When did it become apparent to you that that transfer order existed and that you were so hampered, in terms of the evidence that you sought, because of the British government's directive that they had to deal first with 1MG before they dealt with anybody else?
Mr Simpson: We were aware of the existence of the transfer order very early on because the mechanism 650 was operated very early on by them, There were two stages to it: first was the transfer of the retail deposits From KSF(UK) into a company which is owned by the Bank of England; and then there was a second transfer from that company into 1MG. That all happened quite quickly, so we knew by the existence of the transfer order. It was some weeks before we were aware of the full implications of the transfer order and, indeed, there 655 were some aspects of what was going on which we were not aware of, for several months later, until the judgment in the Bank of England case.
Q1234, The Chairman: This relates to what? This is about funds in flight„, what issues are we talking about there, sorry? 660 Mr Simpson: In respect of the Bank of England case, that was a situation where it appeared that the Bank of England had been in KSF(UK) since about 3rd October —
Q1235. The Chairman: This is the first supervisory notice'? 665 Mr Simpson: Yes. They had set up a trust account in order to ensure that people who put money into the hank in the UK were not prejudiced, but they did not include the isle of Man bank in that.
Q1236. The Chairman: Are you happy now that there is a good working relationship between you and 670 the Liquidator in the United Kingdom?
Mr Simpson: Oh, certainly, yes. The communication is frequent, very constructive, and I would not criticise them for their level of co-operation or their attitude towards us.
675 Q1237. The Chairman; So, in terms of the funds that were with KSF(UK), what proportion of that do you expect to see returned?
Mr Simpson: Right, well, the total amount which was with KSF (UK) was about £590 million in total. This is talking very round numbers. Deposits were roughly £350 million. There was an amount due under the 680 Repo agreement of £185 million. There were certificates of deposit, which were invested, through the UK bank, of £53 million and there were net derivative positions of around £2 million. That headline figure was reduced by amounts which Isle of Man owed to UK under what we call the subparticipation loans. This was where, effectively, the Isle of Man bank had loans, which were typically large loans and so some of the risk was laid off with the UK. The total with the subparticipation was about 685 £143 million and that was netted off. That sounds like a had thing: it was actually a very good thing, because we were able to reduce our hanks' liabilities by I00% of £143 million, so any assets were shared out among fewer creditors hut, on the asset side, we gave up a smaller percentage of £143 million, on the assumption that KSF (UK) are not going to pay out 100%. So that was a big win for us. That gets its down to £447 million. Of that amount we have received £53 million in respect of the 690 certificates of deposit. We have received £122 million from the sale of collateral shares under the Repo agreement, because when the Repo agreement was cancelled, we grabbed the security. We have also received, as of today, 53% of E205 million, which is the portion of our residual claim, which has been agreed by them so far. So far, including what we have received today, we have received about £284 million from KSF (UK). 695 They are forecasting a recovery of between 75% and 84%, which means, on the assumption that our claim figures are agreed where we think they will be agreed, that we can reasonably expect a further £55 million to
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E77 million from them in the fullness of time, which would take total recoveries from the UK to between about E340 and £360
700 Q1238. The Chairman: Thank you very much, it is good to have that laid out in that form. What progress is being made with regard to the parent company in Iceland, in regard to the parental guarantee and any negotiations that are happening now? I am well aware that this is subject to court action, but if you could give us what you can tell us, I would be very grateful.
705 Mr Simpson: Yes. The KHF winding-up committee are denying liability under the parental guarantee, on the basis that the chief executive officer of the hank in Iceland did not have the authority to sign it. To me, that is no better than trying to claim that it does not count because he had his fingers crossed behind his back. It is outrageous. Creditors are understandably disgusted and we are pursuing this claim vigorously. We are not in negotiation with KHF any more, because it is in court. We have a court hearing, which is provisionally 710 scheduled for late February, and 1 would expect to receive a judgment within a couple of months of that date. However, I would expect that, whatever the result, it is going to he appealed, because I expect if we lose, we will appeal, and it' they lose, I am pretty sure they will appeal. That would result in the case going to the Supreme Court of Iceland, which could easily take another year because they are pretty busy at the moment,
715 Q 1239. The Chairman: Obviously, you are talking about between 4.3p and 14p, for example, in terms of the shortfall. In absolute terms, would that mean it may have to he picked up by the Icelandic parent, in terms of its total liability to you, if they lose this case?
Mr Simpson: It is very difficult to tell. The resolution committee has not published an estimated outcome 720 and I do not think they will do for some time, for two main reasons. One, they are having problems valuing their assets; but also they are having problems quantifying the liabilities, because of claims like ours, which are in dispute and so on — and there are some other very large claims out there. So as for the effect, as for what we will ultimately get from KHF, it is very difficult to tell. Their debt is trading at about 25% of face value. There is a secondary market which has developed. Whether that is a 725 reliable estimate of what we could ultimately get, 1 do not know.
Q1240. The Chairman: So even winning the case is not going to mean 100% return on the funds.
Mr Simpson: No, it is not. There are two main legal issues in the case. One is priority and the other one is 730 validity. On the priority issue, we put in a claim under section 112 of the Iceland Bankruptcy Code, claiming a priority claim on the basis that it is backed by retail deposits. However, there has been a very recent case in Iceland which goes directly against us on that point, so we have had to concede on the priority issue, but we believe we have got a very strong case on validity and so we are pursuing that vigorously and we are in court 735 in February. In our estimations, our estimated outcome statement, we have not accounted for anything from Iceland at all. So any effect of a distribution by Iceland will be a positive effect, but we do not know what form that would take. We know that KW' own Anion Bank, which was called New Kaupthing. It was the entity in Iceland where they put the local business in to keep that going. It is possible that they will come up with some 740 sort of an arrangement whereby they will issue shares, either in KW' or in Anion, to creditors, or shares plus cash, some sort of a mixture. They are trying to come up with ideas as to how to progress matters, but we do not know what form it will take at the moment.
Q1241. The Chairman: Actually, having accounted for it, if we just set that to one side, the funds that 745 you have taken account of, how do you anticipate the timetable working out for the repayment of those funds to depositors?
Mr Simpson: Well, firstly, we are dealing with uncertain future events, so they are very much estimates. We are dependent on two primary factors. One is the speed with which our own loan book is realised and 750 the other one is the speed with which the administrators of KSF(UK) can realise their loan book. Our loan book is being realised in accordance with what we would expect-- actually slightly better than what we would expect — and, on that basis, I would expect that we would be most of the way there by the end of 2013.
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Looking at the loan book profile, once you get into quarter 2 of 2011, there is a large volume of loans due for repayment throughout 2011-12. So I think, by the time we get to 2013, we will be most of the way there. 755 I believe that the loan pattern in the UK is broadly similar.
Q1242. The Chairman: So you are talking about 80% of the 85% will be in by that point?
Mr Simpson: Yes, I would expect that, I think, yes. 760 Q1243, The Chairman: Okay. Moving back to the Scheme of Arrangement, to what extent were you involved in publicising the Scheme of Arrangement and what awareness did you have, early on, in terms of how effective or adequate the communication was between the promoters of the Scheme of Arrangement and the depositors in the early clays? 765 Mr Simpson: Well, as you see from the court documents, I was neutral in regard to the Scheme until mid- to-late March in 2009, when potential benefits from the Scheme became apparent. I am aware that there was a great deal of discussion and negotiation between Treasury's advisers and various creditors and creditor groups, but I was not a party to those negotiations. I know a great many 770 depositors were keen for the Scheme of Arrangement option to be explored in the run-up to each of the court hearings. I was inundated with e-mails and I believe the court was inundated with c-mails as well, begging them to delay the passing of the winding-up order in order to enable a scheme to he explored. So, clearly, there was a great deal of support for the concept of the Scheme. 775 Q1244. The Chairman: And that was up to March?
Mr Simpson: Yes.
Q t245. The Chairman: And that was the point where you, in effect, had to make a determination as to 780 the benefits and whether it was going to be advantageous.
Mr Simpson: Yes.
Q1246. The Chairman: That was obviously made around assumptions that were... on information that 785 was available at the time.
Mr Simpson: Y es.
Q1247. The Chairman: Do you feel, in hindsight, that still stacks up, the assumptions that were made? 790 Mr Simpson: Well, we had to... we could only use the information that was available at the time. If we had had additional information, I guess the Scheme proposition may well have been different.
Q1248. The Chairman: On the information you had, you are happy that you made the right call at the 795 time — with the benefit of hindsight, on the information you had then. (Mr Simpson: Yes.) And also, then, is it fair to say that, as the recovery rate since has risen, the perceived benefits of it have fallen?
Mr Simpson: I think that is right. Clearly, we are now looking at potential recovery levels which are significantly ahead of the levels we were contemplating back in March/April/May 2009. So if you compare 800 the Scheme to our current beliefs, then yes, it is certainly different.
Q1249. The Chairman: In terms of your involvement, in terms of explaining and gaining support, you were entirely neutral throughout that process. That is right?
805 Mr Simpson: Yes, we were active. We conducted a series of roadshows — there was one in London and two in the Isle of Man — where we explained the Scheme to creditors and also produced explanatory documents and so on. We had a series of... We had nine conference calls with the Depositors' Action Group, where they were collating and asking questions, not just about the Scheme but about the whole operation of
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the liquidation. 810 So there was a lot of interaction there, as well as individual queries from creditors. But our aim was not to try and gain support for the Scheme; it was to make sure that creditors understood the Scheme so that they could make a decision which was as well informed as possible, given the circumstances.
Q1250. The Chairman: And you were then in that informing process, sharing information, based on the 815 assumptions that you had, in terms of the likely advantages and disadvantages. But you are content that you would still be seen to be neutral on the whole Scheme of Arrangement, or would it he fair to say that you might have been perceived to have been promoting it at the time?
Mr Simpson: I guess when you look at my statement, my affidavit of 2nd April 2009, I listed what I 820 perceived to be the benefits of the Scheme, which were certainty as to the initial distributions, quicker payments generally, the subordination of Treasury's claim and a benefit to creditors if recoveries were less than 60%, as it was at the time, because Treasury would not be able to recover their top-up payments. On that basis, I think my words were, I recommended that the creditors should be in favour of the Scheme, based on those perceived benefits. 825 01251. The Chairman: In 2008 you were quite clear, at that time, that you were not going to get all the information you needed quickly. Is it fair to say that that was quite a big barrier to the Scheme of Arrangement progressing, that that lack of information would have been a large, if not insurmountable, harrier to the undertaking of the Scheme of Arrangement? 830 Mr Simpson: Certainly, more information would have been better, but I do not think it made the Scheme imviable. When you are dealing with insolvent companies regularly, there is frequent, significant uncertainty over future asset realisations. One of the perceived advantages of the Scheme was it provided an element of certainty in respect of the early payments out of the Scheme and also provided a form of safety net, if 835 recoveries did not meet the 60% initially and then the 70% level.
Q1252. The Chairman: So you felt that, by the time of the court case and the time you made your affidavit on 2nd April, at that point there were sufficient details available for depositors and others to make a clear and informed judgement on the Scheme of Arrangement? 840 Mr Simpson: I think so, and I think that was clear in Deemster Corlett's judgment on 9th April 2009, where he reviewed the information which was presented in court and indicated that he was not prepared to disregard the perceived advantages. I think people who were present in court would agree that he was very searching in his questions. 845 Q 1253. The Chairman: The Depositors' Action Group feels strongly that the primary motivation to delay invoking the Depositors' Compensation Scheme and, therefore, pursuing other options which brought time to develop a potential funding solution was to protect the reputation of the Island, rather than seeking to prioritise and maximise support to affected depositors. Was this part of the objectives of setting up the 850 Scheme of Arrangements, as far as you are aware?
Mr Simpson: Not as far as I am aware. In my discussions with Treasury, they never raised their funding issues with me.
855 Q1254. The Chairman: Okay. In terms of the sale of assets, and the wind-down that you have outlined, would the sale of assets have been conducted in a similar way, regardless of whether the Scheme of Arrangement or DCS was chosen as the wind-down option earlier?
Mr Simpson: I believe there would he no difference in the way in which the assets have been handled. 860 The obligation of a liquidator would have been the same as a scheme administrator to attempt to maximise the return for creditors. I know there was a perception that liquidation equals fire sale, but that was not the case.
Q1235. The Chairman: It is an important point. Thank you for clarifying that. Is it correct that interest on the accounts continued to accrue between 8th October and the final winding-up
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865 order and, if so, are you in a position to tell us at what rate it was? Was it just a roll-over rate?
Mr Simpson: No, when the winding up order is passed, its operation is backdated to the date the petition was lodged. So, although the winding up order was passed some months later, its effects took place as of 9th October 2008. 870 Q1256. The Chairman: So there is no interest payable after the —
Mr Simpson: Not unless we get in a very fortunate position where there is sufficient money to pay interest, which would require everybody to have received 100% recovery first. 875 Q1257. The Chairman: Is it your opinion that Treasury would have come out — the Isle of Man Government Treasury would have come out financially better off from a Scheme of Arrangement than a Depositors' Compensation Scheme wind down?
880 Mr Simpson: 1 have to say I do not know.
Q1258. The Chairman: Not something you have considered?
Mr Simpson: It is not something I am aware of. 1 know there were discussions, as you have alluded to in 885 the earlier evidence, discussions between Treasury and the banks. t was not privy to the discussions as to how the financial burden of a Scheme or the Depositors' Compensation Scheme would be borne.
Q1259. The Chairman: Do you think local depositors were treated any different from depositors elsewhere in the world, with regard to their treatment at any point? 890 Mr Simpson: No, not at all. It is the obligation of a liquidator to treat all creditors equally and fairly. If we had either sought to treat them differently, or had somehow treated them differently, 1 am sure the court would not have allowed it. 895 Q1260. The Chairman: One of the significant issues that was raised with regard to communication and the reliance that was placed on internet communication throughout the whole period, whilst I do not think there is any dispute that you, as Liquidator Provisional, very much did engage with depositors via that forum, is there an argument to be made that perhaps other people who did not have internet access were somehow disenfranchised from the process and the education that was going on over that period? 900 Mr Simpson: Well, a very large proportion of the creditors of the company are internet based. We had e- mail details for a great number of them — for example, the Edge depositors, which is an internet product. But communication with creditors is always an issue, particularly when you are dealing with creditors who are based all around the world. So it is never easy. 905 Q1261. The Chairman: But did you feel that you had communicated enough formally in writing, as opposed to just relying on the internet?
Mr Simpson: I believe so. There were statutory notices and so on which had to he sent out and, by law, 910 they had to be sent out in hard copy. We could not just send things by e-mail or post them on the website, but e-mail and the website have certainly been a very useful means of trying to make sure that we communicate with everybody.
Q1262. The Chairman: There were also concerns that it was quite a tight timescale to reply in, especially 915 for people who lived in some of the far-flung corners of the world. 1 appreciate what you say about statutory timescales. Do you think that the statutory timescales are adequate?
Mr Simpson: We are working within a legislative framework which is very 01(1: the 193 l Companies Act, 920 the 1934 Winding up Rules and the 1892 Bankruptcy Code. None of those pieces of legislation were designed
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with modern multi-national, multi-currency entities in mind, and I am sure that they did not envisage the sort of practical issues which we have had to deal with, and other liquidators have had to deal with, where we are dealing with assets and creditors spread ali around the world. I did go to court on the... I got an order on 15th May 2009 to enable me to accept electronic copies of 925 documents for voting purposes, which helped speed the process up so that people did not have to post documents hack to me. They could download from the internet, fill them in, scan them and send them back to me, so we did what we could to enable people to vote within the tirneframes.
Q1263. The Chairman: Are there any key lessons you think that we, as legislators, should be learning in 930 terms of insolvency legislation on the Isle of Man and where you feel it has let you down, I suppose, in order to do your duty to depositors and areas where you think we might improve?
Mr Simpson: Well, I think there is a consultative operation going on at the moment to review insolvency legislation and I am sure there will be some issues flagged as part of that process. In terms of insolvency law, 935 I think everybody accepts that our legislation is very old and needs updating and that would certainly he helpful, 1 think, to insolvency practitioners and to creditors.
Q1264. The Chairman: Are there any specific examples you could raise today that are in need of change? 940 Mr Simpson: 1 do not think there is any specific — well, you mentioned the interest situation a few minutes ago, Mr Chairman. The rules for the payment of interest are quite archaic. Under section 23 of the 1893 Bankruptcy Code, interest which has not been paid up to the date of the petition, up to 9th October 2008, can be paid up to a rate of 5% regardless of the actual coupon rate on the interest and there are other rules around 945 that are incorporated in the Bankruptcy Code and the winding up rules, which are quite illogical, 1 think, and difficult for people to understand. I think creditors would certainly have welcomed more clarity as regards to the rules hut, certainly, 1 think there will be recommendations coming out from the consultative body in the New Year.
950 Q1265. The Chairman: When we were talking about interest, we talked about their rights would only kick in if the return was greater than 100p in the pound.
Mr Simpson: Yes.
955 Q1266. The Chairman: Is that the next level of creditor, in terms of where the money goes after the deposits have been paid back in terms of capital in full? What next?
Mr Simpson: Under section 23 of the 1892 Bankruptcy Code, creditors who were due interest were able to claim, as part of their proof of debt, interest rates up to 5%. if we get to a point where we can repay 100% of 960 people's claims, those creditors who were not clue interest up to 9th October can claim interest at a rate of up to 4%, and then, if there is still money left over, all creditors can claim interest at a rate of up to 4% up to the date of the final dividend. At that point, if there is still any money left, that goes to the shareholders.
QI267. The Chairman: Thank you very much. 965 One of the aspects that we have been discussing in previous evidence and I am glad you were here to listen to that — was regarding the Depositors' Compensation Scheme and pre-funding. Is that something, from a liquidator's point of view, you have a view on?
Mr Simpson: I can certainly see advantages to pre-funding, in terms of the speed with which a scheme 970 could pay out, but there would need to be a lot of pre-funding. I can see, whilst obviously the banks are currently making contributions into the Depositors' Compensation Scheme, those contributions add up to — cannot remember the exact figure — something like around L'10 million a year in total. Given the average size of banks on the Isle of Man, you would need to have many years of payments like that to pre-fund a scheme adequately, so I guess it is a political question as to how Government wants to position its Scheme. 975 Q1268. The Chairman: Another peripheral point. In the judgment on 23rd February 2009, permission
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was given to set up a consultative committee. This committee was never actually formed. Were you party to the reasons why not?
980 up Simpson: Permission was granted to set up a consultative committee to try and ease the process of consultation with creditors, to try and make it easier for us to communicate with a representative body of creditors. Although they would not have been elected by the creditors, they would have been chosen on the basis that they appeared to be representative. That did not happen, probably because things actually moved on very quickly from then on, but also there 985 were some objections. There was some debate amongst creditors as to who should be allowed to sit on the committee and whereas, from a convenience point of view, it would have made sense to have creditors who were based on the island, creditors who were off island were concerned that maybe their views were different and would not be heard.
990 Q1269. The Chairman: Do you think it was perhaps a failing not to do that, inasmuch as, as it turned out, the electoral mathematics of the whole voting procedure is very much dependent on some key players and key groups and that it might have been known, some months earlier, that a vote on the Scheme of Arrangement would not have gone through without the consent ot' those key individuals'?
995 Mr Simpson: Irrespective of that consultative body, there was a large amount of consultation going on at the time.
Q1270. The Chairman: Okay. So you do not think that the failure to set up the committee was a critical failure in terms of the acceptance, ultimately, of the vote? 1000 Mr Simpson: I do not think so. I know you have asked, previously, questions as to why we think that the vote Failed. I think there were probably two prominent reasons. One, there was a body of creditors that thought that, if they voted against the Scheme, Treasury would come back and make a better offer, and I think there were also some creditors who preferred the legislative certainty of a liquidation route, as opposed to a 1005 scheme, almost irrespective of the perceived benefits of the scheme.
Q1271. The Chairman: Okay, what overall lessons are there about the Depositors' Compensation Scheme arrangements, in the light of the KSF experience? Are there any differences to what a DCS should seek to deliver, taking account of continuing economic uncertainty? 1010 Mr Simpson: I think that is a political question, Mr Chairman, for the Government to determine what they want to get from a compensation scheme and what level to pitch it at.
Q1272. The Chairman: Have you received any feedback From depositors about the adequacy of 1015 communication with them? What is the substance of that?
Mr Simpson: Well, I think, as a starting point, creditors are never going to he happy with anything the Liquidator says to them. All they want to hear me say is, 'Here's all your money back right now, with interest.' Given that that is not going to happen, fundamentally they are going to be disappointed and unhappy [020 with anything that I do say to them — understandably. It is all part and parcel of insolvencies. I have had a lot of feedback about communication, some of it good, some of it bad. It is a problem. You need to find the right balance between communication and the cost of communication, which is ultimately borne by the creditors. Whereas some creditors are happy with less frequent communication, some want more. So, particularly when you are dealing with such a large body of creditors, you are never going to get a 1025 consensus.
Q1273. The Chairman: How influential on the eventual outcome for returning depositors' money was the spreading of risk by the directors making... (Inaudible/ to outside parties rather than all within the group, and should this be a pattern for hanks for following in future'? 1030 Mr Simpson: The UK are currently forecasting an outcome of between 75p and 84p in the pound, we are forecasting 85.3p to 95.7p, and the Icelandic bank is not forecasting anything, but we have seen this sort of
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indication of their debt trading at around 25% of face value. It seems pretty clear to me, therefore, that the recoveries in KSF(lsle of Man) are higher as a result of that diversification of assets. The quality of the loan 1035 hook is key, because if you have got a poor-quality loan book then that can erode, or even reverse, the differential. But thinking about the pattern for banks to follow, I think it is important to remember... 1 know when Mr Coyle was giving evidence he said there is no set standard pattern in the banking world, but the upstreaming model is not just a Manx banking model, it is not even an offshore banking model, it is a global banking 1040 model and I think it is very difficult for the Island or for any other similar jurisdiction to buck that trend. Yes, that does create risks for the Island and we do need to be... It creates problems for our regulators, I am sure, and they need to be happy with the regulation of the parent bank,
Q1274. The Chairman: Part of the mess that has had to be unravelled is the level of upstream between 1045 London and Iceland, as well as the Isle of Man and London (Mr Simpson: Indeed.) and all the circuitry stuff that goes with that.
Mr Simpson: Quite right. Yes, you are right, because London had exposure to Iceland as well, yes.
1050 The Chairman: Mr Houghton.
Q1275. Mr Houghton: Just a couple of questions, if I may. I thank you, Mr Simpson, for some very comprehensive answers that you have given thus far. I thank you for that. 1055 These are just a few ideas on timescale, and I appreciate if your answers are vague on this, but timescales for completion of your work: how much longer? You are two years into it now. It takes an awful long time, you have got a lot to do yet, that is quite understood. Any idea?
Mr Simpson: Well, I go back to the timing of the realisation of the loan book. I think by the end of 2013, 1060 we will be very largely there and, certainly, I believe that the vast hulk of the work will be done. At that point, if things have gone well, I would expect the UK to be in a similar position. We would then be waiting upon any residual loans locally — there are one or two longer dated ones any residual assets in the UK and also the resolution of the situation in Iceland. It could be they issue shares or something like that, which could create an even longer timescale. 1065 I would expect the hulk of the work to have been done and the bulk of the money to be returned to creditors, I think, by the end of 2013.
Q1276. Mr Houghton: Finally, if I can ask about the realisation of the loan book, as you say: the loan book and the value of it, of course, and the changing values and the patterns of those values... Would you be 1070 looking to sell those off or wait and realise the returns to the last, the longest deposit?
Mr Simpson: We have looked at selling the loan hook. We conducted an exercise fairly early on, because there was some interest in buying the loan book. In that initial exercise the highest bid was, I think, about getting on for 70% of the face value of the hook. That would have resulted in a write-off of E146 million 1075 worth of value.
Q1277. Mr Houghton: Of good asset value?
Mr Simpson: Yes. So the decision we took, at the time, was the best value for creditors would he obtained 1080 by continuing to run the loan hook, on the basis that we thought the outcome for the loan book was going to be better than 70%.
Q1278. Mr Houghton: How many staff behind the scenes are operating, are administering that?
1085 Mr Simpson: We have a team, We retained a number of the Bank staff. We have got three Bank staff working on administering the loan book under a single manager from my team. There were about 180 loans initially. We are now down to about 90.
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Q 1279. Mr Houghton: With a period span of what — five, I 0 years? 1090 Mr Simpson: Most of the loans will be repaid in 2011-12.
Q1280. Mr Houghton: As early as that?
1095 Mr Simpson: Yes. There are a smaller number due in 2013, one in 2014, and there were a couple of others which were longer dated, which we were... they were set-off issues.
Mr Houghton: Thank you. Thank you, Chairman. 1100 The Chairman: Mr Crowe.
Q1281. Mr Crowe: Thank you, Chairman. Just on the voting on the Scheme of Arrangement, you mentioned just about the time of the vote, the depositors, or some of the depositors, felt that Treasury would he making a better offer, and this influenced 1105 the vote. How recent was that to the vote? When did that information becomes an important factor?
Mr Simpson: I became aware of it in the days leading up to the vote.
Q1282, Mr Crowe: So it was fairly imminent before the vote that this — 1110 Mr Simpson: I believe so. Well, I guess it could have been going on for longer, but I was aware of email traffic around that time, in the few clays leading up to the date of the vote.
Mr Crowe: Thank you. 1115 Q1283. The Chairman: You were not aware of any evidence that it was true, that Treasury would he coming back with a better offer?
Mr Simpson: No. 1120 The Chairman: Mr Rawcliffe.
Q1284. Mr Raweliffe: Can I just ask what proportion of the assets was represented by the loan book?
1125 Mr Simpson: The loan book had a face value of £416 million at the time at which t was appointed. Just bear with me for a moment. The total assets, as per the statement of affairs, after knocking down the sub- participations, would he about £1.1 billion.
Mr Rawcliffe: Thank you. 1130 Mr Simpson: And total creditors are about 900 mill ion.
The Chairman: Thank you very much, Mr Simpson. 1135
Dr Downs was called at 4.40 pm
Statement by Dr A Downs 1140 Q1285. The Chairman: Dr Downs, would you care to come forward, please. For the purposes of the tape, if you would just introduce yourself and if you would like to give an opening statement, please feel free.
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1145 Dr Downs: I am Angela Downs and I represent the depositors... Well, I try to represent all the depositors via the Depositors' Action Group. Yes, I would like to say a few words, if you do not mind. This is the second time I have been before you. '[his second part of the inquiry is a hit different from the first because, of course, it concerns the period which, unfortunately, we all experienced at first hand. So I would like, hopefully today, to help to shed light from the 1150 depositors' point of view on what, for us... well, what we might call the post mortem aspects of the inquiry and, in particular, the Scheme of Arrangement; also to help to identify how some things might he improved for future customers and notably in terms of depositor protection. I would also like to draw your attention to an opportunity which we believe now presents itself to perhaps finally resolve the problem that remains for those depositors who are still short of half their savings. Despite 1155 the good recovery estimates, nevertheless, we are still short of half our money. As you know, we have submitted lots of written evidence, but before we get to the questions, I would just like to mention two things in particular. I really hope to be able to put to rest this persistent myth that the Scheme of Arrangement was ever going to be of benefit to depositors. We just do not believe it was. It seems to us more and more evident that it was essentially a damage limitation exercise, designed to protect the 1160 reputation of the Isle of Man. I am not talking about the cost to the Treasury, but the actual reputational issues, and also to avoid triggering the DCS, before it was actually ready to be triggered, because it does not seem to have been quite fit the purpose, as it stood at the time and, concerning a possible solution for depositors, there have been a few recent developments which ( would just like to update you with, if you do not mind. 1165 Through our advisers, we are in contact with Treasury officials in the UK and the Isle of Man to discuss the creation of a loan trust, which would he underwritten by both countries and which would allow depositors to draw down 100% of their deposits now, rather than waiting for the next six or seven years for all of it to come back. The loan would he largely repaid from the assets of the Bank — which we hear the recovery is expected to be high — but this was to be of inestimable value to the depositors to have their money now and 1170 not in five or seven years' time. We believe such a plan to be eminently workable. We have already got support in Westminster for the idea, so we are really calling on the Isle of Man Government to come to the table and sit down and try and work out the details. Our letter was published in the Manx Herald about this about ten days ago — no, longer ago now — and it has attracted a record number of comments from depositors. A similar article was published 1 [75 in the Examiner last week. As the main author of those letters, I have been overwhelmed by the response. Within clays, over 100 comments were posted on the Manx Herald website and I feel that the quality of these comments and the dignity of the depositors is quite striking. It surprised me and so I do hope that if you have not Looked — I think I sent it to Roger recently — if you have not looked, I would ask you please to read these comments. Someone was asking, I think, recently, what was the effect on depositors. Well, a lot of them will 1180 tell you there, so please can you read these comments. That is it, really, that I wanted to say.
The Chairman: Thank you very much 1185
EVIDENCE OF DR A DOWNS
Q1286. Mr Houghton: Thank you, Chairman. 1[90 Dr Downs, lovely to see you again. Thank you for coming again to the Isle of Man. Before I go into questions that we have prepared for you, this loan trust that you have mentioned there, I cannot say that I have actually seen the documentation, although I have seen an awful lot of information from you. Could you send to the Committee the background, skeleton documentation on such a trust, and we will certainly look at it. We would be very grateful. 1195 Dr Downs: I do not think there is one yet and I am not one of the negotiators on this, so I am not absolutely sure where it is at.
Q1.287. Mr Houghton: So there is not a proposed skeleton document. 1200
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Dr Downs: I do not think there is a thing written down yet.
Mr Houghton: Because, obviously, you would need to move that proposal forward, before you went forward to our Treasury. 1205 Dr Downs: There have been discussions and I personally was not involved with them. We have someone, an adviser in the UK, who is helping us with this and there have been discussions with members in Westminster and with the UK Treasury. I cannot tell you exactly how Far it has got, but the idea is certainly floated and there is expressed support For the idea. I think that is where it is at. It has not got onto a piece of 1210 paper yet, as Car as I know.
Q1288. Mr Houghton: I understand, but the idea needs to have meat on the hone because, of course, you were mentioning that with such a trust, of course, that would he one idea, as you were saying, that there may be an ability of drawing clown 100% of the remaining capital, of course, that is — 12 (5 Dr Downs: That is the idea, yes, and there would be some support and some guarantee from both governments. This would also involve the UK.
Q1289. Mr Houghton: That would need a comprehensive document, of course. 1220 Dr Downs: Of course, the details have to be worked Out, but we have to have a sort of willingness on both sides to do it.
Mr Houghton: That is as far as it is — 1225 Dr Downs: Yes, as far as the detail.
Mr Houghton: — only being a skeleton proposal, not a documentation, a fully documented proposal put together in order for the Treasury to look at it and weigh its value. 1230 Dr Downs: I know that some contact has been made with the Treasury, but I cannot tell you exactly where it is at.
Q1290. Mr Houghton: Okay. If you could arrange for whomsoever (Dr Downs: I will.) to provide us 1235 with that information and such a documentation, if there is one being put together, we would he very grateful, thank you. If I may lead in, Dr Downs, just a few lead-in questions first: can you just remind the Committee when and how did this key depositor group form? How did it actually come about and what process was used, to seek to gain engagement with the Isle of Man authorities from the outset? 1240 Dr Downs: Well, it started in a very ad hoc way by one depositor setting up a website. That was within hours of the collapse of the Bank. Word spread. Word spread rapidly that is the power of the internet now, isn't it? So it is very much an internet thing —
1245 Q1291. Mr Houghton: Were there any particular points of contact with the Isle of Man? Obviously, the Treasury was one that —
Dr Downs: Is was all very disorganised, of course, and as you can imagine, at the time there was widespread panic and everybody was looking in all directions and running in all directions. This Group was 1250 formed. A number of key people emerged and those who could tried to contact who they could, but there was no.. You can understand that, at that point, there was no sort of formal structure to this Group. So there was no-one appointed to go and negotiate with anyone, and I do not think there was any formal negotiation. There were people resident in the Isle of Man, there were other people who flew over here and camped out here 1255 practically, and tried to meet whoever they... to find out who might be involved, but there was no official engagement, and I do not think there was any official engagement from the Isle of Man side until, I think, it
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was in December when the Scheme of Arrangement was being thought about, t think it was John Spellman, who I believe was working on contract to the Treasury at the time, who contacted members of the Group and suggested forming an informal committee to look into that. But I do not know of anything which I would say 1260 was any official contact before that.
Q1292. Mr Houghton: Thank you for that. Were problems being encountered to confirm the KSRUK) assets clearly explained to you?
1265 Dr Downs: Problems to ?
Mr Houghton: The problems being encountered: did you encounter problems when you were looking for the confirmation of the UK assets for the KSF? Were they clearly explained to you in those early days?
1270 Dr Downs: Well, no, but maybe they could not he — let us be quite honest about it! When we knew about this business of NO, and that we were actually in a queue for that... I am not quite sure how to answer that. There was this figure of E500 million floating around, and that is all we knew. There was not much.
The Chairman: You were clear, early on — 1275 Dr Downs: Well, t think even the Liquidator Provisional did not know much at the time either, so...
Q1293. Mr Houghton: What we are just trying to ascertain in the early stages is how things actually started going and just what sort of a professional reception you got in the early days. That was the purpose of 1280
Dr Downs: Well, it was very hard to get any information, but maybe some or it was not there to give, It was very frustrating, of course.
1285 Q1294. Mr Houghton: When was the Scheme of Arrangement proposed to you and who proposed it to the Depositors' Action Group?
Dr Downs: Well, that rather depends what you mean by 'proposed'.
1290 Q1295. Mr Houghton: When it was actually tabled in the direction for your consultation. Was it consulted? Did Mr Spellman have any part to play in that?
Dr Downs: Mr Spellman set up this informal committee in December, which was actually set up not specifically, as we understood, for a Scheme of Arrangement, but looking at any way to try and do something 1295 other than a liquidation.
Q1296. Mr Houghton: Is he the point of contact?
Dr Downs: Yes. I was not involved at the time, so I am telling you what l have been told. 1300 Q1297. Mr Houghton: That is no problem at all. Can you recall, from any of your information, what were you told about the tangible benefits of the Scheme of Arrangement over the Depositors' Compensation Scheme at that time?
1305 Dr Downs: At which time?
Mr Houghton: At the time when the Scheme of Arrangement was —
Dr Downs: See, this is a very long time! (Mr Houghton: It is.) It started in about... If I can say, I have 1310 got the timetable here. We were told in late November that the restructuring plan was being looked at by MixPartners and the Treasury, l believe. It was not called a scheme of arrangement at the start. So, we wrote most of... Most of what we learned came through the court hearings, in fact, the basic details of which were
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then put up on the Bank website, and members of the DAG who went to the hearings reported back and there was discussion. There was a restructuring plan mooted. I have noted this because the dates, otherwise... one 1315 gets lost. The first mention of a thing called a scheme of arrangement being under consideration was around mid- January. That was in an affidavit to the court, prior to the hearing on 29th January, when the court was presented with a very sketchy outline of what was then called a potential scheme of arrangement. This is a long period of time. Then it was put off for two adjournments and the first actual real proposal 1320 came on 9th April. So it is difficult to know which piece of time you are actually trying to look at.
Q1298. Mr Houghton: This is from the outset. I am just trying to piece the way the Scheme of Arrangement was launched, how it was launched, if at all, if was indeed —
1325 Dr Downs: It was launched through the court, as I have just said to you.
Q1299. Mr Houghton: But you had established this contact with the Treasury's consultant, Mr Spellman. Mr Spellman was your point of contact: what I am looking to see is how professional and were you 'sold' the Scheme of Arrangement in a professional manner, in a way which you could understand and circulate it and 1330 then inform the members of DAG, importantly —
Dr Downs: No, nothing was circulated, because the informal committee were asked to give... We arc not allowed to divulge what was going on, they were asked to give a confidentiality... they did not sign a paper, but they were asked to treat it in confidence. 1335 So, all we knew, there was... we are not part of this and I was not, we were not part of the informal committee, all we knew was that there were people... and we took of a lot of hope from that, there was a group of people who were discussing with the Treasury', but who could tell us very little of what was going on in this discussion.
1340 Mr Houghton: Well, they were discussing but —
Dr Downs: So there was nothing coming out. Subsequently, when things could come out, talking to the people who were in this informal committee, they complained all the time that they were not given information they needed in order to be able to assess whether the Scheme of Arrangement could he of benefit 1345 or not, and they actually got the feeling that they were not there to help to develop a plan, but they were rather got there to give support, and when they did not support they were regarded as being effectively hostile to the Treasury.
Mr Houghton: I see. 1350 Dr Downs: I think this is partly where comes the feeling, which became very strong, that the depositors' interests were riot necessarily at the top of the list, as far as the Treasury were concerned.
Q1300. Mr Houghton: Were there any factions of your members displaying any positive support for the 1355 Scheme of Arrangement?
Dr Downs: Yes, of course, partly because, in any case, there was very little information about what it consisted of, so of course there was a lot of hope. People hoped that it would be better, and who wouldn't? You think, 'AIL there might he something better than a liquidation and we will get more of our money back.' 1360 Mr Houghton: Of course.
Dr Downs: So I think everybody had some belief at the start that this might go somewhere and some people continued to believe longer than others. Some people got disillusioned, particularly the people who 1365 were closest to the discussion, I think, got very disillusioned early on.
Q1301. Mr Houghton: Disillusioned because of lack of information'?
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Dr Downs: Lack of information and the feeling it just was not going anywhere. 1370 There was nothing brought forward which showed any real likely tangible benefits it had.
Q1302. Mr Houghton: So it would have been more helpful, then, perhaps, if the Treasury, who were speaking to your informal committee, would have allowed them to be able to discuss those proposals group- wide, rather than in the committee? 1375 Dr Downs: To discuss it wider, yes, and to have more information in order to be able to assess what it might mean. There were no real clear details of what it would he. They were presented with very vague things — 'This will he better for you,' sort of thing, I think.
1380 Q1303. Mr Houghton: What do you see, Dr Downs, were the causes of a lack of support overall? Poor communication? Once you actually saw the Scheme, was there a change in emphasis then?
Dr Downs: The cause was probably the Depositors' Action Group! But the reason... Do you mean the reason or the cause? The reason I think was that there was no benefit in it. It was not worth supporting, so 1385 why would you...?
Q1304. Mr Houghton: But if it was not... when I say 'sold', the information was moved across to the depositors —
1390 Dr Downs: But there was nothing to sell.
Q1305. Mr Houghton: Once the Scheme of Arrangement and the documentation had come together-.- we are not part of the Treasury here, of course —
1395 Dr Downs: No, I know. I realise that.
Mr Houghton: that is nothing to do with this. What 1 am trying to say is, did it fall down, due to a lack of understanding, do you believe, or when it received a lot of criticism front the DAG, were the DAG members fully aware of the consequential effect of the Scheme of Arrangement? 1400 Dr Downs: Yes, I believe so. I believe it failed because it did not deserve to pass. I do not think it failed because it was not understood. think it almost passed because it was not understood, actually. 1 think you should turn the question around, why did it nearly pass, because a lot of people were not informed. Not everybody was in the DAG 1405 and not everybody is even on the Internet.
(21306. Mr Houghton: Would you go so far as to say that was one of the reasons why the Scheme of Arrangement did not get off the ground with the Depositors' Action Group, because it was not properly conferred upon members of the DAG, because the informal committee were not able to inform other members 14 10 of the Group, which, itself, caused a faction that they knew more than other Group members would know? Was there any disturbance on the inside of DAG on any of that?
Dr Downs: There were different currents inside DAG. It is obvious there would be and there were different appreciations at various stages but, at the end of the day, when the Scheme of Arrangement was put 14 15 to the vote, there were at that time... there was a subgroup of DAG, as you well know, someone came... that is more or less water under the bridge, I think, now. There was a group of higher-value depositors who, at one time, felt that their interests were perhaps not being fully represented by the DAG as a whole and then they became known as the PPDG and — I have lost what I was saying... 1420 Mr Houghton: It is alright. "rake your time, Dr Downs.
Dr Downs: What did you ask me?
Mr Houghton: Well, you were going on to elaborate the point of how the Scheme of Arrangement was
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SELECT COMMITTEE, THURSDAY, 10th DECEMBER 2010 1425 not really conferred upon by all the members of the group.
Dr Downs: Yes, I know where I have got to. As it progressed over time, I think that group were more supportive for longer, probably, but by the time it was voted upon there were two proxy holders, one from each of these two groups, who collected proxy votes 1430 for the vote and they all voted no, including the PPDG. So when it came to the vote, when the final Scheme was there on the paper, both factions, as there were at the time, of the Depositors' Action Group, voted against it and we had about 1,000 proxy votes between the two groups, I think.
Q1307. Mr Houghton: That is very helpful, thank you for that. 1435 Moving on then, Doctor, why does the Depositors' Action Group believe that depositors should be entitled to 100% immediate reimbursement by the Government, when depositors could have been as aware of potential problems in Iceland as the authorities at that time'? It is an awkward one, but it is just the way of — 1440 Dr Downs: Depositors are depositors; they are not specialists in financial services! It is a very strange question.
Q1308. Mr Houghton: The nub I am trying to get to is that the Group was very effective, though, at the time that it was operating, and is very effective now. The issue is that you have to have the understanding — 1445 and I will just repeat the question — that the DAG, believed that the depositors should be entitled to 100% immediate reimbursement by the Government, and that is what you are looking for, but depositors could have been aware of potential problems in Iceland, as the authorities were.
Dr Downs: Well, that is the part that I find difficult to understand. We are not sophisticated investors who 1450 are poring over the financial press, and we are not the regulators who have information from all sorts of sources as to... so I do not quite see... Perhaps depositors could have been informed, but could you really expect them to be as well informed as to —
Mr Houghton: From what I saw — 1455 Dr Downs: That is what I do not understand in your question.
Mr Houghton: — at the time, and I any saying this admirably, at the time the DAG soon got themselves — 1460 Dr Downs: Well, we learned from—
Mr Houghton: — very organised and quite professional in some of the areas that they were doing, so of course someone was advising the DAG -- unless it was the spokesman at the time — who were very well advised in some areas and did really understand what was happening. 1465 Dr Downs: Well, of course —
Mr Houghton: Rather than just art action group for getting the money back, which was the purpose, they did understand the whole position. 1470 Dr Downs: I think there was a very fast and steep learning curve. I certainly knew nothing about these things before. We have all come quite a long way, we have all learned quite a lot, but I do not think you can expect... And obviously there are some individuals, and they will he the ones who came to the fore, because they had more knowledge of this sort of area than the average depositor, so it is normal that they would come 1475 to the fore. But I do not think the mass of depositors could honestly be expected to he — whatever you said — as aware of the problems in Iceland as the regulators and the authorities.
Mr Houghton: Thank you. 1480 Dr Downs: It is a hit like saying... I take an analogy from another field totally, which I know more about:
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think of public health. If there is a public health hazard that the authorities responsible for looking after these things are aware of, and there is a product on the market which is a hazard for consumers, and they do not do anything, they do not act, they do not say anything and people die or get very sick, do you turn round to them and say, 'Well, you should have known — you could have read the articles in the scientific press"? It seems to 1485 me a bit like that, what you are saying!
Q1309. The Chairman: Perhaps I could flip the question round and say, how much money do you have to have in an institution before you do start taking a few steps to make sure that you are putting it in the right place? Does that tie in with the 00,000 limit for the Depositors' Compensation Scheme? 1490 Dr Downs: There is obviously something in that, yes. I did not have a huge amount, so I am probably not the best person to ask about that. Obviously, people who had larger sums would be more informed, yes.
The Chairman: Thank you. 1495 Q1310. Mr Houghton: Thank you, Chairman. Do depositors believe that their best interests were high on the agenda of the Isle of Man authorities throughout the period post collapse?
1500 Dr Downs: I think we have touched on that probably already, haven't we? We had the feeling that, of course, they are on the agenda, but we had —
Q131 1. Mr Houghton: Were your best interests high on the agenda? Did the depositors feel that?
1505 Dr DOIMS: I do not think the mass of depositors felt they were at the top of the agenda.
Q1312. Mr Houghton: Okay. What has been the real impact of the delays in payments Out to depositors? Could you elaborate in any way?
1510 Dr Downs: Oh, I think you should read those letters in the 1/1ofix Herald. I am surprised you ask me that at this stage. People who are still homeless, because they had their money, they had just sold their house. There were people who were expats, who were coming back to the UK, sold their house, put the money there, perhaps for a few months white they found a house — and there are quite a lot of people in this situation, it is not just one or two — and there it was, gone and, even with half of it back, 1515 they still cannot buy the house that they wanted to buy so they are still homeless. There are people still living with their family and friends who are without their own home. There are people whose pensions... who were relying on income from pensions that have disappeared. There are old people who were planning to go into sheltered housing and the money was there for that and they are now unable to do that. I know of one in particular, whose daughter and son-in-law had to come back from abroad 1520 and buy a house in the UK in order to have their mother with them, because her sheltered housing, they no longer had the money for. These are just examples, but there are a lot of them.
Q1313. Mr Houghton: Right, of course. Equally, can you give us any examples as to what extent has the introduction of the Early Payment 1525 Scheme been beneficial to stakeholders? How well was that received?
Dr Downs: The Early Payment Scheme. Well, it was obviously very helpful, particularly for people with lower... because it was a fixed amount, so for someone who had a fairly small amount, £1,000 and then 129,000 was obviously quite a substantial sum, and so, obviously, it was a help, given the delay in triggering 1530 the compensation scheme. I think the first £1,000 felt a hit like... I think, yes, that was not too well received. It really felt like a bit of an insult, offering people f.:1,000 when it really was not much. Just around Christmas time it felt like a handout for the poor. The second one, the further £9,000, was more significant, obviously. 1 think that came in February. 1535 Q131,1. Mr Houghton: A lot of this we have spoken about this afternoon has been on communication and
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how well communicated you were, when your organisation got together and put some infrastructure in place, which does take time, as you rightly say. Flow would you sec now, how could communication he improved in the future? 1540 Dr Downs: Communication with the various players?
Q1315. Mr Houghton: Communication with the various bodies, yes. It is a very large question. (Dr Downs: Yes!) In general terms, would you say that there should be an off- 1545 the-shelf disaster recovery plan available to contact people, rather than you have to find out from the media — which is what people found out very quickly, anyway — but very closely following that, a 'disaster recovery' type of plan? I do not want to put words into your mouth, though, Dr Downs. Would you support that? Is that one idea?
1550 Dr Downs: Yes. I think if there was a central place that one could go to, that would help. There was also a very little... I have to say something: Mr Simpson says that there were letters sent out, because I am not sure... Everyone is not on the internet, and Mike Simpson mentioned the Edge product — he has got figures which I do not have. I do not know what proportion of depositors had Edge products. But I do know that half of the depositors about were in the Derbyshire, and they were certainly not an internet product. I have no idea 1555 - and probably Mr Simpson has a better idea than I have — as to what proportion of people are actually on the internet. So I do not know how large that is. Certainly, the maximum number of people who ever registered on the Depositors' Action Group website was about 2,500 not all depositors, presumably. They did not have to be, but mostly presumably as well. So that is — what? — about a quarter of the total number. Perhaps the rest were not interested, or perhaps they did 1560 not have internet access. In terms of written communication, to the best of my knowledge, I received two letters between the collapse of the Bank and the Liquidator going into liquidation: the first in, I think, early November, which was the official notification — that was a month after the collapse — to say the Bank had collapsed. I do not know for how many people that was the first news they had that their money had disappeared — I have no idea 1565 - but that came in early November. Then, sometime in December, there was... Both of these letters were from the PWC, and the second one in December had more information and provided bank statements — (The Chairman: The 16th.) 16th December, that would be it, thank you. I do not think I have ever had any other written information.t 1570 Mr Houghton: Okay. So that could he improved upon.
Q 1316. The Chairman: So you did not receive any other information, until —
Dr Downs: I did not receive the EPS, actually. but I think there is a problem which is well known for the 1575 people living abroad: lots of things never arrived. I never got letters about the Early Payment Schemes. Of course, I knew about them.
Q1317. Mr Houghton: That you know went out to other people?
1580 Dr Downs: Well, I believe they were sent out. The Liquidator said they had sent them out.
Q1318. The Chairman: The other thing you would have been clue, would he, of course, voting papers for the creditors' meeting?
1585 Dr Downs: I never had those.
The Chairman: You did not receive those, either?
Dr Downs: No. 1590 Mr Houghton: Thank you, Chairman. Final question, Dr Downs —
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Dr Downs: And I never actually printed them until just before coming here, because I did not want to use 1595 all my paper and ink printing 53 pages of Scheme and 71 pages of explanation.
Q1319. The Clerk: Sorry to butt in, but if you never received them, did you mention that to the Liquidator at any time?
1600 Dr Downs: I d id, yes.
Q1320. The Clerk: And what response did you get?
Dr Downs: Well, the response, which is really quite — I fund quite laughable, really — the response was, 1605 `Well, you got them — if you can e-mail me, you know about it and you could download them from the site,' which, of course, I did, but my point was, how many people did not know?
Q1321. The Clerk: But you personally did manage to get them electronically?
1610 Dr Downs: Of course.
The Clerk: Okay. Just asking!
Dr Downs: Yes, of course I did, but the reason for complaining was not that I could not vote, but that 1615 anyone who did not have access to the internet and may not even have known that a vote was taking place —
The Clerk: Did you...?
Dr Downs: — but not complain to the liquidators that they had not received them, because they did not 1620 know that there was anything to receive.
Q1321. The Clerk: Did you check that they had the right address for them?
Dr Downs: Yes, they had the right address. I received the other letters. 1625 I mean, this was looked into and I do not think it was looked into enough, that is the other thing. The single letters came and I do not think t missed any of those, except perhaps the Early Payment Scheme, but apparently the documentation for the Scheme of Arrangement was a huge package — it weighed several hundred grams — and it was sent out through a courier, it was not just put in the post in the Isle of Man, it was sent to a firm and we have seen that was presented in evidence to the court — the evidence that this was 1630 actually delivered, that the documents were delivered to this firm. So it is probably that firm that did not do their job properly, but I do not think it was followed up as it should have been.
The Chairman: Well, we have got to he careful of that. That is —
1635 Dr Downs: It was not only me. We actually did a survey on the website amongst our depositors and I know we had at least 200 people who told us they had not received papers, and they were all outside the UK and the Isle of Man.
The Chairman: just want to be careful here. Obviously, this is something that has been ruled on by the 1640 courts.
Q1322. Mr Houghton: Finally, Dr Downs, have you any idea what proportion of the members of DAD have received full payment, full repayment? 1645 Dr Downs: Members of DAD?
Mr Houghton: Of DAD, yes. Have you got any information on —
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Dr Downs: It depends what you mean by members of DAG. 1650 Mr Houghton: Well, the members of your organisation. Have any idea what the proportion is of those members who have received full repayment? Have you any such figures of that?
Dr Downs: I do not think I can answer exactly that question. We estimate that, of all depositors and 1655 bondholders, about two thirds have received full payments; and 70% to 75% of the retail depositors. In the other figure, I am including bondholders with insurance. But that is not members of DAG; that is all depositors. We do not have a number for the members of DAG, really. The currently active members of DAG, that is something else, because obviously the people who are... Now we have better numbers, we have more statistics on these people and we have probably 1660 around 750 currently active members and less than 10% of them are fully paid. But, of course, the ones who are fully paid have no longer any particular reason to be with DAG.
Q 1323. Mr Houghton: They do not report in to — 1665 Dr Downs: No. I have no reason to suppose that the original members of DAG were not representative of the depositors as a whole, but I cannot be sure of that, so I... is that okay?
Mr Houghton: I do apologise for asking you these wide questions, but it is just to see if we can gain the 1670 information from you as to how and where the frustrations lay as time has gone along and the matter has developed, of course, through to this day. So I thank you for that, Dr Downs. Thank you.
Q1324. Mr Crowe: Yes, I was going to ask how many... the Depositors' Action Group, how many by number and how many by value were in your Group, as a percentage of the total, but you have actually 1675 answered that by saying about 25% by number were part of the Depositors' Action Group. Is that the figure?
Dr Downs: I think so, yes, at Least registered on the original website. You see we had no way of knowing who were depositors or not. We do not have this information.
1680 Q1325. Mr Crowe: It is more an informal grouping, rather than a formal grouping?
Dr Downs: Yes, certainly at the start, but now we have something rather more formal, we have a second website, in which we have actually asked people to provide some sort of proof of their status as a depositor and that was set up just about the time when the DCS was triggered, after the Liquidation, so it is 1685 predominantly people who were not goiq3 to be fully paid and we have more information about those people, because we know they are depositors.
Q1326. Mr Crowe: Thank you. The other question is concerning the question we put to Mr Simpson about this question, when the vote for 1690 the Scheme of Arrangement came to he deliberated upon, it was felt, in his words, that some of the depositors felt that Treasury would make a better offer. Was that a real possibility or a real understanding?
Dr Downs: It is not my understanding, actually. I was surprised he said that, so I do not know where that came from. 1695 Q1327. Mr Crowe: You had no prior knowledge of this?
Dr Downs: It was not my understanding.
1700 Mr Crowe: So that information is new to you then?
Q1328. The Chairman: It seems to be a subject that never ceases to surprise us. Are you surprised also by Mr Simpson's comment about the volume of e-mails being sent to him in the court, begging the court to stay the process of invoking...
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1705 Dr Downs: I think everybody continued to hope for a very long time that something better could happen. The people who were begging it were not begging to have that Scheme of Arrangement; they were begging for something that would he better, that they would get more back. The formal proposed Scheme was not actually on the table, really, until 9th April, when we saw the full document. So, of course, people were 1710 clutching at straws. I was very uncertain, We all were. There were very big discussions about it. So no, I am not surprised at all, but f think by the time the final proposal came and those people really looked at it, the doubt disappeared.
The Chairman: Thank you. 1715 Q1329. Mr Raweliffe: Dr Downs, it obviously has been, and always is, very unfortunate for the people who are caught up in a bank collapse of this nature. You mentioned that you were seeking some sort of loan trust under which people could draw 100% of their deposits. That presupposes that they would be entitled to 100% of their money. 1720 Dr Downs: What do you mean by `entitled'?
Q1330. Mr Raweliffe: Are you suggesting that any jurisdiction with any hank should guarantee 100% of all the deposits in all the banks in their jurisdiction? Because that is the implication of what you are 1725 suggesting.
Dr Downs: No, we are not saying we are entitled to anything. We know we are not entitled.
Mr Raweliffe: But if you say 100%, then it would he — 1730 Dr Downs: We just believed that, given the exceptional nature of the banking crisis, it would be the right and compassionate thing to do. It is what almost every other government with the notable exception of Guernsey — has done during this crisis. ((SF {IOM} is the only Kaupthing subsidiary in Europe where the people have not been paid out. 1735 Q1331. Mr Raweliffe: Have the people in London been paid out in full, then?
Dr DOWnS: Oh, yes, immediately. The retail depositors.
1740 Mr Rawcliffe: To any amount?
Or Downs: Yes, they had their accounts transferred to ING and the few that were not that was the Edge accounts. The ones that were not Edge accounts have been repaid 100% through the FSCS, who are now standing in their shoes, effectively, which is what we are really asking the Isle of Man — 1745 Q1332. Mr Raweliffe: Right, that is one point. The second point is, will it still he possible, bearing in mind that people will have had, by next week, over 60%, it still would be theoretically possible to set up a loan trust, up to the amount which might be distributed on the Liquidator's estimation, so you could say that if you set up such a trust, if it were possible, that another 1750 20% might be drawn. That might be a possibility, but I think to say that 100% is going to be drawn produces a presupposition that everybody will get 100% —
Dr Downs: Well, other governments have done it. I do not see why the Isle of Man should feel they... Other governments across Europe have done it, so. 1755 Q1333. Mr Raweliffe: Not all.
Dr Downs: Guernsey have not done it for the Landsbanki. I do not know any others.
1760 Q1334. Mr O'Shea: Obviously, we sit here with the benefit of hindsight.
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Going back at the time, think we touched upon this with Mr Simpson. As it transpired, his ability and the authorities' ability to get meaningful information out of the KSF(UK) — effectively, they were statute barred from doing that. If it had been communicated perhaps more effectively that that was the reality and therefore there was not going to be any detailed financial information available until, let's say, March, do you still think 1765 that the Depositors' Group would have preferred to wait in anticipation of what that information might show or do you think there, potentially, would have been a view to say, 'Well, if it is clear that we are not going to get any meaningful information, we should pursue a liquidation and let the process get under way', because the reality or that, potentially, would have been that payments might have been started earlier than they were, because of the way that the process had run? 1770 Dr Downs: It is a bit of a hypothetical question, obviously, so it is difficult to —
Mr O'Shea: A quick answer?
1775 Dr Downs: Yes. I think it depends at what point in time. For a certain time, I think everyone was wanting to wait and see if something better could be done, and that would he normal. So it depends at what point. The Depositors' Action Group — and that is not hindsight, I am now going hack to what actually happened — actually did not start asking for liquidation until February. At the January hearing, the court hearing at the end of January, we were getting very doubtful about what was seen to he possibly going to be proposed and 1780 feeling probably we would be better with liquidation, but still said, 'Okay, we'll hang on for another adjournment.' An adjournment was granted until 19th February for the Scheme to be tightened up. When it seemed quite clear that very little was done and there was no more detail and it did not seem to be going anywhere, it was on 19th February that the Action Group asked to go into liquidation. That is actually the history of it. So I do not think it would have happened before about then, anyway. 1785 The horror of it was that, on 19th February, the court, having given something like three weeks from the previous hearing for the Treasury to get their act together and make this proposal, when they came back on 19th February and it still was not really there and it could not be put to the vote, there was then an adjournment until 9th April. We were absolutely knocked back by that because that was another much bigger adjournment because they had not come up with the goods on 19th February, and I think that is when things 1790 got really stressful.
Q1335. The Chairman: Can I take you back to the start of the evidence you have given this afternoon, and two points that you made there: one was that you felt that the Manx authorities were more interested in the reputation of the Isle of Man than they were in the depositors of the Bank. Do you not perhaps feel that, 1795 with 10,000 potential either ambassadors to the island or angry and dissatisfied customers, the reputation of the Isle of Man was heavily tied up with achieving a good result for the — ?
Dr Downs: Yes, indeed.
.1800 Q1336. The Chairman: How do you reconcile that with the statement that — ?
Dr Downs: I do not! No, I cannot reconcile it, I do not know.
Q1337. The Chairman: You also briefly mentioned the loan trust and that you had been lobbying in 1805 Westminster and there was agreement to this. Given that, from what I understand of it so far, it seems to be all about action and money from the Isle of Man point of view, what is it that the government in Westminster are offering, in terms of putting into this, and what role would they have in this?
Dr Downs: I tell you, I am not involved closely in the discussions so I cannot answer that fully, but 1810 understand that there is a suggestion that they would be willing to help.
Q1338. The Chairman: Financially?
Dr Downs: Yes. The loan would be guaranteed by both governments. 1815 Q1339. The Clerk: Is that people at Westminster.., i.e. in Parliament or in government, do you know?
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Dr Downs: There are contacts with the Treasury.
1820 Q1340. The Clerk: Okay, so it is Whitehall rather than Westminster'? Okay.
Dr Downs: There are Members of Parliament involved who are supportive,
The Chairman: Ministers or...? 1825 Dr Downs: I am not sure exactly who is what and l do not think... I do not know, fully.
Q 1.341. The Chairman: Well, perhaps if your Group are more in the know and wish to share that with us you can write to us with that. 1830 Dr Downs: I will ask them if they would do that.
Q 1342. The Chairman: You mentioned also, earlier on in your evidence, about this informal committee. Were members of that informal committee chosen by Treasury or were they nominated by the Depositors' 1835 Action Group? How were those members of the informal committee selected: do you know?
Dr Downs: They were suggested by... No, I am not sure now. The Action Group was certainly contacted. I think it was through the Action Group but there might have been some suggestions... 'Well, we know, we've talked to so and so.' I cannot he sure. 1840 The Chairman: Again, if you want to follow that up.
Dr Downs: I was not there.
1845 QI343. The Chairman: One of the other things that came out of your evidence to us was that there was an implication of some form that your legal costs, as the DAG, would be borne by the Treasury. What was the basis of that? Was there anything in writing or an e-mail to say that this was going to happen, and it' not, what was it that gave you this impression?
1850 Dr DOWIIS: There are two quite separate issues on the costs here and I think they have perhaps got confused. In terms of the costs in assessing the Scheme and during the development of the Scheme of Arrangement, the members of the informal committee did ask the Treasury, if they could bear those costs, and it went back and the answer came back no, and I think that was accepted. 1855 These costs: this is the costs of assessing and getting some legal advice to assess the proposals. These were not very large costs finally and some of it was done by lawyer members of DAG for free, anyway. But the second issue concerns the costs of actually opposing the Scheme, when it came to court. That was not for the Treasury to decide or not. That was the (Mr Crowe: Court.) court's decision, yes, so it was natural that the DAG should apply to the court for the costs, when the Scheme had been rejected and they had had to 1860 spend a lot of money going to the court, having counsel at court. The costs were awarded and the Deemster said he had 110... it was perfectly obvious that costs should be awarded, but he did not award them against the Treasury: he awarded them against the Bank. So, okay, the Depositors' Action Group does not have to bear the costs on its own, but the body of creditors has to bear the costs.
1865 Q1344. The Chairman: This is the point about that: there was no assurance given to you by Treasury that it would be them picking it up, it was entirely a court decision.
Dr Downs: The costs of opposing the scheme, yes.
1870 The Chairman: Thank you.
Dr Downs: As I say, the costs of assessing the Scheme in the early days, that was at the request of
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Treasury and they said no, and think that was... No one is going hack on that.
1875 Q1345. The Chairman: There seems to be a frustration throughout this about giving a Scheme of Arrangement document in writing and actually getting something. From the timetable that 1 have been able to follow, it was first mooted on 27th November: there was nothing on paper until mid-January, even in outline form, and you consider that... Well, let me go on, actually, in terms of the timetable; the Scheme of Arrangement was described on page 1880 17 of your evidence as 'sketchy and incomplete' on 19th February at the court hearing, and yet the informal committee, as I understand it, walked away from engagement with the Treasury in mid-January only as details were emerging. Do you feel that perhaps they walked away too soon, and constructive engagement was cast asunder too early in the process? 1885 Dr Downs: Maybe, but they clearly felt that they were just not getting anywhere. They were not getting the information that they needed. But I cannot really speak for the members of that committee. It is difficult to know how it was, inside that group at the time.
Q1346. The Chairman: It just appears that, in February, communications really quite dramatically broke 1890 down between the depositors and Treasury at that point; and, yet, there was still a feeling that a scheme of arrangement could come out of it, and there was a willingness by some and a tack of willingness by others. Is it perhaps fair to say that, in the absence of a unified front from the depositors, Treasury was almost hound by that point to explore the option. 1895 Dr Downs: But why did it take so long?
The Chairman: That is something we can follow up on.
Q1347. Mir O'Shea: Mr Chairman, I think it just comes back to my question that if there had been, 1900 perhaps, greater clarity of the difficulties which the Liquidator had encountered — because actually the information could not he made available — if that had been clearer, would that have helped the overall process'? The reality was that the information was not available and never could have been, because it was locked in...?
1905 Dr Downs: Mr Simpson said something just now that I noted, which is a hit related to that. When the final Scheme... Well, on 9th April, this business about the only financial benefit was going to come out of the Scheme really was if the recovery was less than 60%. That was actually up to 70% in the following weeks before the vote. Yet, 1 just checked that, in the previous evidence, the first prediction... In April 2009, the provisional liquidators were already predicting the estimated recovery between 74% and 89%. That was at the 1910 time of the vote of the Scheme of Arrangement. So, that might help me to understand why we felt the Treasury was taking a practically zero risk, in proposing to hold back until it got to 60% or even 70%, because by that time — and the liquidators say, and I am sure that is true, that they are naturally cautious with their estimates and they were estimating a minimum of 74% in April 2009. That is why it seemed a no-brainer, really, at that point to cis, 1915 Q1348. The Chairman: One element that we have heard of in evidence earlier this afternoon was that of the Depositors' Compensation Scheme and the funding of it or otherwise. Certainly, in your evidence that is something that you have been quite forceful, that there should be funding of the Depositors' Compensation Scheme. Having heard the evidence from the Isle of Man Bankers' Association and Liquidator, do you still 1920 feel that that should be the case?
Dr Downs: That it should be pre-funded? (The Chairman: Yes.) Well, I am speaking a bit for myself here, because I do not think it has been discussed very much recently amongst the Group. I am not sure it is the main issue; the main issue is how can it be arranged in order that the payments can be timely? Now, 1925 whether that is clone by — having listened to Mr Coyle — by pre-funding or by some other mechanism, which means that funds can be made rapidly available, I think is a matter for you to decide. What is important is that it is not going to take 10 years to pay the depositor scheme. In the UK... I think the compensation scheme in the UK is supposed to pay out within three months, and 1
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believe they are bringing it down to 20 days at the end of this month. It is a sort of guarantee, practically, a 1930 promise that the compensation scheme will pay out its full payment within three months. It does not seem to be quite the case here — (The Chairman: Yes.) although —
The Chairman: It did happen.
1935 Dr Downs: — it did happen. Finally, you got the act together and your Scheme did pay the depositors, but when it got triggered —
The Chairman: Perhaps —
1940 Dr Downs: — thanks to the Treasury funding from the Government.
Q1349. The Chairman: Perhaps a slightly easier thing to do if you are able to print your own money, I suppose.
1945 Dr Downs: That is where the issue lies. The issue is what speed can the payments actually he made and what is the best mechanism to do that. I don't know.
Q1350. The Chairman: Okay. Before we wind up, is there anyone on this side? No? 1950 Are there any concluding comments that you would like —'?
Dr Downs: While we are still on the DCS, can I just make another point there, which I did actually send to you and which no-one seems to mention at all. I notice that Mr Coyle said the £50,000 per person' — I noted that — £50,000 per person is probably comparable with the UK... Well, it isn't, because that is not the whole 1955 story. What does it mean, £50,000 per person? We thought — and that's what goes Out in all the consumer information — there is compensation up to :£50,000. What does it mean'? Depositors thought... I think most depositors thought, when the Bank went down, that that meant that, say you have 11100,000 in the Bank and the liquidation pays out half of that, then there is a shortfall of £50,000, and people thought that that would be 1960 covered up to that point. Now, if you had much more than that you would not get more than £50,000... In other words, I think people thought that any shortfall from liquidation would be covered up to a maximum payment of £50,000. Well, that's not the case. What is the case is that, in fact, someone who has £100,000 and a 50% recovery gets 150,000 from the liquidation and nothing from compensation, because the compensation means that no one who has more than £50,000, or £50,000 or more, will get less than that. It does not 1965 guarantee any more. So if you get the £50,000 back through liquidation, you get no compensation whatsoever. Recently I have looked at what happens in the UK — and I do not think any of the Group had clone this before — and in the UK it is somewhere in between those two extremes these days. In the United Kingdom in the FSCS, the first £50,000 is fully protected. (The Chairman: Yes.) So in that same example, someone who had £100,000 would get back the first £50,000, and would then get, if the recovery was 50%, 50% of the 1970 other £50,000, so he would get £75,000 back. But in the isle of Man, you get £50,000. Do you follow me? I did send you a document based on that, and I have really looked at the rulebook of the FSA. I do not know whether Tynwald wanted it to be different or not, but I am sure it is different from the UK scheme. That is perfectly your right to make it different, I am not denying that, but then it should be made clear to depositors and not pretend it is the same — 1975 01351. The Clerk: The limits have been changed out of sync, because I think the UK, since Tynwald operated, has changed its limits, did it not?
Dr Downs and the Chairman: We are not talking about the limits. 1980 The Chairman: We are talking about where the funds come from.
Dr Downs: The limits were changed at almost the same time, actually. I think they changed them — was it not on 6th December?
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1985 Q1352. The Chairman: You are talking about —
Dr Downs: I am talking about what that limit actually means in practice.
1990 The Chairman: What it does mean in practice —
Dr Downs: — the calculation of the compensation.
Q1353. The Chairman: What it does mean in practice... everybody is guaranteed their £50,000. It is 1995 where that money comes from — that is the point.
Dr Downs: No. That is not the point.
Dr Downs: I obviously have not explained it very well. 2000 The Chairman: I have seen the paper that you have sent. If you have £50,000 —
Dr Downs: If you have £50,000 or less, it is the same.
2005 The Chairman: That is right. That is the point. It is only when you exceed the £50,000 that it becomes an issue, because of the way that the funding is structured.
Dr Downs: The way the payment is structured —
2010 The Chairman: It is the source of the money...
Dr Downs: No, it is not depending on who sources the money.
The Chairman: Not who, but whether it comes from a compensation scheme or the proceeds of 2015 liquidation.
Dr Downs: Whether it comes at all
The Chairman: Okay. 2020 Dr Downs: I do not think we —
Q1354. Mr O'Shea: A similar issue is in terms of whether you have to subrogate your rights as a creditor under this Scheme. 2025 Dr Downs: You get less... In the United Kingdom, the first £50,000 of every depositor's money is fully guaranteed, so every depositor, however large his deposit, will get the first £50,000.
The Chairman: But where does that money come from? 2030 Dr Downs: The rest of the money... It comes from, as much as possible, from liquidation and the shortfall comes from the compensation scheme.
Q1355. The Clerk: When does it come from the liquidation because, presumably, liquidation is not 2035 immediate?
Dr Downs: Well...
The Clerk: Over time? 2040
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Dr Downs: Well, it comes over time, yes. But the end result is quite different.
Q1356. The Clerk: The comparison you are making is not always going to he as clear-cut as you suggest, is it, because liquidations take different lengths of time to complete, don't they? In other words, you are 2045 comparing two very, very -
Dr Downs: [ think the compensation pays as it does here, up front, and is then clawed back, as necessary.
The Clerk: I think where the Chairman is coming from, about where you get the money from, the first 2050 £50,000...
Q1357. Mr Raweliffe: What you are suggesting, it seems to me, is that the first £50,000 is paid for by some other party altogether. It may he the compensation scheme, it may be the other banks. But thereafter, the Liquidator pays what he manages to get into the balance of the depositor. That, I think, is what you are trying 2055 to say.
Dr Downs: Yes, that is the mechanics of the thing.
Q1358. Mr Rawcliffe: Whether that is what the UK scheme does, I have no knowledge. It would seem 2060 unusual, if it were that.
Dr Downs: The UK scheme fully guarantees the first €50,000. The mechanics of it are something else. I am looking at the actual end result here -.
2065 01359. Mr Rawcliffe and others: Both schemes guarantee the first €50,000.
Dr Downs: No, it does not.
The Chairman: Yes, it does. 2070 Dr Downs: No, only for people who do not have more than £50,000.
Mr Raweliffe: If you have got €51,000, it guarantees the first .E50,000.
2075 The Chairman: Yes.
Dr Downs: So you get £50,000, and what about the rest?
Mr Raweliffe: You get whatever comes out of the liquidation. 2080 Dr Downs: No, you do not. That is it - that is what happens in England. This is not what we are getting.
Mr Raweliffe: I think you misunderstand the UK scheme.
2085 Dr Downs: No, I think you are misunderstanding the Isle of Man Scheme, with all due respect.
Mr Rawcliffe: That is what the Isle of Man Scheme does.
Dr Downs: The Isle of Man Scheme makes sure that - {Interjections) 2090 Q1360. The Chairman: We can go round the houses on this subject for quite some time and, certainly, before we report, we will make absolutely clear what the Isle of Man Scheme does and what the UK scheme does and we will report on that within our report. For my part--
2095 Dr Downs: Can f just draw your attention, then which I think I sent you, because I checked up on this - the ESA had, maybe in June 2008, a document - it was a consultation document on three possible ways of
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calculating: there are examples in there, three possible ways of running a compensation scheme. One was to pay all the shortfall up to a maximum of £50,000, which, actually, is what they did in UK before 2000, or something like that. That is the most generous scheme. There were three alternatives: the UK opted for the 2100 middle alternative and the Isle of Man have opted for the lesser alternative of the three, but it is very clearly explained in this document, so perhaps that would help.
Q1361. The Chairman: Okay. Is there anything else you want to add before we conclude the public sitting? 2105 Dr Downs: There might be, if I could find it! Hang on, I got carried away on that.
The Chairman: That is okay. 2110 Dr Downs: I do think that is something that is not appreciated, and perhaps not even by Tynwald, that the DC'S is not the same.
The Chairman: No, it is not the same. 2115 Dr Downs: It does not guarantee the same amount of compensation as the scheme in the UK does, and I think depositors imagine, when they read that, it is the same compensation limit. They think that it is the same. 2120 Q1362. The Chairman: The UK system is a very different system altogether in terms of the cross coverage of deposits from insurance [inaudible] and all sorts —
Dr Downs: Yes, but I am talking about as applied to bank deposits.
2125 The Chairman: I do just want to make the point that it is a very, very different beast altogether in the UK.
Dr Downs: I know, but in the same situation, with the default of a hank, the meaning of a £50,000 limit does not mean the same thing to the depositor in the bank that has gone under,
2130 The Chairman: You have made your point.
Dr Downs: 1 would like you to investigate it. Mr Rawelitfe: It is more interesting... [Inaudible] but not For the Isle of Man Scheme.
2135 The Chairman: Well, you have made your point.
Dr Downs: Well, it is and 1 think it' it is different. You should make it clear in your consumer information how it works, because it is not clear to consumers how it works and that is another issue.
2140 Q1363. The Chairman: As far as I am aware — will you just clarify this for me — in the Manx literature for Manx depositors, there is no reference to the United Kingdom, the way that the United Kingdom operates, in terms of its financial guarantee. (Dr Downs: No.) It just says that it works under the auspices of the Manx scheme and further details can be found here. (Dr Downs: Yes.) Okay.
2145 Dr Downs: It is a reasonable assumption that when two authorities say your deposits are guaranteed up to £50,000, most people will assume it means the same thing.
The Clerk: Not if they are professionally advised, and presumably —
2150 The Chairman: Right, let's not go round in circles.
Dr Downs: No, let's not go round in circles, it is getting late.
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Q1364. The Chairman: Are there any concluding comments you would like to make? 2155 Dr Downs: Y es, there are, actually.
The Chairman: Please do.
2160 Dr Downs: Well, just picking up on one or two things that I have noted, which 1 did not think were completely covered. Back to the Scheme of Arrangement, the documentation was huge. 1 was asking why did people vote for it? The documentation was enormous, and it came very late and, in fact, the timetable of the court was not respected. Documents were actually sent out I think I have put this in writing to you somewhere — just three 2165 weeks before the day of the vote and the statutory timetable said it should be 28 days. They were sent out on 27th April and the vote was on 19th May: well, I count that to be 22 days. That is days, not working days. If it is working days, it is an even worse calculation, but l do not know what is meant. So, there were 22 days. Lots of people are all over the world, so you can count... Bven when the post actually arrived with a normal sort of delay, it might be up to a week, so it was very little time for people to possibly take notice of 2170 all that information. It said on it, 'Please read it very carefully and if necessary, ask for professional advice.' Well, there was no time for all that. So anyone who had not followed all the discussion on the website and through the Action Group who received that, f do not know what they could have made of it. 1 think it is an important point: there really was not time for people to assess that. Otherwise, l think that is about it, really. I did have closing remarks, but I think we have probably - covered 2175 them. Just going hack onto the loan trust idea, 1 think it follows from the recommendation 18 months ago, for the Treasury committee in the UK, that the two governments should get together. As far as we can see, it never happened and nothing was done. We still think the door is open. It is still open and we hope something will be done about it. 2180 Okay, I think I had better stop.
The Chairman: Thank you very much. I am not cutting you short? (Dr Downs: No.) If you have nothing else to add, okay. 2185 Dr Downs: Thank you very much.
The Chairman: Well, thank you very much for joining us here this afternoon, and thank you, ladies and gentlemen for coming in. The Committee will now sit in private. Thank you. 2190 The Committee sat in private at .5.51 p.m.
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PROCEEDINGS OF THE SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER & FRIEDLANDER (ISLE OF MAN) LIMITED AND THE DEPOSITORS' COMPENSATION SCHEME
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Douglas, Monday, 14th March 2011
Morning Session: 10.30 a.m. — 11.44 a.m.
The Committee sat in public at 10.30 a.m. in the Legislative Council Chamber, Legislative Buildings, Douglas
[MR WATTERSON in the Chair]
Procedural
The Chairman (Mr Watterson): Welcome, everybody, to the latest oral evidence session of the Kaupthing Singer & Friedlander Select Committee. The Committee was appointed on 16th July 2009 with the remit to investigate and report on the cause of the collapse of Kaupthing Singer & Friedlander (Isle of Man) Ltd; the role of the Financial Supervision 5 Commission in ensuring the proper management of KSF (Isle of Man) Ltd to protect depositors' funds; the credibility of the Depositors' Compensation Scheme; and any other relevant matter; and to report back by the March 2010 sitting of Tynwald. 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 10 the action taken to try and save KSF Ltd. We are meeting this morning to take oral evidence and we have invited the Minister for the Treasury, Mrs Anne Craine. For the benefit of members of the audience who do not know, to my far right are Mr Roger Rawcliffe, Mr Phil O'Shea and Alan Crowe MLC, member of the Committee; and to my left, Roger Phillips, our Clerk. My
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141 SELECT COMMITTEE, MONDAY, 14th MARCH 2011
15 name is Juan Watterson and I am the Chairman. Can I ask everybody to switch off their mobile phones to prevent interference with the recording equipment.
20 Statement by Hon. A Craine
Q1365. The Chairman: Can I ask Mrs Craine if she would like to make an opening statement.
25 Mrs Craine: Thank you, Mr Chairman. Good morning, gentlemen. Thank you for the invitation to speak with you today. For the record, as you will already be aware, during the crucial period from October 2008 when KSF was placed into administration, and May 2009, when the Bank was placed into liquidation and the Depositors' Compensation Scheme was triggered, I was MEEK from Ramsey, Minister for Education and a member of the 30 Council of Ministers. I succeeded Mr Bell at the Treasury on 1st April 2010. I was, therefore, not a member of the Chief Minister's steering committee dealing with the issues surrounding KSF, but had a general knowledge of the situation, as would each member of this Committee, through my work as a Member of Tynwald. As a Member of the Government, I did my best to support and assist my colleagues, the Chief Minister and Mr Bell, and other senior Members and officials of Government as they grappled with this 35 unprecedented crisis. Mr Bell has already appeared before this Committee and given oral evidence, and the Treasury has also provided comprehensive written submissions. I am happy to answer questions about the work that has been undertaken by the Treasury since I took up the post of Treasury Minister, but I can only speak in general terms from my own experience for the period preceding. 1 have deliberately not reviewed the Treasury files 40 and submissions already made before this Committee as 1 see that as simply duplicating the work of the Committee and the work that it is undertaking. It' it is alright with you, Mr Chairman, as we proceed through the questions, 1 will refer to the notes that I have before me in order to be able to give you as fulsome an answer as I can. 45
EVIDENCE OF HON. A CRAINE
The Chairman: Mr Crowe. 50 Q1366. Mr Crowe: Thank you, Mrs Craine and good morning. You have had advance warning of the questions?
Mrs Craine: I have, thank you. 55 Q1367. Mr Crowe: So can 1 just ask, first of all, what are the general aims of the DCS and, just for Hansard, what assessment was made of likely and future difficulties which the DCS will aim to cover and what are the key situations where the DCS can he viewed as effective and concerns about if a second bank were to fail, what would actually happen? So if you would like to expand a bit on that, Mrs Craine. 60 Mrs Craine: Yes, certainly. You will recall, hon. colleagues, that, at the time of the introduction of the new DCS in November 2010, we did a presentation — Treasury did a presentation — to Tynwald and, within that presentation, a copy of which 1 have before me, it indicated what the general aims of the DCS were. The main aim was to provide 65 compensation to qualifying depositors and it was agreed that the DCS should, in particular, protect the vulnerable depositors. It should protect and enhance confidence in the Isle of Man and in our banking system, it should be affordable and liquid, it should broadly meet international standards and it should have administrative clarity. The assessment that was made of likely future difficulties that the DCS would aim to cover was the second 70 part of Mr Crowe's question, but I would have to say that, at the time of the KSIT 2 bank collapse, I was not
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Treasury Minister and, therefore, I was not aware of, and unable to answer on, the technical aspects of any assessments that may, or may not, have been carried out. Generally, though, it is my understanding that the DCS is not intended by itself to deal with systemic bank failures, it is part of a well-constructed safety net, which includes prudential regulation and supervision. It is not intended as a lender of last resort for the whole 75 sector, as a central hank might be. I think I would describe it as a consumer protection device, not a bailout for banks. The further part of Mr Crowe's question was, I think, what are the key situations where the DCS can be viewed as effective? Was that the next part? 80 Mr Crowe: Yes.
Mrs. Craine: The 2010 Depositors' Compensation Scheme was devised, taking into consideration the lessons learnt from Kaupthing, Singer and Friedlander. During the KSF collapse, the early payment schemes, which provided up to £10,000 per depositor proved 85 to be particularly effective in alleviating hardship. Therefore, the 2010 DCS incorporates an early payment provision. The DCS is a joint industry-Government funded scheme which has demonstrated that it can work effectively in providing compensation to depositors. The Scheme, as previously constructed and now since modified, has dealt, 1 believe, reasonably well with the collapse of KSF Isle of Man. It was fully funded from the outset and, once the Bank went into default, paid out full compensation to eligible depositors in 90 accordance with the regulations, achieving full refunds of deposits to approximately three quarters of all depositors. The longer-term aim is to have the Depositor Compensation Scheme partially pre-funded to provide the liquidity to pay out in a timely fashion, should we ever he in the unfortunate situation of a default again. The 2010 Depositors' Compensation also provides flexibility in the Scheme management, again to deal with 95 prompt administration, should the DCS he called upon. I think the final part of your question, really, Mr Crowe, is the DCS regarded as fit for purpose?
Mr Crowe: That is going on to the next question. 100 Mrs Craine: Oh, was it? Right. Was there a second part to your question that I have missed, then?
QI368. Mr Crowe: Yes, concerns were expressed that if a second bank were to fail, while a DCS recovery is already under way, would the Scheme struggle to provide an effective and timely cover? 105 Mrs Craine: l believe that we have in place as sustainable a scheme as could be expected from our jurisdiction at the current time.
Q1369. The Chairman: You mentioned about the Early Payment Scheme, which is now written into the 110 2010 Scheme — that still appears to be somewhat discretionary, isn't it, in terms of how much and when, the nature, the extent and the timing of the payments under an Early Payment Scheme'?
Mrs Craine: I think that the Early Payment Scheme was quite timely in its presentation, but the difficulty that I think it encountered was the fact that there was this question mark of whether the business was going to 115 be going into liquidation or not, and I believe that that delayed the process of the Early Payment Scheme.
Q1370. The Chairman: I suppose what I am trying to get at is, looking forward, based on the 2010 Scheme, the new Depositors' Compensation Scheme, if there were to he another banking collapse, the Early Payment Scheme is& There does not appear to be any policy for when payments& It does say when& in 120 terms of the potential is there for something to be paid out within 28 days, but what is Treasury's policy about how much and when it should he paid out?
Mrs Craine: I am not sure that there is policy as to how much, Obviously, that depends on what amount is going to be required. I think, in practical terms, it has to be accepted that Treasury works hand in glove with 125 the Scheme manager and now, as I understand it, that can he Treasury itself in this particular case. I understood it was the FSC to start with.
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In terms of payments, I know that it has been voiced in the UK that early payments should be made within seven days. I think that that is aspirational, to say the least. I do think that you have to work quite closely, obviously, with the bank in question and the Scheme manager, who is the person who holds the addresses and 130 data of the depositors themselves, so it does come down to aspiration versus practical application.
Q1371. The Chairman: You also talk about pre-funding and it is your ambition to have it part pre- funded. Who is going to be providing that pre-funding?
135 Mrs Craine: 1 can only consider that that would have to be Government who would have to hold the pre- funding. I do not think that that would be something that the banks would be in a position to be able to meet that
Q1372. The Chairman: Even though in the UK that is exactly what they do. 140 Mrs Craine: 1 think we have to accept that our position in the Isle of Man is somewhat different and that if we are too onerous about our requirements, then it could have a detrimental effect in attracting business here.
Q1373. The Chairman: The new feature of the 2010 Scheme is the £100 million cap in any one instance, 145 £200 million in aggregate in any ten-year period restriction on the payment of the DCS. Do you not feel that that somewhat undermines the consumer protection angle and will actually increase the complexity of the Scheme, given that it might mean, ultimately, that the £50,000 due to that series of creditors is not available in the case of a large bank failure?
150 Mrs Craine: 1 think that we have to take a pragmatic view on this. I think we have to face up to the fact that we are dealing with a situation where we have to protect those small depositors, first and foremost. I think that it has been proven that the Isle of Man Government and the banks have come forward very well on the previous Scheme. We can talk hypothetically about 'what happens if', but I do not think it is actually helpful to do so. I think that, obviously, there are conditions that the Isle of Man Government would have to face up 155 to and that would certainly be an unprecedented situation.
Q1374. The Chairman: Unfortunately, the entire DCS is based around the premise of 'what happens if& ' so is it not& but the case that, if a bank folds with more than a significant amount of liabilities, and a relatively low recovery rate, it is entirely possible, whereas before, at least people knew they were going to 160 get their £50,000 sooner or later: potentially, now, that is undermined.
Mrs Craine: It is possible for the Scheme to go out and borrowing, of course.
Q1375. The Chairman: But no-one is going to be paying that back, apart from, potentially, the taxpayer. 165 Mrs Craine: It will take longer.
Q1376. The Chairman: The Scheme is worded so that if you& it is capped not just in a monetary amount but in time. So it is capped at £200 million in any ten-year period. So it is not about taking longer; 170 these people will not get their money.
Mrs Craine: My understanding is that there is the ability for the Scheme to go Out and borrow and, if that is the case, then it will take longer for that repayment period to be made.
175 Q1377. The Chairman: What will they borrow against?
11Iry Craine: I am afraid I do not know the technical aspects of that, Mr Chairman.
Q1378. The Chairman: You have only got& you know you are only going to get a certain amount of 180 assets in, based on a projection. You have got large liabilities with a bank failure. If the two are mismatched by even just the liability of the 50,000 group, if that is more than £100 million, the only place the money is going to come from is the taxpayer, isn't it?
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Mrs Craine: It is going to be, yes. 185 The Chairman: Okay. sorry.
Q1379. Mr Crowe: Could you give us an indication of how you compare our Scheme in the Isle of Man to competitor jurisdictions and could you also give us some feel as to how European Union governments are 190 changing their schemes to give greater confidence in their respective areas. Just a general comment on the competition, shall we say?
Mrs. Craine: I understand that, in Jersey, depositors' compensation was introduced in November 2009. Their compensation is limited to .£50,000 per person for local and international deposits. However, unlike the 195 Isle of Man, no protection is afforded to deposits held by companies, small or medium enterprises, partnerships or trusts. Theirs is similarly capped at £100 million in any five-year period, in line with the Guernsey scheme. Obviously, the United Kingdom has recently moved from £50,000 to £85,000. In euros believe that is € 100,000. 1 think that there was some query about the EU jurisdictions. I do not know what the position is in respect 200 of the EU. I know that, in respect of the Irish position, our DCS would he called upon before their scheme of arrangement would kick in to support their depositors in Irish banks.
Q 1380. Mr Crowe; How do you feel about our competitiveness as an Island against other jurisdictions?
205 Mrs Craine: I think that we are quite good in our standards of competitiveness in respect of this, and 1 think that that has been proven by the way in which we have actually dealt with the KSE collapse, in that a scheme kicked in, Government came to support that scheme. It was paid out, it has been funded, and I think that the record that we have of 75% of all depositors having been paid out at this time is a good one. I understand that the ultimate payout will be 97 pence in the pound and that the liability to Government will be 210 in the region of £2 million to £2.3 million. 1 think that that is a creditable story for the Isle of Man to he able to relay and shows that the Scheme that we have had, and the responsibility taken by the Government to support that Scheme, has been well regarded
215 Mr Crowe: Would you say —
:Vim Craine: — and responsible.
Q1381. Mr Crowe: — that it was good management of a difficult situation? 220 Mrs Craine: I would.
Mr Crowe: Chairman, do you want to —
225 Q1382. The Chairman: Maybe you think that the balance has swung too far from being towards the banking competitiveness and away from consumer protection since the introduction of the cap?
Mrs Craine: No, I do not think so. I think that the Island is acutely aware of its need to protect those more vulnerable depositors and, generally, those are the smaller depositors. 230 I think that the acceptance has to be — and perhaps we will touch on consumer risk later on — that people do have to he responsible for their own affairs. I think that, as far as possible, we try to ensure that people understand the risks that they are taking and I think that that is a matter that has been improved following questions by yourself, Mr Chairman, to the FSC. I think that we are very conscious of depositor protection, hand in glove with competitiveness. 235 Q1383. Mr O'Shea: In introducing the updated Scheme in 2010, did the Government give serious consideration to amending the limit up to the €100,000? Clearly, I guess the high-value depositors who are now likely to have to wait until 2013 to get the next 20% or so, if the Scheme had been invoked to that level,
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potentially, would have an opportunity to get to higher returns in a similar situation. 240 Mrs Craine: The position, as you may recall, Mr O'Shea, was that, in fact, our Depositors' Compensation Scheme was revised and put to Tynwald about a week or two weeks before the United Kingdom increased their levy and the levy was raised to €100,000. You may be aware that we have a working group who are looking at various issues surrounding the 245 Depositors' Compensation Scheme and that is one of the considerations that they will be giving thought to.
Q1384. Mr Crowe: How do you balance the needs of the consumer and consumer protection with attracting business to the Island, or the banks who may wish to come here?
250 Mrs Craine: I think that we have to be cautious not to he too onerous on our demands on the banks. I think that we have to be seen to be treating them equitably with other jurisdictions and not being too demanding because 1 do think that there is a risk that it could potentially put banks off coming and establishing their businesses here; but I think, by and large, we are seen as a fair and responsible jurisdiction. We do work with the banks and, indeed, the question of capping the I:100 million was a matter of some 255 discussion between the banks and ourselves. So I think that what we have come forward with is a Scheme that can be sustained and managed, and I think that that working relationship that we have with them was of benefit in the formation of the Scheme.
Q1385. The Chairman: Have you sought to obtain assurances from the parent companies of Isle of Man 260 banks, Isle of Man based banks, those that have branches, that they will be covered in any UK scheme?
Mrs Craine: No, we have not. The position is, quite clearly, with UK banks and I think what you are asking is, the UK banks that have their parent operations —
265 The Chairman: Those which just have branches on the Isle of Man, rather than subsidiaries on the Island.
Mrs Craine: Right. I think we are in danger of being accused of not standing on our own two feet, if we are to seek from UK banks the assurances that would make our risk watertight. I think we have to respect the fact, or at least acknowledge, that we are an independent jurisdiction and, as 270 such, need to behave as one. I do not believe that seeking out assurances and guarantees from the UK banking sector for those banks placed in the Isle of Man is practical or reasonable.
Q1386. The Chairman: But when you do that, if you are not seeking a guarantee from the fund, then the parent company, you tie one hand behind the regulator's back, because what you are saying is that we will 275 take the responsibility for the branch, but actually, what we cannot do, unlike a subsidiary, is control capital liquidity?
Mrs Craine: What we have got is a situation where we can make these arrangements and we can seek all the guarantees that we wish in the world: when it comes down to it, I am concerned that they are not worth the 280 assurance or the paper that they are written on, because I think that, when it comes down, in practical terms, to whether the Isle of Man and its banking system is reliant on other jurisdictions, then there is one answer and that will be, prove it.
Q1387. The Chairman: Well, that might be our relationship with the FSA, but is that what you are saying 285 about the parent groups of banks with branches on the Isle of Man?
Mrs Craine: I am saying that we have to be practical about the whole proposition of banking in the Isle of Man. We have a successful banking system here which is based in the Isle of Man and we cannot place false hope on other banking parent groups to bail us out in such times as we may see an issue growing in the Isle of 290 Man.
Q1388. The Chairman: Okay. I think I am still a bit concerned, though, that we are not actually differentiating our approach, then, in terms of branches and subsidiary companies on the Isle of Man. The two are clearly very different in terms of the amount of control that you have over them. Are we saying that you
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Mrs Craine: I would not choose to answer that question, Mr Chairman. I think that is one for the FSC.
The Chairman: Right, okay. 300 Q13S9. Mr Crowe: Minister, can we just change tack slightly and look at the question at the bottom of the page, talking about measuring the credibility of the DCS in the eyes of depositors, banks, regulators, other Governments? 305 Mrs Craine: No, your pages are different than mine.
Mr Crowe: Oh, sorry.
Mrs Craine: Oh, yes, sorry, I think I have — 310 Mr Crowe: About the credibility of the DCS being a key issue.
Mrs Craine: Right. 315 Mr Crowe: I know you have covered, probably, some of this but can you just talk about measuring the credibility?
Mrs Craine: Yes. The question goes on to ask how we measure the credibility of the DCS in the eyes of the depositors. I think that is the one, isn't it? 320 Mr Crowe: Yes.
Mrs Craine: Banks trading on or oft' the Island, regulators in other jurisdictions and other Governments& and the response that I would make, through you, Mr Chairman, is that the Basle Committee have recently 325 undertaken a consultation which included eminent bodies such as the IMF and the World Bank, in order to develop a robust methodology to assess the compliance of depositor compensation schemes with core principles. Obviously, once this exercise has been finalised, Treasury will consider this as a measurement tool covering all categories, as no doubt external bodies will utilise this when measuring the credibility of the Isle of Man DCS. 330 Again, what I would say is that, in respect of credibility with the depositors, Mr Crowe, I believe that that was credible. The actions that were taken were credible. I believe that the trigger of the DCS came about very quickly, the response was good, and I think that the overall response is one that is almost a textbook exercise.
QI.390. The Chairman: Is it not fair to say that, actually, the true litmus test of confidence in the DCS is 335 actually hank deposits on the Isle of Man (Mrs Craine: Yes.) and that if depositors were not happy with it they would leave, if banks were not happy with it they would leave, and the experience, to date, has been that, over the last two years, bank deposits have remained relatively stable?
Mrs Craine: They have and I think that, whilst there has been a slight dip, that has not necessarily been 340 associated with the collapse of KSF; it has been rather more to do with the global financial situation and banking in general.
Q1391. The Chairman: Will that be reflected in international trends?
345 Mrs Craine: Yes.
Q1392. The Chairman: If we can revisit the 2010 Depositors' Compensation Scheme, to what extent were the banks and other regulatory authorities consulted about its relevance& its effectiveness?
350 Mrs Craine: As you will recall, I was not Treasury Minister at the time, but there was a consultation
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process in 2008 and 2009 and I understand that Mr Bell maybe touched on that when he gave evidence to the Committee.
Q1393. The Chairman: Sorry, can I just clarify, though, Minister, that you were the Minister who moved 355 the 2010 Regulations, weren't you'?
Mrs Craine: Yes, but I think your reference was to what was the consultation. (The Chairman: Yes.) The consultation was made prior to my being Treasury Minister although, on the back of that consultation, I was able to introduce the Regulations in 2010. The consultation that was carried out, I think& I understand 360 was acknowledged by Mr Bell to be somewhat limited in 2008 and my understanding is that more comprehensive consultation was carried out in 2009 and that, as I said, the Government Code of Practice was used in that consultation. I am satisfied that sufficient time was given for depositors to respond to that.
Q1394. The Chairman: In the consultation document, the cap was in when the final one appeared, it was 365 out and then it was hastily put back in again. Is that a fair summation of it and how did that come to pass?
Mrs Craine: I think that was an example, actually, of where we worked quite well with the Banking Association, because, as I understand, the cap was not in and this was picked up at the last minute. It was, in fairness, I think, an administrative error as much as anything else. I do not believe that there was any 370 preconceived deliberation about that. So when it was picked up and the Bankers Association approached me, readily agreed that we should have that reinstated and that is why it was reintroduced at the following month's Tynwald.
Q1395. The Chairman: If you consider that a good example of the Treasury and the bankers sector 375 working closely together, how do you explain why would they put in a letter to us, dated 20th September 2010 that, and I quote from their letter: 'Communication with the Association was somewhat sporadic"?
Mrs Craine: Which association?
380 The Chairman: The Isle of Man Bankers Association.
Mrs Craine: Oh, sorry, who said it was sporadic?
The Chairman: They did. They said that communication with them, by you, was sporadic, somewhat 385 sporadic on this matter.
Mrs Craine: Well, that is interesting because, in fact, I did not have the approach from the Bankers Association until just prior to the Depositors' Compensation Scheme going to Tynwald — and that was certainly after the date of that letter. 390 Mr O'Shea: 1 think that is probably the point, that I think, whilst there might have been some consultation in 2009, 1 think the issue the banks were putting forward was that there was not follow up consultation, immediately prior to the 2010 Scheme going to be laid before Tynwald.
395 Q1396. The Chairman: Was there something of a rush between the draft Scheme going out to the various stakeholders and a decision being made as to whether to put it to Tynwald'?
Mrs Craine: Not as far as I am aware. I think that Treasury, as far as I understand it, was keen to get this, in fact, if I recall rightly, 400 Mr Chairman, there was a sunset clause to the whole matter that we needed to get back to Tynwald in time to be able to meet the needs of that sunset clause date and therefore it was coming forward — and I will just check now, was it October or November? The presentation was in October, with a view to bringing it in November.
405 The Chairman: The commencement was 23rd October.
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Mrs Craine: Was that when it went to Tynwald?
The Chairman: Yes. 410 Mrs Ovine: Right, and the alteration, the amendment to the capping, was then in November. All I can say is that things do get slowed down somewhat by the summer recess. Perhaps communication was not as good as it might have been at that point, but I do not think that there was anything untoward about that delay. In fact, the consultation, as I understand it, took place in 2009 and I had no representations from 415 the Bankers' Association to indicate that they were unhappy about anything that was coming forward.
Q1397. The Chairman: So the introduction of this cap that appeared was a political decision that was made before your arrival in the Treasury Minister's office?
420 Mrs. Craine: No. I think that what you are referring to, the cap, was actually taken away. The reinstatement —
The Chairman: Yes, but what you are saying is this was unintentional.
425 Mrs Craine: Yes, as far as I know. No not think that even the Bankers' Association picked it up until just before it was to go to Tynwald.
The Chairman: I need to wind hack, then, because in 2008 there was not a cap.
430 Mrs Craine: Right.
01398. The Chairman: That cap then came in at some point. Was that during your watch, I suppose I am asking?
435 Mrs Craine: Yes. The cap came in following representations from the Bankers' Association in October, and I agreed that we would& In fact, it was about a week before we were to take it to Tynwald and, because of the sunset clause, I agreed that we would carry on with the regulations but observe the spirit in which we were intending to move forward and would observe that cap during that interim period, should a default happen in that month. 440 Therefore, it was brought in with an amendment to the Order in November.
Q1399. The Chairman: Why did you feel that it was important to have a cap in the DCS?
Mrs Craine: [ think that there was some nervousness on the part of the banks that this could make their 445 position very vulnerable and could make the jurisdiction less competitive in its presentation.
Q1400. The Chairman: So you were content that the concerns of the banks outweighed any potential customer protection issues?
450 Mrs Craine: I believed that the customer protection issues were reasonably covered, anyway.
Q1401. Mr O'Shea: Is that correct? My understanding was the 2008 Scheme did have a cap within it, and the concern was that, when the 2010 regulations were seen by the Bankers' Association very shortly before being laid before Tynwald, they were not shown within those regulations, and therefore the concern was that 455 actually there had been a revocation of the position.
The Chairman: I will have to look at that.
Mr O'Shea: I think that was then raised and effectively the status quo was then retained by the later 460 amendment that was put through.
The Chairman: I will have to look at that, then.
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Mrs C'raine: Mr Chairman, it' the Clerk would like to make a note of that, I am happy to check that out 465 with Treasury and we can&
The Chairman: f am sure we have got a copy of all this in some of the files behind —
Mrs Craine: — I am happy to forward that information to you for clarity. 470 The Chairman: Okay.
Q1402. Mr Crowe: Can we just change the subject slightly and talk about the working relationship between the Island authorities and the UK authorities? This has been a continuing subject of comment in 475 relation to the collapse of KSF. Would you like to make a statement about the current working relationship with the United Kingdom authorities, Minister?
Mrs Craine: Yes, certainly, the present relationship is one very much of business as usual. I know that there is continuing dialogue and constructive co-operation, wherever possible, and I think that 480 a very positive climate now exists with the UK authorities. You will he aware that the UK regulatory scene is shortly going to undergo significant change and it is going to be essential for us to have that working dialogue and to make sure that we have got the right contacts and right channels to he able to communicate, as and when this new structure comes into place.
485 Q1403. Mr Crowe: So this is politician to politician, as well as FSC to FSA'?
Mrs Craine: Yes, we do have those political contacts and I do not think that we necessarily use them on a regular basis, but they are there should we have call to do so.
490 Q1404. Mr O'Shea: Is there, then, a danger that we might find ourselves in a position that actually we experienced in 2008 whereby the relationship, in terms of dealing with the potential failure of Bradford & Bingley, which probably was viewed as it bank of national importance, that actually the process worked extremely well and the FSA, I think, were very supportive of that approach. And then we had Kaupthing, which probably, from a UK point of view, was not viewed as a hank of national importance, and they were 495 not prepared to get involved and support. Is it not feasible that, actually, if something similar were to happen in future, we could find exactly the same position?
Mrs C'raine: One can never say never, but i would like to think that we have all learnt from the lessons of Kaupthing Singer & Friedlander- and that the position would not be replicated. 500 I think, at the time, it. was a very torrid climate that was being gone through. I think that misjudgements were made and that has become clear in the evidence that is shown in your first report — the timeline and the way in which events unfolded were not predictable, by any means. I would like to think that what you are suggesting is that we would have stronger political links in order to be able to avert such a problem in the future and we always need to work on those. 505 Q1405. The Chairman: Is it fair to say that there has been no politician-to-politician contact, certainly with the UK Treasury, since Kaupthing?
Mrs Craine: There has been informal contact, but we have not had need to make formal contact on issues 510 as yet.
Q1406. The Chairman: In terms of the informal contact, was the matter raised of the Treasury Select Committee's recommendation that the UK and Isle of Man Governments should work together to resolve the situation? 515 Mrs. Craine: Yes, forgive me, I was thinking on my own personal level. Of course, the Chief Minister has had formal contact at the Treasury Select Committee.
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Q1407. The Chairman: I was thinking, after the report and after the recommendations were made, 520 whether there has been anything since then.
Mrs Craine: I am not aware of.
Q1408. The Chairman: Okay. It is notable that we talked about the €100,000. That was something that 525 has crept up. Is it the intention of Treasury and the PSC to introduce the €100,000 limit on the Isle of Man?
Mrs Craine: I think, as I referred it, if I can find it here, Mr Chairman& it referred to the workings of the working group and this will be one of the considerations that they will be making. I am trying to find& It 530 may he helpful if I could just find the body of that working group for you.
The Chairman: Perhaps you could also give us an indication of its membership.
Mrs Craine: Yes, that is what I have here somewhere. If you will just bear with me a moment. This is it. 535 The working group is supported by the Attorney General's Chambers and has representatives from the Law Society, the banking industry, the liquidator of KSF Isle of Man, the Scheme agent of the DCS, KPIVIG, the Chief Executive of the Chamber of Commerce, the Department of Economic Development and the FSC. They have been brought together to work on developing the Depositors' Compensation Scheme and, in particular, looking at the possibility of providing preferred creditor status to depositors. 540 They are also taking into consideration the EU standard, which provides for the compensation of up to €100,000 per depositor, faster payout within seven days and changes to the rules in respect of offsetting loans against deposits, where depositors have both. I think it is fair to say that we acknowledge these external pressures to meet those EU standards, but I think we also need to balance that with the sustainability of our Depositors' Compensation Scheme. 545 Q1409. The Chairman: Does that Committee have a timetable to report back to Treasury'?
Mrs Craine: I am afraid I do not have that information here. It is an ongoing working group and — we are in March now, aren't we — I am afraid I could not answer you as to what the timeframe is with regard to 550 which aspects of their work they should he reporting hack to Treasury when.
The Chairman: It would be appreciated if you could let us know about that at some point.
Mrs Cmine: Yes. So you would like some further information about the workings of the group and what 555 timeframe surrounds —
The Chairman: I did not catch whether Treasury was represented on that group. I presume it is.
Mrs Craine: It is, yes. I do not think that we have actually put ourselves down as being on that working 560 group hut, yes, Treasury is represented on the working group.
The Chairman: 1 suppose it is then the matter of what the timetable is to report on what, so that —
Mrs Craine: And frame on different aspects of their work. 565 01410. The Chairman: So that we can, perhaps, formulate some assumptions on when Treasury is likely to make any changes to Tynwald. I suppose, that would he further down the line. 1 suppose that will be after a consultation process, but --
570 Mrs Craine: I think with some of the& certainly I am told that, in respect of looking at, for example, the preferred creditor status, it is quite complex and is still in the investigatory stage, because it would probably require a change in primary legislation. So some of this may be short term, but very much more of it, I think, will be longer-term developments.
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575 The Chairman: So getting hack to the question that& sorry?
Mr Crowe: Could I ask& ?
Q1411. The Chairman: Before we do, the question that started this train off and I would just like to 580 finish with it: has the €100,000 Limit been discussed by that and has any conclusion been made on it?
Mrs Craitze: It is part of their considerations, but no conclusion has been made.
Q1412. Mr Crowe: Can I just ask, as part of the Committee's brief, are they looking at the different 585 treatment that parents — Spanish parents or Irish parents — have, different from a UK parent? Is that coming into the rnix of their considerations?
Mrs Craine: I am not aware as to the comprehensive matters that they are considering, so I am afraid I cannot answer your question. 590 Mr O'Shea: [Inaudiblel & whether they arc. I think the reality is that, obviously, for Irish banks here, as we said, it would be the Isle of Man Scheme up to £50,000
Mrs Craine: Yes. 595 Mr O'Shea: — and then, if that is not in a position to fully pay out, the ability to then use the Irish scheme. I think it would be helpful if this Committee could actually understand how the mechanics of that existing Scheme work — and as you say, it applies to the Spanish — because, clearly, if actually there is a clear mechanism for that and, for example, if that could he extended to cover UK banks, then that might present the 600 Isle of Man with an alternative model.
Mrs Craine: I am afraid that your reference to the Spanish banks is something that is not known to me, that there is any provision for any additional bale-out for the Spanish banks. I noted that was in one of your questions, but I was not clear as to where that had come from. 605 Q1413. The Chairman: I suppose we are just looking at different channels in terms of company structuring and as to where the parent gets dealt with from a liquidation point of view, in that you end up with different results whether that is done in London, as with the KSF sister company, or in Spain, as we have several banks on the Isle of Man that are — 610 Mr O'Shea: I think our understanding is that the Spanish-owned banks are promoting access to a European solution beyond our&
Mrs Craine: That is not within my knowledge, I am afraid. As I say, I did pick that up in your question, 615 but we were unaware of that.
Q1414. The Chairman: Okay. What impact has KSF had on the banking sector in the Isle of Man and what changes have we seen since Kaupthing to that sector? 620 Mrs Craine: I think that it has had very limited effect and impact on the banking sector in the Isle of Man, actually. think I am now in danger of repeating myself in saying that 1 think the way in which we have dealt with the collapse of KSF has been in a responsible manner and I think that that has meant that the banks and the 625 banking industry in general have continued without too much& Concern' would be too strong a word, but I do not think it has adversely affected the banking industry.
Q1415. The Chairman: Are you satisfied that enough has been done by the banks and others on the Island the ESC, for example — to promote awareness of the DCS, as well as issues such as upstreaming, as 630 well as how banks on the Isle of Man work?
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Mrs Craine: Yes, I do think that that is a matter that has been improved. I think, as I said, from issues raised by yourself as to the clarity, to give people the clarity of understanding about what the DCS would cover and the necessary information from the FSC, has been improved. So I think 635 that, from an education point of view, people should he more aware now as to where the DCS applies and what it covers and what it does not.
Q1416. The Chairman: I suppose the FSC is one thing, but are you happy that the banks themselves have done enough to raise awareness of this through their own actions? 640 Mrs Craine: I believe so. I think we are in danger of trying to remove all risk from the depositors themselves, and we cannot put ourselves in a position of alleviating the depositor from calculated risk. In very many cases, those high-end depositors are able to make calculated judgements for themselves, or if not, to buy in professional advice. I believe that we have made strong attempts in trying to advise the smaller 645 depositors with as much clarity as is possible to give them the advice they need in making safe deposits.
Q1417. The Chairman: As I say, I appreciate that that information is available on the FSC's website, but come back to my question, which was: are you satisfied that the banks themselves are doing enough to raise awareness of the Depositors' Compensation Scheme? 650 Mrs Craine: I think you can always do more but, having said that, I think the banks are very much more aware of that responsibility these clays, and for me to sit here and say, yes, I believe that is the case& I am not familiar with all of the banks, or all of the preparation and advice that they give to depositors in each and every circumstance, but I believe that that is very much in their consciousness. 655 Q1418. Mr Crowe: Thank you for that. Are we actively promoting the Island as a place to do banking? For instance, are we Looking to encourage new banks to come here?
660 Mrs Craine: That now is actually a responsibility that lies with the Department of Economic Development and, as the Member with responsibility for financial services, I am sure the Chairman is doing his bit in promoting the Isle of Man as an area to do banking. I think that that is part and parcel of the general promotion that is being made in marketing not just financial services, but certainly financial services as part of the package of the Isle of Man as a good place to do business. 665 Q1419. The Chairman: In terms of overall lessons about the Depositors' Compensation Scheme, do you feel that lessons have been learned within Treasury and the ESC or just generally within the Isle of Man and more broadly?
670 Mrs Craine: I certainly think so. I think that the importance of having the early payment scheme, the introduction of more flexibility attached to the Scheme, even down to the way in which to handle the estates of deceased persons. All of those things have been very much, because of the experience that has been gone through, I think there are very many aspects now that the Isle of Man is much more prepared to be able to cope with than previously. It has been quite a hard experience, but I think it is one that has proved to be 675 beneficial.
Q142(). Mr Crowe: Shall we move on, Minister, to the Scheme of Arrangement now'? 1 think some of this would have been before your time, but one of the recurring themes is communication and, before getting onto that, can you talk about any comments in the evidence we have already received on the Scheme of 680 Arrangement, as to your views on any issues that have arisen since the Scheme of Arrangement was rejected or at the time the Scheme of Arrangement was being developed and proposed as an option?
Mrs Craine: Of course, that was before my time and so I do not have any particular comment to make. know that it was an arrangement that was put together, as believed to he with the best of intentions. 685 1 understand that the Scheme itself, whilst that was voted clown, the majority of small depositors voted for it and it was lost on the back of those higher-value depositors not wishing to go down that route. I have little
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knowledge, really, of the communication that went forward at that time and whether that was adequate or not.
Q1421. The Chairman: Okay. It is fair to say that there is good news with regard to the KSF collapse or 690 some sort of silver lining, shall we say, that the rate of recovery is looking to be quite so good. What is your message to those who have said, 'Don't bank on the Isle of Man' and those who have had concerns at this stage?
Mrs Craine: I think the proof of the pudding is in the eating, isn't it'? I think that progress has been made 695 by the liquidators in recovering assets and making payments to the Bank's creditors has been a very good record. If I might quote, figures from January this year indicate that 61 pence in the pound — dividends — paid to creditors, with indications from the liquidators that this will rise to about 73 pence by next month. £587.4 million of assets recovered, 7,919 claims processed and admitted and, in the end, the dividend outcome is expected to be between 91.4 and 97.7 pence in the pound. I think that portrays a picture that can give 700 confidence about doing business and banking in the Isle of Man.
Q1422. The Chairman: It has certainly demonstrated the prudential regulation of Kaupthing, but do you think it is acceptable that depositors are going to have to wait quite so long to get their money back?
705 Mrs Craine: I think the fact that they are going to receive a very large amount of their money hack, albeit for those higher-value depositors it is going to take a hit longer& I think that, overall, the success rate of what is going to be achieved is commendable.
Q1423. The Chairman: Given that the low-end expectation of the payout is in the region of 91 pence and 710 61 pence has been paid out, has the Treasury given thought. to doing another early payment scheme of 30 pence in the pound, knowing that is going to give a greater degree of certainty to those who are still without their money, knowing they are going to get it eventually?
Mrs Craine: No, I believe that Treasury has played its part. Three quarters of depositors have been paid 715 out now in full and I think that the early payment scheme and the aims of that have been met. I do not think that it is necessary for Treasury to step in any further on this matter at this time.
Q1424. 'the Chairman: So you are saying that the objectives to the early payment scheme are only to cover those who are going to be in the lower value end, who are suffering hardship? 720 Mrs Craine: I believe that it is. I think it is important to recognise that the scheme itself is there to protect those more vulnerable depositors and I think those people, by and Large, are those with smaller sums and perhaps those who were more reliant on that money being made available to them. I think Government stepped up to the plate and delivered that and I think that what we have here, in what will he seen to be 725 achieved, will be a success story.
Q1425. Mr Crowe: I thank the Minister for that. We had some comment about communication — and as I said earlier, this was a recurring issue — and the Liquidator was communicating with depositors through the internet. Would you like to comment on, or 730 possibly agree, that he was making positive efforts to keep depositors updated about key developments?
Mrs Craine: Yes, I think the Liquidator was. 1 think the officers of Treasury were, as well. From a general perspective, which was the only one I had at that time, I knew that there was a vast amount of work going on, to try and feed out information to depositors. 735 Of course, this was a terrible time of uncertainty for those depositors and I think that their lifeline was that means of communication and I think that that was met as realistically as possible. Certainly, from the contact I had with depositors themselves, which was generally in the form of round robin e-mails or letters, when those were passed to Treasury, the central body for dealing with and responding to, they did so in a timely manner and the personal feedback that I have received is that the communication and the result has been very 740 satisfactory.
Q1426. The Chairman: Has anyone any more questions on that theme?
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What I would like to move on to next is just taking some evidence on some of the comments made regarding the recommendations of the first part of our Report and some of the views that were expressed by 745 yourself and others in Tynwald, and in correspondence and the Treasury's response dated December 2010, to our first set of recommendations. Could I ask then, what options the Treasury is considering for the restructure and governance of the Financial Supervision Commission? 750 Mrs Craine: [ am not sure whether it is in here or not. You will be aware that Treasury is reviewing the role of both the Financial Supervision Commission and the Insurance and Pensions Authority at the present time and that is a matter that is at the forefront of our thoughts at the moment, as to how we are going to progress with that. No work has commenced as yet and we will be dealing with that over the next three months, I would suggest, certainly getting it underway. 755 Q1427. The Chairman: It has not started yet?
Mrs Craine: No. 760 Q1428. The Chairman: Why did you feel this was an issue that could wait?
Mrs Craine: It is one that is a complex matter and it also ties in with the expiration of the terms of office of members of the FSC. It is one that we, therefore, felt that, rather than do something half way through their term of office, it was something that we needed to have a little bit of time to consider and to make a 765 judgement on bringing both bodies together under the one umbrella. It is not one that is to be just rushed.
Q1429. The Chairman: Quite right. The terms of office for FSC members finish in October or November this year? 770 Mrs Craine: Yes.
Q1430. The Chairman: And whilst 1 appreciate you are saying you do not want this to be rushed, if it has not been started yet, and our first interim report was in June 2010, do you not feel you are in more danger of rushing it now, rather than less if you had started it when we reported in June? 775 Mrs Craine: Possibly, Mr Chairman. There have been a number of other issues that a very limited number of people within Treasury have been able to address these matters.
Q1431. The Chairman: So, you are saying it is not a priority? 780 Mrs Craine: 1 am saying it is a priority now. It has not been at the top of the list, given other considerations over the last three months.
Q1432. The Chairman: We did touch about information for depositors via websites and the FSC and 785 others. You have supported our recommendation 4 in your response to the Report, but only so that the rulebook may be amended in future, if required. Do you not feel that it is quite so important that this information is provided to consumers?
Mrs Craine: Forgive me, Mr Chairman, I have not read this this morning in preparation for this meeting, 790 so what you are referring to is& ?
The Chairman: Information for depositors via websites.
Mrs Craine: Yes. I think that already some of the information that you are seeking has been improved 795 upon on the website. As I say in the Report, this matter really lies with the Financial Supervision Commission and their remit, but the FSC& I do not know if you have the Report there, or not.
The Chairman: Yes.
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800 Mrs Craine: The FSC advise that the rulebook may be amended in future, if required, to compel additional publication of data by any banks, and I am quite happy to be led by the FSC on that matter.
Q1433. The Chairman: Given that this is a matter for consumer protection, is this not something that Treasury should have a view on'? 805 Mrs Craine: I am content with the recommendations of the BC,
Q1434. The Chairman: Why would Treasury not seek a binding memorandum of understanding or contract with the Financial Services Authority or, as it is going to be, the Bank of England, on banking co- 810 operation?
Mrs Craine: As we have said in the Report, what the Eon. Member was seeking, or what the Committee was seeking, in asking for a legally binding memorandum of understanding is one that is not readily forthcoming from other jurisdictions. If we were to go along and ask for a legally binding memorandum of 815 understanding, we are at best displaying our naivety about such matters and 1 do not think that we would wish to place ourselves in a position where we were felt to be so amateurish at our presentation that we would go and seek such a legally binding agreement. think we are in danger of exposing ourselves as not being a professional international finance centre if we are so risk averse that we would not accept the standards that are accepted throughout all of the 820 jurisdictions, and that is to operate within a memorandum of understanding.
Q1435. The Chairman: Do you not accept, though, that the biggest fundamental weakness of the whole KSF case was the lack of any duty of care owed by the FSA'?
825 Mrs Craine: No I do not.
Q1436. The Chairman: Why?
Mrs Craine: [ think that there were other contributory factors that were introduced into the whole collapse 830 of KSF and I do not think that any legally binding understanding could have been contracted into. I think that what is quite clear is that when such matters are& such contracts are entered into, they sometimes can be disregarded in a time of need and the simple answer is: it is not worth the paper it is written on and we will see you in court!
835 Q1437. The Chairman: But do you not accept you are not going to see them in court, if you do not create an obligation?
Mrs Craine: And what expense do we go along from the Isle of Man& as a sort of child in the playground to offer up our pleadings to the big boys, who, you know, are going to be derisory in their 840 approach to us if we were to pursue this matter? think that, sometimes, we have to accept that we must stand on our own two feet. We have to abide by the same regulations as apply in other jurisdictions and if we are going to be out there playing or participating in the wider world, we have to do so with a degree of maturity and understanding that this is not the way in which other jurisdictions do business and I believe it would be a step too far, if we were to try and ensure that 845 this degree of assurance could be given to us.
The Chairman: Thank you. Right, any final questions? 1 will start with Roger?
850 Q1438. Mr O'Shea: Just one, sorry. Are you satisfied that either the 2010 DCS, or the work that is underway to review that, has taken account of all the sensible learning out of the Scheme of Arrangement issue, such that if there were another failure, presumably the jurisdiction would move straight to invocation of a DCS, because there would be no issue or debate about another option?
16 EPTKSF140311
156 SELECT COMMITTEE, MONDAY, 14th MARCH 2011
855 Mrs Craine: Unfortunately, I do not think that there is such a thing as a 'typical' failure, and as such I think each case has to he judged on its own circumstances. I think it is a lesson to be learnt and one that I think we would take into consideration in the way in which we would proceed in the future. I feel sure that this is one of the things that the working group are 860 considering, but I would not wish at this point to dismiss that as an option because I think it could have succeeded and it was not given the opportunity to do so. So I do not believe that it was necessarily a wrong thing to introduce.
Qt439. Mr Crowe: Chairman, could I just go back to the question you were talking about administering a 865 memorandum of understanding. Can you just confirm that you do maintain good co-operation with other regulators in other jurisdictions? Just to make sure, they are not as formal as&
Mrs Craine: Yes absolutely. Obviously, that is a question, I am sure, that you probably asked the regulator himself, of the FSC and my understanding is that, yes, that was a time of some concern. However, 870 understand that working relationships with regulators in other jurisdictions are very much better these days. In fact, I myself have met with the Irish regulator, not that there was a requirement for me to do so at any point but, nonetheless, I think it is important for these relationships to be established and maintained and I am confident that our regulator does that. 875 Mr Crowe: Thank you, Chairman.
The Chairman: Thank you very much for your time and attendance this morning and for your answers. The Committee will now sit in private. Thank you very much. 880 Mrs Craine: Thank you, Mr Chairman.
The Committee sat in private at 11.44 (1.111.
17 EPTKSF140311
157 158 of Man istc Minister for the Treasury GOVCIT1311011/ Yn Tashtey Government Office, Douglas [sic of Man, Oritish Isles FROM THE OFFICE OF THE TREASURY MINISTER 3PU Telephone (01624) 685386 Fax (01.524) 6856'62 Mr .3 Watterson MHK, Chairman of the Select: Committee of Tynwald on Kg' f: r ^rsil I:reasuryarirNn@gm,im IOM Limited, Government Legislative Buildings, Douglas, Our Ref: KCM TM .1 3 PW RE Your Ref: C/KSF/.1W/MG i)uLe: Sopternber 2011)
Dear Mr Watlierson CLERK .t).:Ie TVt).1471/Al..i.1)
Re., Select CoMIllitlie,e of Tyntitiald on Ka upt ihingSin-g.t.:.tr and Fr iedla:ndEr Cf,)P1 ) 'Ltd
1 refer to your letter dated 2 August 2.010 requesting further information from the "Treasury in respect: of the Select Committee's continued examination of this inquiry which now focussing on the Depositor's Compensation Scheme (DCS).
Whilst t appreciate that: the Committee gathered a substantial amount of evidence in respect of the first phase of their enquiry there in invariably a degree of overlap in the matters now raised by the Committee which was furnished eariler,
The Appendix attached deals with the specific points raised in your i(ttter with cross reference being made to relevant material where submitted previously.
1 would like to again respectfully draw t:he attention of the Committee to certain matters contained within the information provided which remain commercially sensitive especially in relation to the bids made by the parties in the attempted reconstruction and potential sale of KSF. IOM Ltd. It is appreciated that: much of the work conducted through the Chief Minister's Steering Group on this particular matter was extremely sensitive and commercially confidential, I would again like to reinforce the earlier advice that in the event that the Cornnatee consider publishing matters of such details we seek the prior permission of those concerned.
It is acknowledged that t:he interest of the Committee will invariably extend to the current: developments being proposed for the DCS which, subject: to the approval of the Council of Ministers, will he presented to the October sitting of Tynwald. to advance of such proceedings I am content to enclose a copy of the proposed D(: -;S Regulations 2010 (sr) 683/10) for the Committee's information,
159 I also note the Committee's intended course of action is to invite my predecessor as Treasury Minister, Hon A. Bell NIHK, together with relevant Officers to give oral evidence at some date to be arranged in October, 1 shall as a matter of course copy this submission to Minister Bell for his attention and make available any previous evidence as may he required.
Yours sincerely,
n, Mrs A V Craine MHK S A Minister for the Treasury
cc. Hon A Bell NIHK
160 SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER & FRIEDLANDER (I0M) LTD ("KSFIOM")
Treasury response to letter of 2 Aulug 2010
1) The main events leading up fo r on and after 8 October in relation to the aftermath of the collapse of KSFIOM
In its previous submissions of evidence for the first part of the Select Committee's investigations the Treasury gave an assessment of events leading to the collapse of the bank up to 9 October 2008 when a Liquidator Provisional was appointed, Other than an involvement with Singer & Friedlander Investment Management TOM Limited who had been appointed by the Treasury to manage an element of its investment reserves and a separate Treasury deposit that had been lodged with the hank there had been no ongoing relationship prior to the demise of KSF(I0M).
After that date the Treasury, working as part of the Chief Minister's KSF Steering Committee, firstly attempted to find a buyer for KSF(10M) and thereafter pursued the opportunity of promoting a Scheme of Arrangement before the Court finally made the Winding Up order, All options for resolving the position of the bank were considered with liquidation being the option of last resort,
Whilst the Isle of Man Government attempted to find a buyer for KSF(IOM) and explored whether a Scheme of Arrangement was a possible solution, the Treasury implemented the Early Payment Schemes, This was done with the support of Tynwald and the application of its Reserves in order to bring financial relief to the depositors.
Since then the Treasury's role and contribution has extended to the following.
The Treasury was a member of a Steering Committee established by the Chief Minister, The Committee met very regularly over the period from October 2008 to May 2009, A full set of minutes was submitted as part of the Chief Minister's documentation for the first part of the report which represents a comprehensive record of events as they unfolded at the time.
4, The Treasury has worked alongside the Financial Supervision Commission (FSC) as Scheme Manager of the Depositors' Compensation Scheme which became activated on 27 May 2009 when
161 an event of default was declared under the Compensation of Depositors Regulations 2008. The Treasury has promoted the financial modelling of the funding required for the KSF DCS and sought the necessary Tynwald approval to the financial motion that has facilitated the accelerated payout of full compensation to nearly all qualifying claimants under the DCS, This has been effective by providing Government funding in advance of the levies paid by contributing banks together with providing an additional loan secured against liquidation proceeds.
The Treasury dealt with a very large number of depositors' queries, especially in the period between October 2008 and May 2009 during its administration of the Early Payment Schemes (EPS).
a The Treasury published information for depositors on its website and established a dedicated helpline and e-mail address not only for its EPS but also more general enquiries on the KSF collapse.
The Treasury was fully engaged in the Government's endeavours to progress a Scheme of Arrangement as a preferred option for the relief of creditors,
The Treasury has since continued a line of communication with the Scheme Manager and Liquidators mainly in relation to the reconciliation of relative claims made in the EPS/DCS and Liquidation and in monitoring the return of funding to the Treasury as the liquidation dividends are recovered and distributed.
2) What action the Treasury and other Isle of Man authorities, in particular the FSC,, took in relation to the -collapse of the bank after 8 October 200.8, The Committee is particularly interested in the Treasury's co-operation with the Liquidator?
The sequence of events following the collapse of KSFIOM on 8 October 2008 were set out in the earlier Treasury submission however, stated briefly this comprised the following action:-
s The KSFIOM board became aware that it could no longer rely on its parental support and it was concluded by both the FSC and the board of KSFIOM that KSFIOM could no longer continue as a going concern,
The FSC determined to suspend KSHOM's banking licence and a joint application to Court was prepared overnight and filed on 9 October
2008 ,
The FSC together with the KSFIOM Board petitioned for the appointment of joint liquidators and in the interim (Le. prior to the substantive winding up hearing) liquidators provisionally (the "Winding Up Proceedings"),
2
162 It is understood that the FSC worked with the Liquidators Provisional as appropriate to assist in the execution of their responsibilities.
Treasury was greatly assisted by the FSC in first consulting upon and afterwards promoting the DCS changes that were passed by Tynwald on 9 October 2008 (Statutory Document 826/08) and subsequent amendments approved on 23 October 2008 (Statutory Document 844/08),
The Chief Minister's Steering Committee established at the time was concerned to ensure that depositors were kept informed as best it could on the position of DCS at this stage. A number of Government agencies including the Treasury, the Chief Secretary's Communications Unit, and the FSC each contributed to that objective. The Liquidators Provisional also provided information on the position of the bank and more pertinent guidance for its creditors and depositors alike.
The Treasury has held periodic meetings with the Joint Liquidators to discuss the position of depositors, examine the progress in realising assets and, together with the FSC in its Scheme Manager capacity, has also kept abreast of the progress with the liquidation in relation to the funding provided by way of the EPS and interface with the DCS,
3) The system for administering the assets of KSF (I 0M) Bank after the collapse, and in particular what action was taken to save the Bank?
As referred to previously the Treasury was a member of a Steering Committee established by the Chief Minister to look at all options for resolving the position of the bank, with liquidation as a last resort, The minutes of those meetings present a detailed record of the efforts made, by Government to; save the bank through its attempts made at salvage and to find a buyer, introduce a Scheme of Arrangement and latterly, assist accelerated funding for the DCS, once the creditors had determined that liquidation was their preferred solution.
The Treasury engaged the services of its legal advisers through the recommendation of the Attorney General and also engaged Nix Partners through their introduction by the FSC to advise on possible solutions. Alix Partners are a well regarded global business advisory firm offering services and advice on business solutions, including financial restructuring and bankruptcy reorganisation, engagement of Alix Partners being approved by the Steering Committee
The Treasury was involved in the evaluation of bids put forward by the parties who had expressed interest in acquiring parts of, or the whole of, KSF(IOM),
3
163 4) Who proposed the Scheme of Arrangement and why?
The Scheme was put forward as a viable option by the Government's advisers, Alix Partners, based on their professional experience in dealing with other cases of this nature, This proposal was approved by the Steering Committee as the preferred course of action to that of liquidation.
5) Who supported/opposed it and why?
The supporters and opposition to the Scheme of Arrangement is a matter of Court record and indeed some parties' views on the appropriateness of a stay of the Winding Up Proceedings varied from hearing to hearing,
In order to understand the process of the Scheme of Arrangement it is important to note that from 9 October 2008 until the Winding Up Order was made on 27 May 2009 the matter was before the High Court and it was a decision of the Court as to whether KSEIOM should be wound up or not and indeed when the winding up petition should be substantively heard. The ESC have summarised the events put before the Court during this period as follows;-.
The first hearing was held on 9 October 2008 to consider the Winding Up Proceedings and afterwards came back before the Court on 24 October 2008. Many parties appeared, some, at that stage, seeking an adjournment, whilst others asked the Court to make a Winding Up Order immediately, The
- Treasury asked the Court for a stay of the Winding Up Proceedings (the Court was advised at that stage negotiations were still progressing at Government level) and further time was required. The Court decided to adjourn the Winding Up Proceedings to 27 November 2008.
On 27 November 2008 the Treasury sought an adjournment and presented its evidence in support (including an affidavit from Mr Lovett of Alix Partners). The Court considered the evidence and granted a stay to 29 January 2009, essentially to allow time for the Treasury (in conjunction with Alix Partners) to investigate the options available,
On 29 January 2009 the Court considered the options and heard the further evidence presented to it, in particular by Alb< Partners on behalf of the Treasury, setting out the rationale behind the implementation of the proposal for a Scheme of Arrangement. The Court gave judgment on 29 January 2009 and agreed to an adjournment to 19 February 2009 to allow the Scheme of Arrangement process to develop,
Further evidence was filed before the hearing on the 19 February 2009 and having heard the evidence and considered all parties' submissions, the Court determined to further stay the Winding Up Proceedings to 9 April 2009 to allow the Liquidators Provisional in conjunction with Treasury and its agents Alix Partners to consider, prepare and promote a Scheme of Arrangement,
4
164 In advance of the hearing on the 9 April 2009 KSF(IOM), the Liquidators Provisional and the Treasury filed a Joint Petition essentially seeking to obtain an Order from the Court to call a meeting of creditors and contributories (shareholders) to vote on a Scheme of Arrangement which had by now been formulated and prepared in draft. The Court granted such an Order on 9 April 2009 and as a consequence adjourned the Winding Up Proceedings to the 27 May 2009,
On the 27 May 2009 the Court heard evidence that the proposed Scheme of Arrangement had not obtained the necessary statutory majorities for the approval of the Scheme and as a consequence the Court determined that no further stay should be granted. The Court then heard the evidence in relation to KSFIOM affairs and determined to make an Order winding up KSF(10M).
This outline of events explains how the Court was involved and effectively oversaw the two competing processes of a Winding Up and a Scheme of Arrangement. On the evidence presented to it and for the reasons set out in a number of judgments the Court ordered a series of stays, each on its relative merits of exploring options and eventually allowed the Scheme of Arrangement to be pursued and voted upon. The creditors' interests were represented at all hearings and individual creditors took the opportunity to make their own individual representations — some for, some against,
6) What were the possible alternatives (a) with hindsight (b) as it appeared at the titre?
The alternatives to a Scheme of Arrangement were:-
• A sale/merger of the entire business
4 A sale of different parts of the business
• Salvage by way of restructure supported by 3' .(1 Party or Isle of Man Government assistance
• The Government to acquire the bank
• A loan work-out arrangement or hybrid wind down
• Liquidation
The respective scenarios were first presented to the Standing Committee by Alix Partners on 21 November 2008. The possible options do not alter with hindsight although the attractiveness, or feasibility, of the options are weighted differently with the luxury of new information such as the eventual level of return of assets which is now forecast to be as high as 97%,
5
165 7) What action was taken to communicate, consult with depositors, and whether, with hindsight, could this have been done better?
Once Liquidators Provisional for KSFIOM were appointed, the bank moved under the aegis of the Court. AL that point the Liquidators Provisional became mainly responsible for communicating with the depositors.
Treasury was responsible for communicating with the depositors' with regards to the Early Payment Scheme, In that time the Early Payment team dealt with more than 7,000 e-mail and letter enquiries and over 5,000 telephone calls regarding the Early Payment Scheme and the situation in general.
The helpdesk worked extremely hard to ensure the best possible, timely communication with the depositors', Members of the team had to deal with communications, telephone, letters and e-mails, from around the globe often from depositors' who did not speak English as their first language, information regarding the Early Payment Scheme and regular updates were posted on the Government website and the Financial Supervision Commission website. Depositors were also advised to check the websites of the Provisional Liquidators and latterly that established for the Depositors Compensation Scheme by the Scheme Manager.
Depositors' often expressed their frustration with "the lack of communication" when really they were referring to the lack of new or definitive information which was a result of the attempts to find a solution other than liquidation,
8) What specific difficulties arose in relation to communication with depositors or other interested parties, especially in connection with the distribution of voting papers?
As it was the liquidator who was responsible for the distribution of the voting papers this is a question that he would be better placed to answer, In Treasury's experience of administering the Early Payment Scheme it is evident that the dispersal of depositors across the globe presented an extremely challenging logistical exercise in the delivery of correspondence and validation of eligible depositor's claims,
9) What lines of communication exited between, the Treasury, the Liquidator, the FSC and any other official bodies and depositors? (please set this out in a chart)
The Chart attached merely sets out the primary bodies with which Treasury had established communication lines at this time, the majority of which were represented through direct contact. The inter-relationship amongst these bodies was often complex with the necessity to engage in a cross reference of events and activities dependent upon the specific nature of the task in hand. The narrative below may be helpful accompanying the chart to provide an illustration of the purpose for which each of the main communication channels were established,
6
166 After the appointment of the Liquidators Provisional, communication between the Treasury was almost exclusively routed through the Steering Committee established by the Chief Minister as referred to earlier.
Communication between the Treasury and the FSC was in relation to a mixture of their role as Regulator and subsequently as Scheme Manager for the DCS, The appointment of KPMG as Scheme Administrator by the FSC as Scheme Manager of the DCS added a further layer of communication which has largely been in respect of funding reconciliation and accounting for the DCS.
The Treasury was not only concerned in answering individual depositors (and their representatives') queries but also became involved in detailed discussions with depositor groups. The Minister and Officers met with a number of parties lobbying for their particular interest group.
The Treasury engaged its own legal advisors, Gough & Co. together with supporting Counsel, through the auspices of the Attorney General's Chambers in order to provide representation through the courts and support the formulation of the Scheme of Arrangement.
Treasury appointed Alix Partners to advise on matters of bank reconstruction, the proposed scheme of arrangement and ancillary issues pursuant to the approval of the Steering Committee.
Treasury was a member of the Chief (Minister's Steering Committee and through that group made representation to the UK Parliament Select Committee., KSF UK, the Icelandic KSF Resolution Committee together with other parties which emerged throughout that time.
10) What was the Scheme of Arrangement intended to achieve,
The benefits of the Scheme of Arrangement over and above the normal liquidation process were set out in the extensive explanatory documents and consultation guidance provided to KSFIOM creditors who were invited to vote on the proposed arrangements, The main aim was to achieve a better managed administration of the asset realisation exercise from the bank's asset and loan portfolio with the opportunity to plan an accelerated release and distribution of dividends to depositors.
11) When was the political decision made not to proceed with the Scheme of Arrangement?
The decision not to proceed with the Scheme of Arrangement was effectively made when the creditors meeting of 22 May 2009 determined to reject the Scheme of Arrangement and the matter was referred back to the High Court on 27 May 2009 which awarded the judgement. There was no effective political decision taken which influenced this process.
7
167 12) What formal process was undertaken to select the consultants in relation to the Scheme of Arrangement?
Alix Partners were introduced to the Steering Committee through the Chief Executive of the FSC who had recommended their association on the basis of previous experience in the field of bank reconstruction. The principals of Alix partners attending the Steering Committee on 6 November 2008 provided a presentation outlining their credentials and experience in this area. On the basis of the presentation and subject to the agreement of professional fees the Steering Committee agreed to the engagement of Alix Partners who would be accountable to the Group reporting through Treasury, It was accepted that time being of the essence there was no alternative available, The Minutes of the meeting held on 6 November 2008 concluded that Alix Partners should be appointed subject to approval of fees which was subsequently endorsed. The Steering Committee likewise endorsed the appointment of Gough 8l Co. as legal advisers, as recommended by the Attorney General, which was approved at the meeting held on 19 November 2008,
13) A description of the Depositors' Compensation Scherne its history from 1991 to date, How it works its scope, who contributes to it; when it is brought into operation.
The Depositor's Compensation Scheme provides compensation for depositors' in the event of a bank becoming insolvent. The coverage extends to sterling and foreign currency deposits of resident and non-resident depositors, with a maximum compensation of 100% of deposits up to F50,000 per individual depositor and £20,000 for businesses and other depositors.
The compensation payments by the Scheme are funded through compulsory levies on all licensed banks that are members of the Scheme with a maximum amount payable in any one year, The total amount that can be levied on Scheme participants is currently capped at E200m, The Government liability is similarly capped at E150m. The proposed new Depositors' Compensation Scheme 2010 Regulations, if approved by Tynwald in October 2010, will set the cap on participant banks at F1.00m over a 10 year period with the Government similarly setting aside a maximum of a further ElOOm from reserves in any 10 year period. The Scheme will also provide powers so that the Scheme Manager may also borrow to accelerate funding of compensation. The origins of the Scheme date back to 9 January 1991 when Treasury made the Banking Business (Compensation of Depositors) Regulations 1991. The 1991 Regulations came into operation on 1 February 1991 and were approved by Tynwald on 20 February 1991
The 1991 Regulations provided for the establishment of a fund out of which compensation was paid on eligible protected deposits if a Scheme participant licensed under the Banking Act 1998 (previously the Banking Act 1975) was deemed to have defaulted.
8
168 On 9 October 2008 the 1991 Regulations were revoked and replaced by the Compensation of Depositors' Regulation 2008, Statutory Document 826/08 (Copy in previous submission papers)
As a result of the Financial Services Act 2008 the 2008 Regulations applied to "deposit takers" rather than banking institutions. As Building Societies were excluded from the Scheme however, the effect was that the scope of the 2008 Regulations was the same as the 1991 Regulations with regards to Scheme participants.
On 23 October the Regulations were amended by: The Compensation of Depositors' (Amendment) Regulations 2008 Statutory Document 844/08 (Copy in previous submission papers)
The amendments included the reinstatement of £20,000 cover for persons other than individuals and a reduction in the maximum levy on participants in the Scheme in any one financial year.
These Regulations were further amended by:-
Compensation of Depositors' (Amendment) Regulations 2009 (Statutory Document 23.2/09 (Copy in previous submission papers)
Compensation of Depositors' (Amendment) (No, 2) Regulations 2009 Statutory Document 466/09
Compensation of Depositors' (Amendment) (No. 3) Regulations 2009 Statutory Document 671/09
Compensation of Depositors' (Amendment) Regulations 2010 Statutory Document 192/10
These four sets of amendments extended the "sunset clause" to ensure that the level of compensation thresholds remained available in the event of a default whilst consultation on a new DCS was being carried out and a new Depositor Compensation Scheme was developed.
The proposed Depositors' Compensation Scheme Regulations 2010, Statutory Document 683/10, will, subject to Council of Ministers approval, be put to Tynwald for consideration and approval at the October 2010 sitting,
Copies in Appendix of: Statutory Document 466/09 Statutory Document 671/09 Statutory Document 192/10 Statutory Document 683/10
9
169 14) The extent to which it is credible; is it fully funded? Is it at a level similar to or better than competitor jurisdictions?
The Depositor Compensation Scheme does not have a prefunded cash reserve. There is no money collected from participants in advance of any bank failure, Subject to the availability of resources it is Treasury's intention to build up a fund to serve as earmarked financing for any future event. However, it must be dearly recognised that the maximum future contribution from a combination of both Government and the banking industry is to be capped at i 200m over any 10 year period subject to potential borrowing, then in the event that there was any systemic or major bank in default it is highly unlikely that there would be sufficient funds to compensate depositors to the full value of the threshold limits.
It should be recognised that until recently the isle of Man was in a far better position than jersey and Guernsey as neither of them had a DCS. Jersey introduced a DCS in November 2009, with Guernsey having introduced a DCS one year earlier in November 2008. The compensation levels for individuals are the same as the Isle of Man DCS.
15) How many depositors have been compensated and to what extent?
A total of 9,985 depositors have been compensated through a combination of the Early Payment Scheme and the Depositor Compensation Scheme.
7,472 (74.8% of DCS claimants) have received 100% compensation of their deposit whilst 8,757 (88.7% of claimants) have received over 75%,
16) What forecast can you make about the likely levels of final compensation?
The Joint Liquidators' and Joint Deemed Official Receivers' progress report to creditors for the period from 27 May 2009 to 9 July 2010 forecast that the estimated dividend outcome to be between 85.3p and 95.7p in the E..
17) A description of the similar arrangements in other jurisdictions (e,g, UK, Channel Islands, elsewhere)„
The Financial Services Compensation Scheme (FSCS) is the UK's statutory compensation fund of last resort for customers of authorised financial services firms, which includes banks, building societies and credit unions (deposit takers), It may pay compensation if a firm is unable, or likely to be unable, to pay claims against it usually because it has stopped trading or has been declared in default. The maximum level of compensation for bank and building society claims is the higher of £50,000 or €50,000 per person per firm (for claims against firms declared in default from 30 June 2009),
10
170 Guernsey introduced a Depositor Compensation Scheme in November 2008, The compensation limit is set: at E50,000 and includes a liability cap of E1.00m in any five year period, There is no standing fund but the States of Guernsey Government has agreed in principle to assist the scheme by guaranteeing an insurance policy of £20m to provide liquidity to the scheme.
Jersey introduced a DCS in November 2.009. The compensation limit is €50,000 per person, for local and international depositors. No protection is afforded to deposits held by companies, small and medium enterprises, partnerships or trusts. The maximum liability of the DCS is capped at ElOOrn in any 5 year period in line with the Guernsey scheme. The majority of the cost of the compensation will be borne by the banking industry but levies are capped with the States of Jersey making up any shortfall.
Bermuda and the Turks and Caicos islands are considering the possibility of introducing similar schemes but no further details are currently available.
Further' details of the UK & Guernsey compensation schemes are available at the following we.bsites;--
In the Appendix to the file there is a copy of the States of Jersey Green Paper on their Depositor Compensation Scheme and an article by Westlaw UK entitled "Bank failure and deposit protection in offshoreBritain: the case of Guernsey".
:18) 'Why work on tip-dating the .1S,X"..'S b,c,:rgtin ir) February 20a8"? Whell did work on 1.4.}daing the DOS becornetlr,gent?
In October 2007 Tynwald called for a review of the DCS Regulations and associated legislation, together with the suggestion that: an increase in the DCS compensation levels may be appropriate, At this time there was widespread international disruption in the financial markets and the UK had increased the compensation payable to depositors to £35,000. Treasury agreed Terms of Reference for the Financial Supervision Commission to carry out a review of the DCS and other methods of depositor protection. The FSC, duly carried out a consultation exercise with the banks with the consultation closing at the end of March 2008; suggestions were put to Treasury on 7 May 2008.
A copy of the Memorandum produced by the FSC to the Treasury dated 2. April 2008 is enclosed.
Please refer to the FSC for details of the consultation exercise,
On 9 October 2008 new Regulations were approved by Tynwald increasing coverage for individuals to £50,000 but coverage for other persons ceased.
171 19) Why were changes required to the DCS after the initial Tynwald decision?
The Regulations were amended on 23 October 2008 to re-instate coverage for "other persons" and corporate entities up to £20,000 following representation from industry and the general public.
20) What work is being carried on without fsiel produce an improved version of the DCS? include an account of the process of consultation in relation to updating the DCS with copies of the responses from all consultees.
At the July 2009 sitting of Tynwald the Treasury Minister committed Government to a review of the DCS. Treasury produced a consultation document entitled "Consultation on Options for Change to the Isle of Man Depositors' Compensation Scheme" and invited views on various options outlined regarding a future DCS, Treasury undertook the consultation exercise with the Financial Supervision Commission, the isle of Man Bankers Association, related financial service participants and the general public, The standard Government consultation process was followed and the consultation closed on 23 October 2009. In February 2010 the Council of Ministers approved principle changes to the DCS Regulations taking into account the consultation feedback and best practice of various jurisdictions. It is intended that the new DCS Regulations 2010 (SD 683/10) will be put to -Tynwald in October 2010,
One of the key concepts put forward as a result of the consultation exercise, which was supported by the Council of Ministers, is to change the status of depositors in any default event and make depositors a "preferred creditor", however, such a fundamental change will require further research and changes to primary legislation. This principle and required legislation is being developed by a Treasury Working Group which involves the Chamber of Commerce, the banking industry and members of the Law Society supported by the Attorney General's Chambers. It is likely that the necessary legislation will not be developed until at least the 2011/2012 programme however; in the meantime the new DCS Regulations being presented at the October 2010 sitting can stand alone
Copies of the consultation document, the individual responses and the Government Document 046/10 giving the collective consultation feedback, responses and rationale are included in the file.
I2
172 21) Would it be possible or advantageous to unite the OCS with the similar insurance protection scheme in order to broaden the body of support for both schemes?
The various financial sectors on the Isle of Man have different customer bases and financial imperatives for consumer protection. Any attempt to group together the sectors would need to be considered very carefully as this could generate a commercial disadvantage. We would recommend that when the other consumer protection schemes are reviewed then this needs to be included as part of the options analysis.
22) Provide an up to date account of the progress in relation to negotiations between the UK and Iceland relating to the return of money owed, in particular in relation to parental guarantee,
Treasury is cognisant that the Liquidators have the task of pursuing the parentai guarantee where this has a bearing on the KSF (JOM) liquidation and is not a party to ongoing negotiations.
23) Consider and comment on the e-mail sent to the Committee by Mr Stephen Thomas of the Partially Protected Depositors' Group,
The suggestions made in the e-mail from Stephen Thomas have been considered previously, Namely:
0 The Isle of Man Government has consistently maintained its position that the protection that it offers in case of bank insolvency is clearly laid out in the DC& The Government has made representations as to the facts of the KSF affair both to the UK Government already and as part of the latter Treasury Select Committee exercise.
It is respectfully suggested that it is a matter for the Isle of Man Select Committee to make recommendations as to how the evidence may be considered and as to further recommended actions,
It is a matter for the Liquidator and their advisors to pursue the actions of KSFUK and any transfer of assets in the time leading up to and after the insolvency of the UK business,
Treasury Corporate Strategy 20 September 2010
13
173 174 Appendix 1 - annex , I 1
cn
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0) ic ttf n l) E 0
E mmu o u 4.4U f Co o 0) Lines
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175 176 Appendix 2
Response of Mark Shimmin, Chief Financial Officer of the Treasury, to the questions posed by Mr Roger Phillips, Clerk of Tynwald, in an e-mail dated 10 December 2010 regarding KSF evidence.
How was the Scheme of Arrangement publicised — was there adequate and effective consultation with key parties from an early stage? Which stakeholders expressed positive support for the Scheme of Arrangement during the discussion/evaluation period?
In advance of the Court hearing on 9 April 2009 the Liquidators Provisional and the Treasury filed a joint petition seeking a Court Order to call a meeting of the creditors and shareholders to vote on the Scheme of Arrangement, which had been formulated and prepared in draft.
Once the necessary Court Order was obtained the Liquidators Provisional sent a letter of explanation to all depositors giving details of the voting arrangements and the steps to be followed. The depositors also received a summary of the Scheme of Arrangement proposal as well as the full documentation. Road shows were held in the TOM and the UK to explain to depositors about the Scheme of Arrangement. Information was posted on the Provisional Liquidators' website. There was also an e-mail and telephone helpline published that depositors could use if they had any queries.
As previously stated it is important to note that from 9 October 2008 until the Winding Up Order was made on 27 May 2009 the matter was before the High Court and it was a decision of the High Court as to whether KSF (I0M) Ltd. should be wound up or not and when the winding up petition would be substantively heard.
The Steering Committee established by the Chief Minister supported the Scheme of Arrangement during the discussion/evaluation period as it was considered that it would provide a better managed administration of the asset realisation exercise from the bank's asset and loan portfolio and provide the opportunity to plan an accelerated release and distribution of dividends to depositors during what was an extremely uncertain time for the financial markets.
It is fair to say that some other parties views on the appropriateness of a stay of the Winding up Proceedings varied from Court hearing to Court hearing. The relative support given to the Scheme of Arrangement by each class of creditor was not measured, in absolute terms, until the creditors meeting of 22 May 2009 determined to reject the Scheme of Arrangement and the matter was referred back to the High Court on 27 May 2009. However the Courts were satisfied at the various hearings that the development of the Scheme of Arrangements had enough creditor support to progress.
177 Did depositors indicate that they wished to progress the Scheme of Arrangement as a means of achieving full recovery or that it should deliver tangibly higher return that Iiquidation/DCS? If so, what with the views of the Government?
It was difficult to judge the individual or general mood of motivation held by depositors towards the Scheme of Arrangement objectives. It is possible that some believed that by objecting to the Scheme of Arrangement then the Government may offer some alternative improved arrangement, which was not the case.
It is important to recognise that the Scheme of Arrangement was proposed by the Government as an alternative to liquidation. The depositors were given the opportunity to accept or reject the Scheme by voting on the relative merits being promoted under the Scheme which indicated a higher potential return and more timely distribution for depositors.
It is worth recalling that overall, across the 3 classes, approx 68% of all creditors voted in favour of the Scheme of Arrangement.
Voting split by class:
Small depositor class: approx 84% by number representing 85% by value in favour.
Large depositor class: approx 47% by number representing 65% by value in favour.
Non-protected class: approx 93% by number representing 9% by value in favour.
Accordingly, the necessary statutory majorities were not met in the second and third class and the Scheme of Arrangement was not approved.
On 27 May 2009 the High Court heard evidence that the proposed Scheme of Arrangement had not obtained the necessary statutory majorities for the approval of the Scheme and as a consequence the Court determined to make an Order winding up KSF (TOM) Ltd. Whilst the Government believed that the Scheme of Arrangement solution would have proved to be more beneficial to all stakeholders the Government was bound to accept the Court Order.
178 Evidence suggests that during December 2008 the Liquidator Provisionally would not be able to obtain asset valuations for a number of months because the order place upon the UK Administrator. Should this not have indicated to the Government that the Scheme of Arrangement was unlikely to be viable since no credible model could be created to support this option which could be produced before about March/April 2009? To what extend was the Government aware of the difficulties being incurred by the Liquidator Provisionally regarding obtaining asset valuation in respect of placement with KSF UK?
The Liquidator Provisionally knew the value of the assets held by KSF (TOM) Ltd parent company KSF UK. What was uncertain was the expected rate and timing of return. This did not indicate to the Government, nor indeed its professional advisors, Alix & Partners, that the Scheme of Arrangement was unlikely to be viable. In fact, it attempted to provide a degree of certainty to depositors where none currently existed.
The Government Steering Committee met on a regular basis with the Liquidator Provisionally and was fully apprised of the constraints on progress. As presented in oral evidence on 15 November 2010 the emergence of relevant information and financial forecasts from administrators in the UK was not a digital tipping point but moreover a developmental model which was clarified over time.
What were the causes for the lack of support for the Scheme of Arrangement? Why did the Scheme of Arrangement fail to win majority support? What the (sic) costs incurred in pursuing Scheme of Arrangement?
The Scheme of Arrangement failed to gain the necessary majority from the large depositor class and the non-protected class. It is to be presumed that the main reason these classes of depositor did not support the Scheme of Arrangement was because they did not feel it was compellingly beneficial to their circumstances and in hindsight, the rejection of the scheme may have been motivated to generate a alternative response from the Government. In the case of the non protected class of creditor it is clear that a small number within that class that exercised the vote held very large value claims and therefore were able to have a significant influence on the vote.
On 3 November 2009, the Treasury Minister, Mr Bell, was asked in the House of Keys by Mr Cannan MHK, the Honourable Member for Michael, if he would inform Members of the total of all costs incurred by both the Treasury and the Financial Supervision Commission for attempting to obtain a Court Order to provide for a Scheme of Arrangement in respect of Kaupthing, Singer and Friedlander (TOM) Bank.
The Treasury Minister replied " the work involved necessitated the aid of external specialists, firstly in an attempt to save and rescue the Bank through some form of restructure and latterly in seeking to provide for a Scheme of Arrangement,
179 which was a complicated and costly measure, which involved the appointment of specialist advisers and legal counsel.
There were various work streams associated with the objective of delivering the Scheme of Arrangement together with ancillary matters which made up the bulk of 3 rd i party costs incurred by Treasury and the Financial Supervision Commission which totalled some £1,798,730.
Of this amount £1,719,623 was spent by the Treasury and a further £79,107 was incurred by the Financial Supervision Commission. These amounts exclude any internal costs which have not been separately allocated and charged to this exercise."
Is it correct to suppose the Scheme of Arrangement would have involved the Government in less expenditure than the DCS?
In the event that the Scheme of Arrangement had been successful the administration of the Scheme would have replaced the requirement of both activating the Depositor Compensation Scheme and commencing liquidation. It is generally considered that the effective implementation of the Scheme is likely to have been more cost efficient but this is marginal to the overall cash flow costs to the tax payer. Whilst the profile of cash flow advances and returns to Government may have been somewhat different under the Scheme of Arrangement it is not possible to determine exactly whether the outturn position to Government would have been any different under the Scheme of Arrangement as opposed to the Depositor Compensation Scheme,
The costs to Government in the administration of the DCS for the KSF (IOM) Ltd. failure will be presented in an annual report prepared by the Scheme Manager and laid before Tynwald each year. It should be acknowledged that the costs arising from the scheme management of the Depositor Compensation Scheme are quite separate from the costs of the winding up arrangement and administration of the liquidation being undertaken by PWC.
12 January 2011
180 Appendix 3
„ . . . - - - , "- I (9. fl S 1 0 11 if I P.O. Box 58, Finch Hill House, Bucks Road, Douglas. Isle of Man, IM98 0 -1.
Mr Juan Watterson ConZact John A30c0r , Our Raf: Chairman of Select Comrnittee Your F ,.7& K4lupth4ig Singer and Friedlander (IOM) Ltd & 20 I r) the Depositors Compensation Scheme Legislative Buildings [Douglas of Man IM1 3DF
Dear Mr ‘1,/att,,mson
Select Committee of 'Tynwald on Ka upthing Singer &, Friecilanck-» . (10[1-11) Ltd ("M3F;ftym")
F urth er to your loiter O f 2"=1 August 2010, regarding the above, plese find attached the Commission's nt)sponsc.,, as requested.
Yours sincerely
John Aspden Chief Exec LitiVO
Enc.
r,-.W Fip l b T1 2 7_ SEP '101(1
CHI F E u
l',.:IlephorrEr J44 (0) 1824 889300 /- 44 0) 1824 089399 ,!Y Oir(IGI. Lino: +84 (0) !824 889302 [email protected].;rf,
181 SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER t FR/ER...ANDER (IOM) LTD ("KSFIONr)
Response to letter of August 2010
The FSC's role in the main events leading up to, on and after 8 October in relation to the aftermath of the collapse of KSFIOM
subirussoilmsevi(ience l'or the first par't of the Select Committee's inve.s j(jatjorys, the Cocimission gave a full account of ifs work with the bank up to 9 October when a liquidator provisonai was appointed Since then the Commission's ',nip* has extended to the following.
The Coriiiimission was a member of a standing comm stobilshed by the Chief Minister to look at all options for resolving the position or the bank, with liquidaion as a last resort The committee met very regularly in the period from Ootober 2000 to May 2009. ▪ The COMrVOSSiOn is Scheme i.'litiinacher or the Depositors Compensation Scheme which activated on 27''' May 2009 when an event of default was declared under the Comoerisatmon or 0,: riiipositbris Piegufations 1008 Since thttil date the Commisslon ha i arrnhcie,d the payout of full compensaton to nii:tiarly qualifying claimants. with the assistance of Government hinding and tevies paid by contributing banks ▪ Commisshcn dealt with a very large number ot depositors - queries. especially in the early period after October 2008. The Commission published updates for depositors on its web site on a regular basis from October 2008 [he Commission responded to questions and scenarios arising from time Government's endeavours to prouress a Scheme of Arrangemen as an option for creditors to consider. ▪ The Commission has since maintained communication with the Liquidators (although in view of the intervening role of the Court, this has necessarily been less frequent than with the bank previously)
What action the FSC took in relation to the collapse of the bank after 8 October 2008, with specific reference to co-operation with the Liquidator?
On the evening of the October 2008 culminating when the KSFIOM board became aware that it could no longer rely on its parental support. it was concluded by both the Commission and the board of KSFIOM. that KSFIOM could no longer continue as a going concern and the Coinmission determined
182 to suspend KSHONTs banking licence. A joint application to Court was prepared overnight and filed on the 9 t'' October 2008 The Commission and the KSFIOM Board petitioned for the appointment ofoint liquidators and in the >nterim (t.e prior to the substantive winding up hearing) liquidators provisionally (the 'VVindirig Up Proceedings").
The Commission worked +ivith the liquidator provisional as applicable to help him discharge his functions. There were a number of immediate issues to resolve / clarify at this early stage, the most critical of which were.-
the impact of the DOS changes that were passed by Tynwald on October 2000 (and amended on 23 1 October 2008) and how these would be applied to depositors of the bank: 'in-flight' transfers (IC those payments which were in the course of being processed when the lquidator orovisiona was appointed). and the position of KSF in the UK (in administration'?
The Commiss'ion endeavoured to keno depositors informed as best it could on the positron ci the DCS at this stageThr:Iiquidator provisional also orovded information an the position of the bank.
The joint KSHOM have since been granted a deposit tal6nc] I i,... ■ .> uno..tr the Financial Services Act 2.0od _CL them in carrymig out' their functions with the bank.
The brie held perihdic ineetings with the joint liquidators- to the position of dehoshors the progress l'eaong assets and in its Martajer capacity. progress with the liquidation ann the liquidators' interface with the DOS
To what .(isxtent was the F80 involved in action taken to save KSFIOIV1?
SOS mentioned above the corrItmsson Was a member of ri standing committee estaNshed by the C„Thielt Minister to look at all options for resoving the position of th:,--) bank, with liquidation Os a last resort
In parallel with this:
or; previously advised to the Select Committee the Commission visited the Tripartite Authorities (HM 'Treasury, the Bank of England and the PSA) in the UK to explain the Isle of Man's position and to make an initial approach to establish whether HM Government might facilitate steps to ensure that KSFIOI\il was able to retrieve its money deposited with the UK bank, outside of the lager's formal administration; the Commission and its legal adviser held an initial meeting with a firm in London called Alix Partners who were subsequently engaged by Government to advise on possible solutions: Altx Partners are a well regarded global business advisory firm offering services and advice on business solutions including financial restructuring and bankruptcy reorganisation;
183 the Commission and its legal adviser visited Iceland to meet with the Icelandic rE_,Ioulater and members of the then resolution committee established to commence the process of sorting out Kaupthing his affairs, subsequently the Commission met some of the parties who had expressi,-A into rest rn ar.:quiring parts of, or the whole of, KSFIOM.
Was it realistic to attempt to sell it as a going concern?
The Joinl LiqUidatierS are currently ;-tisfirnating a total dividend payout in the liquktiakm of the bank of up to 95. 7p. If this level is reached the bank will be shown not to have had a rilajor, net. asset deficiency. It is evident that KSHOM is deposits and loan book could have been attractive to different types of buyers, as evidenced by approaches received by Government
!- 10YieVer the lack of clarity over the pOSiti00 between the bank and KSF UK (and certain le_gal challenges thitiit arose thereof) are, ir hindsight_ considiEiried to have been the main irhailengras in realising any - going concern' sale.
Who proposed the Scheme of Arrangem ent. and why? Who supported/opposed it and why? What wore the alternatives (a) with hindsight. (b) as it appeared at the time?
Schernzl: fon,ivard viable option by tne Govenment's ach Partners bA,secl on exp.i..--,4.!erri;e otile i. cases of this, nature.
it as for and against - is a inattt-.'d' of Court record and indeed some par'cies vieviis stagy of the V/Indinig Up Proceii,:d varied from hearing to
In order to tinderStand the (-.)f Scheme of Arritiingement it is ifilportiant to note that horn C.)citober 2000 until the winding up Order' as milho 27 h May 200(:i the matte; 1,,JE:15- beIoR=-;- the i rgh CoUri end It wars a dei...ision of the Court to whether lititSFiONI should be wound up or not and indeed vvhoii the windli- lij up petition should he substantively hoard In an &fort to assist the Select. Committee's understanding of the scrutiny the. follovving paiagrar...Ths 3UpIrMI:11IS ,I) the events before the Court during this period, ftellowiniA the first hearing on 9' N October 2008. the \Pi/int:ling Up Proceedings came back before the Court on 24' 1' October 2008 Many parties appeared, sortie 'at that stage seeking an adjournment whilst others asked the Court to make a winding up Order_ .fhe Treasury asked the Court fc.)s a stay of the Winding Up Proceedings (the Court was advised at that stage negotiations were still progressing at governmental level) and further time was required. The Court decided to adjourn the Winding Up Proceedings to 27 in November 2008.
184 On November the Treasury sought an adjournment and presented its evidence, in support (including an affidavit from Mr Lovett of Alix Partners). The Court considered the evidence and granted a stay to the 29 1n January 2009 essentially to allow time for the Treasury (in conjunction with Alix Partners) to investigate the options available.
On 29 - January the Court considered the options and heard the further evidence presented to it. in particular by Alix Partners on behalf of the - treasury setting out the rationale behind the implementation of the proposal for a Scheme of Arrangement The Court gave judgment on the 29'' January 2009 and agreed to an adjournment to February 2009 to allow the Scheme of Arrangement process to develop
Further evidence was filed before the hearing on the le February and having heard the evidence and considered all parties submissions, the Court determined th further stay the V\iinding Up Proceedings to the 9 April 2009 to allow the Liquidators Provisional in conjunction with Treasury and its agents A:it< Partners to consider prepare and promote a Scheme of Arrangement_ in advance of the hearing on the r April KSFIGM the liquidators Provisional and the Treasury filed a Joint Petition essentially seeking to obtain an Order from the Court to call a meetJn9 of i.;redltors and :::ontt'ibutorles (shareholders) to vote on a Scheme of Arrangement which had by now been formulated and prepared in draft The Court granted such an Order on 9' n April and as a consequent,-..e adjourned the Winding Uo Proceedings to the 27' May 2009
On the 27' klay 2009 the Court heard evidence r, hat the proposed Scheme of ArrangeniE.tint had not obtained the necessary statutory iTlajOnt2S for the approval the Scheme and as a consequence the Gr,)urt de.teroljnecl that. no further stay should be granted The Court then heard the evidence in (ii:d.E0On h,() KSFICM affairs and determined to make en Order winding up KSF101\11
out this .ilistory to explain how the Count was involved and effectively overlooked the 2 competing processes of a Winding Up and a Scheme of ,,An.angerrient Or: the evidence. presented to rI and for the reasons set out in a nun tuber' of judgments the Court ordered a series of stays (for a variety of reasons), no doubt convinced of the possible merits of exploring options. and eventually allowed the Scheme to be pursued and voted upon Creditors - interests were represented at all nerrnngs and individual creditors took the opportunity to make their own individual representations some for. some against
The Commission is aware that other alternatives to a Scheme of Arrangement (with or without hindsight) were sale/merger of the entire business, a sale of different pants of the business a move by Government to acquire the bank (very briefly mooted at one stage but quickly dismissed), a loan work-out arrangement (possibly involving new money to sustain relationships with existing, sound borrowers while loans were worked out), and a liquidation.
185 What action was taken to communicate, consult with depositors, and could this have been done better? What difficulties arose, especially with the distribution of voting papers?
Once liquidators provisional for KSFIOM were appointed, the bank moved under tf'le aegis of the Court. The liquidators provisional became responsible for alt communications with depositors (except where the Government became involved with the Early Payment Scheme, and latterly the Commission via Scheme Manager of the Depositors' Compensation Scheme)
The Commission published updates for depositors on its website, with links to stateme nts by the liquidator provisional, including affidavits etc re Court le.arings. Commission slaff also handled vi large VOLWele of evils and emaiis from depositors at various points in time since the bank a failure in October 2008
Me GOVernM•nt team anti their advisors will be much bitter ptaced to answer other aspects of this question than the Commission
What lines of communication existed betwe e n the F30, the Treasury, the Liquidator, other official bodies and depositors?
Aria( the ;.-Appoini tyri ent or the liquidator provisional, communication beti,,,,veen the C.‘..ornimission anti Treit:lsury a f,Thost. riseloaiVely (01.11:ad through e established by the Cliief via referred to above
COtt1 MUMCLOtn between the Conirrii —sion and the liquidator provisional was COMuCted as rrientionet•.i above
[he Comiliiissiwl invoived in answering indlvidual depositors (arid their rePresentatives') quenes The Go,riwrissroi•»Nas not involved in die:ailed
, ,vith depositor groups
The GOITIMLS3ion also engaged its own egal advisors in its capacity as the regulator ano as the creme Manager
To what extent was the Commission involved in preparing for a change to the DOS? When did work on updating ale DOS become urgent?
As oai- t of its ongoing work the Commission had made some suggestions to 'Treasury of possible changes to the DOS Regulations, including a number of issues arising from the BCC! experience (the Regulation making power in respect of the DOS is in the hands of the Treasury)
These changes resulted in part from consultation between the Commission and the banks that closed on 31'3' March 2008, but the consultation itself was as a result of the widespread international disruption in financial markets from the second half of 2007 and concurrent with an increase in the UK's compensation limit to 05.000 in October 2007. In addition in October 2007, Tynwald had called for a review of the DOS Regulations and associated
186 legislation. together with a suggestion that an increase to the DOS in line with intlabon may be appropriate.
"fireasury duly agreed Terms of Reference for the Commission to carry out a review of the DCS and other methods of depositor protection.
Follo\,,,iing the coitsultation, the suggestions were put to Treasury in May 2008
On 7 v October 2008 the Treasury Minister announced that coverage for individuals was to increase to 050,000 and that coverage for other persons would cease The Commission was made aware of consequential changes that the Treasury decided were needed for the DOS urgently. The Regulations which were approved on 9 October 2008 by Tynwald addressed the 1 reasury Mir:isle; is points and also some of the issues that were found with the 1991 Regulations as mentioned above, and restricted the cover to individuals. The timetable for the changes was not set by CommiiiTtsion
Further ctit.im)git,-i:s byTreasury were made to the Regulations on 21 1 October 2008 ;including the reinstatement of 020.000 cover for persons other than 'ncilviduals). The Commission had negligible input regarding the Regulations ot:23it October 2008 which drafted by the Attorney General's Chambers and - Freali ,..1:7 and changed some of the provisions of the 9' October Reg tria lions 'the Commission submitted suggestions to the Attorney G.;.7tri ,F,, rirS Chambers when it became ai.Nare that new Redlr.iietrons were being Prepared to shhersecite the October Regulations inciudinU concerns regarding some or the changes fn.:::Ide the conivmssion r;o t, ,seei fr:-.tt. draft o r the 2,3' rip ,2 teber Regulations Linn! 5pm on October and the final draft `Si Tuir that day in view of the very Shari: avada Ole. brief COMME:MtS on some perceived issues with the final draft were sentto the t[Orney Ge:;neC":11 r\ihrTh:3 1..er. eU::, On the morning of 23 1 October
The C,01-iiilniion published the latest DUS Regulations on its immediately they became available arild also developed a guide for consumers
Financial Supervision Commission September 2010
187 188 Appendix 4
Your Ref: C/KSF/JW/MG Our Ref: JCirc
20 September 2010
Juan Watterson Chairman of Select Committee Kaupthing Singer and Friedlander (IOM) Ltd & the Depositors Compensation Scheme Legislative Buildings Douglas Isle of Man IfVl1 3PW
Dear Mr Watterson
Re: Select Committee of Tynwald on Kaupthing Singer and Friedlander (10M) Ltd 'KSF,
refer to your letter of 2 August 2010, requesting the Isle of Man Bankers' Association's views on
The efforts made in relation to keeping KSF as a going concern. The proposed Scheme of Arrangement. The IOMBA's contribution to the consultation in relation to the update of the Depositors Compensation Scheme and its fitness for purpose, and related matters.
Before going on to address each of these points in turn, it is appropriate to frame our response in the context of the unprecedented level of global financial turmoil and uncertainty which prevailed over mcst of the period in question. Events which had hitherto been considered almost unthinkable by many vi re becoming reality by the day and existing models of financial controls were. proving inadequate on a global scale. Consequently, the Island together with many other jurisdictions, found itself in uncharted territory, for which there was no 'rule book' readily available. IOMBA recognised that decisions were therefore required to be taken in real time and not always with complete information available to support the decision making process.
The efforts made in r(,.flation to keeping the .KSF :(IOM) bank as a going concern
We can offer no comment on this aspect of your enquiry, as the IOMBA were not a party to any such efforts.
Prasidont John Coyle clo Standard Hank isle of Men l.frnitod Standard Sank House, One Circular Road, Douglas. 1,1/11 1313 TeL 01624 643777 John,coylegstandardbank.oro
189 The proposed Scheme of Arrangement
The lOMBA was not precisely clear on the Government's motivations in pursuing a Scheme of Arrangement, as opposed to allowing the normal liquidation process to play out. In part. this was because communication with the Association was somewhat sporadic on this matter. Our perception was that the Scheme had several aims —
(i) a phased wind-down of KSF over time, which would return an equitable payout to all classes of creditor, not just eligible DOS claimants, (ii) To relieve reliance on the unfunded DOS, which would otherwise not be able to meet eligible depositor claims in a timely way: (Hi) To avoid a potential 'fire sale' of KSF's assets. whilst discussions continued both with potential acquirers and the UK Ministry of Justice, with whom the Island's government was pressing its case (albeit ultimately unsuccessfully).
It 'would be fair to say that the level of information provided to Banks on the Scheme of Arrangement generally lacked granularity. Nonetheless, the Banks were clearly minded to support the government's approach or an '`ft) principle' . basis, subject to their being no financially worse off than under a DOS activation. The fact that the Scheme had no pre-existing basis in law. unlike the DOS. created unwelcome uncertainty for Banks and their parent Groups and ultimately the Banks' support for the Scheme of Arrangement was to be conditional upon an indemnity from Government that the DOS would not be activated in respect of the KSF failure. The Banks were also very appreciative of the Government's plan to pre-fund the Scheme of Arrangement. particularly as whilst the Scheme was under construction, there was no such certainty around how the conventional DOS might be pre-funded, if at all.
In hindsight, even though the Scheme was ultimately rejected by KSF's creditors, it performed two useful functions Firstly, it established a concept whereby public reserves would be used to accelerate payments to KSF depositors, which was later successfully applied when the DOS was invoked. In our opinion, this funding approach was a 'win' all round, preserving the confidence of all bank depositors as well as the confidence of banking Groups in the island as a responsible jurisdiction. The second benefit was that the global financial turmoil had eased somewhat by the time the iiduklation process finally commenced, suggesting that asset realisation prices were better than might have been achieved in the immediate aftermath of KSF ceasing to trade.
Consultation on the Update to the DOS ,
Following the nationalisation of Northern Rock in the UK in early 2008, and increases to equivalent compensation scheme limits in the UK, the Island's DCS arrangements attracted critical scrutiny from a variety of stakeholders. The Banks themselves recognised that an update of the 1991 Arrangements were due, and participated in a data gathering exercise orchestrated by the FSC at that time.
Matters were in abeyance for some months within Government until 7 October 2008 when Government announced an intention to increase DOS cover to £50,000, The Banks at short notice were invited to a meeting at the FSO's offices on 8 October at which details of a revised scheme due to be laid before Tynwald the following day, were communicated. The key features of the scheme revision were to increase the eligible deposit value to £50,000 from the effective £15,000 (i.e. 75% of £20,000) that had prevailed previously, whilst restricting coverage to natural persons only. President John Coyle c/o Standard Bank Isle or Man Limited Standard Bank House, One Circular Road, Douglas. IM1 158 T91: 01624 643777 John.coyletiDstianclardbank.c;orn
190 Such a change, to be funded entirely by the Banking industry, and without prior consultation, had the potential to profoundly impact our member banks. There was deep concern that the contingent risk to banks of such a scheme would make an Isle of Man presence unviable for many groups, particularly as there were no corresponding obligations in competitor jurisdictions of Jersey and Guernsey. Such was the level of concern that an unprecedented meeting of IOMBA took place on Sunday 19 October 2008, to compose a collective written response to Government outlining the dangers and risks of the new scheme.
Our then President ; Mr Mike Hennessy, was invited to address Tynwald Members at a Private Members Briefing on 20 October and was accompanied by a number of our members. The letter prepared was hand delivered to the then Treasury Minister Mr Bell at that time, however in the interim Government had clearly reflected on the legislation passed on 9 October and was preparing a modified version of the Scheme to lay before Tynwald on 23 October.
The features of this new scheme were subject to brief consultation with the IOMBA executive council, and resulted in a financial exposure cap for both government and the banking industry. Whilst this scheme itself was initially considered to be a transient arrangement, it remains in place today. We provided input to a consultation exercise on revisions to the current scheme in October 2009. The 10ME3A is fully committed to engage with Government over a replacement scheme, but clearly it is for Government to bring forward proposals in the first instance.
Whatever the future proposal for the DOS may look like, the Banks do not suppor t merger between it and the Insurance Protection Scheme. Our view is that banking risks are a relatively discrete risk category, for which there is a very clear client expectation of coverage. We are sceptical as to whether a case could be made to Banking Parent Groups as to the benefits which would arise for banks in taking on exposure to risks within the Isle of Man insurance sector, as these would seem disproportionate to the potential widening of the support base by only a handful of insurance licence holders.
In closing, I would like to stress that the Banking industry enjoys a productive and mutually beneficial relationship with Government, which was ultimately enhanced by this shared experience of adversity. In particular, we feel that the actions taken by Government officials in relation to the failure of KSF were undertaken in the best interests of depositors, the banking industry and the Island's international reputation and have paved the way for a longer term depositor compensation scheme that is affordable for both the banking industry and the Government.
Should you require clarification of any aspect of this letter, please do not hesitate to contact me.
---..1(ours sincerely
John Coyle President Isle of Man Bankers Association. President John Coyle clo Standard Bank isle of Mao Limited Standard E3aili< House, One circular' Road, Douglas. 1SB
- ref: 01624 643777 John.coyfeQatandardnank.dom
191 192 Appendix 5
Juan Watterson MHK Legislative Buildings Douglas Isle of Man 3PW
PE:V.18/8084
1 September 2010
Dear Mr Watterson
SELECT COMMITTEE OF TYNWALD ON KAUPTHING SINGER AND FRIEDLANDER (I0M) LIMITED
Thank you very much for your letter of y nd August 2010 advising of the committee which is reviewing the affairs of Kaupthing Singer and Friedlander (tOM) Limited (KSF).
As you are probably aware Hospice Care was a s ignificant depositor of KSF and thus had a significant interest in the process by which the company eventually went into liquidation. We do not claim to be experts in banking or insolvency procedures and so this response is set out from the perspective of an interested depositor/customer.
It is obviously disappointing that KSE's financial position was such that it had to go into liquidation. Given that the company went into liquidakion the end result of the efforts to maintain the bank as a going concern and the proposed scheme of arrangement were to delay the commencement of the liquidation process. This caused the liquidator difficulties in catching up with transactions that had taken place since the bank ceased operations, it also delayed commencement of payments by the liquidator to depositors, Thus, in retrospect the efforts to keep the bank going as a going concern and to put in place a scheme of arrangement, which were doubtless implemented with a view to securing a positive outcome for depositors, in fact delayed the liquidation process.
The author of this letter attended a number of meetings regarding the scope of the scheme arrangement and read a number of the documents produced, It is not doubted that the intentions behind the scheme of arrangement and the efforts to retain the bank as a going concern were well meant. It is also accepted that if the bank had been retained as a going concern so that depositors suffered no loss or if the scheme of arrangement had led to an outcome whereby depositors rece ived either an increased payment or swifter payments then depositors would have been very pleased with the outcome.
We then have to consider whether or not the efforts to keep the bank going or to implement a scheme of arrangement were, in fact: worthwhile.
193 would suggest that if there was any possibility that the bank could have been kept going as a going concern, that possibility should have been thoroughly explored given the advantages that could have been obtained for the depositors. However, € would expect that such a process could be carried out quickly, within a number of weeks and the going concern possibility could either he exploited or dismissed quickly. The scheme of arrangement is a more complex matter. The scheme was eventually voted against by the depositors with some significant block votes influencing the voting. Nevertheless, despite significant promotional activity the scheme was not progressed. This author attended a number of meetings with Treasury and their advisers and reviewed a number of documents and from these documents It was not clear that the scheme of arrangement would have produced a better result for the depositors this must also have been the view of the number of other depositors as the scheme was not progressed.
Obviously, had the scheme been implemented and led to a better result for depositors, it would have been appreciated. This author would suggest that the process of arriving at the proposed scheme was convoluted and drawn out that the final scheme was either act sufficiently attractive to gain adequate support, or its attractions were not adequately communicated to depositors. This author found tine. proposals confusing and whilst the promoters maintained that the scheme was very good when depositors asked why, time responses lacked clarity. Whilst not underestimating the difficulties involver], this author would suggest that if such a schema was to be considered in future it needs to be considered very quickiy and proposals enunciated very clearly so that the scheme. is either adopted (if tmeri-s adoption) ofri.ilecte,d without wasting significant time.
From the point of view of a depositor of KSF the main disappointment was in the delay In commenciug liquidation. it now appears that the likely recovery for depositors will be in excess of initial expectations, and for this we are both pleased and grateful for the efforts of the liquidator. This author has another role in the isle 01 Man F i nancial Services industry and in that capacity I was concerned at the negative PR the Island suffered in the hiatus period between the bank failure and liquidation. As mentioned above, this author is satisfied that those parties trying to put together a scheme were well intentioned and that significant resources wore expended to try and bring about as good as possible result for the depositors. However, not all depositors were so convinced and the delay and the lack of clear information during the delay period allowed less well informed depositors and some less well intentioned depositors to spread negative information about the Isle of Man. NOW that the liquidation process has commenced and payments are being made and the likely prognosis is not as dire as had in€tia€iy been expected, those negative noises have subsided, In retrospect, and it is accepted that this is with the benefit of hindsight, those noises could have been silenced earlier.
Depositors Compensation Scheme (DOS)
The DOS has long been a bone of contention. Depositors would obviously prefer that all of their deposits were 100% guaranteed and Treasury would no doubt like to offer such a guarantee but no one, as far as I am aware, has found a cost effective way of providing such a guarantee It is also this author's view that depositors should take some responsibility for their decisions and no depositor protection scheme can take all the risk out of an investor's decision.
Talking to depositors on the Isle of Man it seems that the biggest disappointment with the DOS was not the level of cover but the late realisation that payments under the DOS could have taken a significant amount of time and it appears that the general expectation was that payments up to the DOS limit would be made as soon as a bank went into liquidation or shortly thereafter. It is accepted that the scheme did not provide for this there may have been lack of clarity about how the Isle of Man JCS worked and when the truth was realised a level of disappointment was experienced by depositors. This is true even of myself, an accountant with over 25 years of experience in the Isle of Man Financial Services Sector. 1 would suggest that the lesson to be learned here is that the shape of the future (ACS, whatever that may be, be clearly and completely explained to depositors so there can be no disappointment if the DOS is implemented.
194 KSF Reason for Failure
I get the impression that a number of depositors are still interested in why KSF failed. The Isle of Man regulators and government seem to have made a big point of the fact that the bank failed because the UK Government froze some accounts. There seems to be some degree of transference of responsibility here. The dank failed because it made deposits to a counter-party that could not cover its liabilities. It is not yet clear why the directors of KSF in the Isle of Man made those deposits or whether or not there was external pressure to do so
Conflicts of Interest
This author and many other practitioners have long been concerned by decisions to allow politicians or members of the regulatory teams to act in regulated industries. This creates an apparent conflict of interest. Given the personalities concerned this author does not suspect actual conflicts occur out the apparent possibility of conflict detracts from the credibility of both those individuals and the regulatory regime_
If you have any queries regarding the above please do not hesitate to contact me.
Yours sincerely
P DEARDEN Hospice Care
195 196 Appendix 6
KaupthinR Singer t Frie(1;ancler Isle of Man 1 m , 10 LP:
Memorandum submitted to the Tynwald Select Committee in relation to events following the collapse of Kaupthing Singer & Friedlander (IOM) Ltd (KSFIOM)
on behalf of Kaupthing Singer & Friedlander Isle of Man Depositors Action Group
September 2010
The first (Interim) Report of the Tynwald Select Committee on KSFIOM concerning the first part of the Committee's remit was published in June 2010 and may be consulted at www.rynwaici.org,im or via the KSFIONIDAG website at: h t tp: / /www. ks fiomdag c orn/ index .p i- 2? cap do ri..= com kb& tas k =--ar ticle&artic = 1478c temid 106
The Joint Response of the KSHOM Depositors Action Group (KSFIGNIDAG) and the Partially Protected Depositors Group (PPDG) to the Interim Report may be viewed and consulted at: htt : wwwksfiomdageom/index. p p2 option—com_kb&task—article&article— l 51 86Iternid= 1 06
1
197 Contents
Remit of the Select Committee Inquiry 3
Introduction
Section 1: Efforts made in relation to keeping KSFIONI as a going concern 4
Section 2: The proposed Scheme of Arrangement 4
Section 3: The Depositors' Compensation Scheme 8
Section 4: Communication with depositors by the ION[ authorities 10
Section 5: E.'fforts made to ensure 100% return of depositors' funds 12
Appendix 1: Background relating to depositor protection in the ION prior to 9th October 2008 13
Appendix 2: Key events following October 2008 15
Appendix 3: The Informal IOMT/DAG Committee set up in December 2008 to consider alternative proposals to liquidation: a statement by four DAG participants 21
References 24
2
198 Remit of the Select Committee Inquiry
The remit of the Select Committee, set up by Tynwald on 16` h July 2009, was to investigate and report on:
the cause of the collapse qf Kaupthing Singer- ti Friedlander (IONI) Ltd (2) the role of the Financial Supervision Commission in ensuring the proper management of Kaupthing Singer 6 Friedlander (TOM) Ltd to protect depositors finds (3) the credibility of the Depositors' Compensation Scheme; and (4) any other relevant matter
The first two items were addressed in the first part of the inquiry and form the subject of the Interim Report.
Introduction
The present submission relates to items 3 and 4, including our views on the proposed Scheme of Arrangement and the communication between the Isle of Man (IOM) authorities and the depositors.
KST{OMDAG's submission for the first part of the inquiry, available from our website, contains much background information which we will not repeat here.[1] Although essentially concerned with the period leading up to the collapse of the bank, section 6 of that submission deals briefly with events subsequent to October 2008 and should be read in conjunction with the present memorandum,
For this second part of the inquiry, our submission is intended to provide our views on the specific issues identified for investigation by the Select. Committee (Sections 1 - 4), together with additional points we would wish to see addressed (Section 5).
Relevant background material relating to depositor protection in the tOM and a chronological account of the key events since the collapse. of the bank as we experienced them is provided in Appendices 1 and 2.
Appendix 3 is a statement by four members of the then DAG steering committee who, in December. 2008 and January 2009, took part in an informal committee set up by 10M Treasury to seek indicative support to alternative proposals to the liquidation of KSHOM and makes reference to e-mail correspondence from the discussion of those proposals that has been redacted to protect the identities of depositors who wish to remain anonymous. As these members have had to step hack from the DAG Steering Group for personal reasons, they have preferred to provide their evidence covering this period in time separately rather than commit to reviewing the whole of DAG's submission and, without taking away from that, we include it here at their request as their submission for ease of reference. The supporting evidence (Ev 1-16) is submitted in 3 separate files.
Separate files forming part of this Submission: KSFIONID,A.G Qualitative analysis of SoA.pdf DA(; Evidence 1-14.pdf DAG Evidence 15.pdf DAG Evidence 16.pdf
3
199 1. Efforts made in relation to keeping KSFIOM as a going concern
References to efforts being made were made by 10M government (I0MG) officials in discussions with DAC; representatives in the early months following the bank's collapse, as can be seen From the evidence supplied'. [Ev 6]
However, as far as we are aware, no concrete or detailed information was ever made available on this subject beyond these vague references, making it difficult to comment on the efforts made, if any, to keep KSFIOM as a going concern. In this context, it is notable that, in marked contrast: to the UK authorities, who rapidly found a buyer for KSFUK's Edge business (in the form of ING), the IOM authorities never appeared to have a plan such as this ready to implement and nor did they deliver any update on developments on this front to retail creditors or explain why they were not being pursued withi0MG support as necessary to make such an outcome viable.
We also note that it is our understanding that the advisers to IONI Treasury (IOMT), Mix Partners, were appointed on terms that did not ineentivise a speedy or simple solution, which — if this information is correct - we consider to be a fundamental arid naive error of judgment or oversight: on the part of IOMT. Terms that reward a lengthy engagement, whether directly or indirectly, would not align the interests of IOMT, their advisers and the retail creditors of .KSFIONI.
Whilst this issue may also be relevant in the following section, we mention it at this point in case the Committee is able to ascertain whether our understanding is correct in this
context also ,
2. The proposed Scheme of Arrangement
A Scheme of Arrangement (SoA) was first mooted by the IOMT on 27' November 2008, at the second court hearing of the petition to wind up the bank. The stated objective was to explore the possibilities of restructuring with a view to achieving "more fir depositors than .:rtbrough liquidation awl the Depositors.' Compensation .5.6-heme/".[131 An adjournment of 60 days was requested and granted in order to "develop a plan that will meet with approval...". Two further adjournments were necessary before — over 4 months later, on 9th April 2009 - the proposed SoA was judged by the Court to be "not a model of clarity' but not so defective as not to be put to a vote of creditors.[341] Throughout the long process of delaying liquidation and triggering the DCS, it was clearly understood by DAG from statements made by the IOMT that if the proposed compromise scheme was eventually rejected by depositors then DAG's legal costs of and occasioned by opposing the scheme and the associated delays would be borne by Treasury.
Early optimism that the IOMT was genuinely working to find a full and satisfactory resolution for depositors persuaded the then-members of the DIG Steering Committee to accept an invitation from John Spellman, former Finance Manager to the IOMT, in December 2008, to take part in an informal committee to consider and, it was hoped, to
1 e-mail from J Spellman, 2 Jan 2009: "JS: A SoA is simply a tool so I assume you mean types of approach. Examples are mergers with local entities (limited interest), asset swaps with London (not interested at this stage), debt sale to Iceland in exchange for assets (extremely complex and uncertain outcome - limited progress), early settlement at a discount by London (E&Y not in a position to consider at present), quasi nationalised entity (uncertain asset recovery position) securitisation (extremely expensive and unattractive to sub 50k) third party deal with IOMG involvement (on hold pending title clarity)."
4
200 support alternative proposals to liquidation. Disillusionment soon set in however as the DAG representatives were unable to obtain any concrete details of the SoA under discussion. By late January, they had reluctantly concluded that the dialogue was not progressing as had been hoped for, leaving them unable to provide any opinion on the merits or otherwise of supporting a SoA. (see Appendix 3)
As it became increasingly clear that the SoA being developed would offer little if any monetary advantage to depositors, and seemingly more and more desperate for it nevertheless to be approved by creditors, the IONIT began its attempts to sell the SoA to depositors by casting grave doubts on the credibility of its previously much vaunted Depositors' Compensation Scheme (DCS). By the time of the fourth Court hearing on February, uncertainty over the ability of the DCS to pay out compensation in a timely fashion had become the principal advantage put forward in favour of the Sod over liquidation,[27, 281 At the next hearing, on 9th April, arguments were again made that the DCS could not be relied upon and that the SoA was therefore the only option to guarantee 'fully protected depositors' (i.e. those with claims less than the DCS compensation limit) any certainty in the amount or timing of repayments. At this time, counsel for DAG argued that he could not imagine a situation in which it would be politically or economically acceptable for the LOMG to allow the DCS to default (which indeed proved to be the case when, following eventual liquidation, the DCS — with the help of L73m IOMT funding and an interest-free IOMT loan of a further L120m — paid out in one fell swoop, Far sooner than would have been guaranteed by the SoA). [32-341 In the context of statements such as these, it is important to note the anger and frustration that retail creditors felt at this point, where — having been deprived of their savings and, in many cases, security - they could clearly see they were being manipulated and their worst fears were being played upon by those in power who had a responsibility to act. in their best interests.
The SoA which was finally put to the vote on 19t h May 2009, over 7 months after the collapse of the bank, was fundamentally economically flawed, presenting no tangible financial advantage over liquidation beyond some cosmetic 'certainty' of payment dates (more certain but not necessarily faster — as events subsequently proved). Moreover, depositors would be giving up potentially significant. rights by releasing all the parties involved in the SoA's preparation from any liability whatsoever arising in connection with it. The Scheme which eventually emerged appeared overly bw:eaucratic, unnecessarily complex and generally unintelligible to the average layman. The sheer volume of paper that creditors were confronted with to form a view on the SoA when it was finally presented to them underlines this fact.
After careful analysis in consultation with its lawyers, .DAG concluded that "the slim merits of the ,Vocl are jar outweighed by its disadvantages" and that "liquidation ... hill almost inevitably be quicker; simpler; cheaper and conducted more openly than the proposed SoA" . [38, 391 We continue to believe that this was — and remains - a valid analysis and that depositors would indeed have been financially disadvantaged by the proposed Scheme. in a last ditch attempt to persuade (or perhaps rather to frighten?) depositors into voting for the Scheme, Mr Bell, speaking live in a Manx Radio programme on the eve of the vote (18'1( May), said that a failure to vote in favour would be "damaging to the interests, certainly sections of the depositors, as they wouldn't get their money so quickA ... there would be a fire sale' of assets, rather than the managed sale of assets which we think would give a higher return to the depositors; and one or two other things", a warning he repeated in another live broadcast early
5
201 the next morning, adding that liquidation could close the door to any possible sale of the business. It appears that these ill-conceived comments were riot exactly appreciated by PWC (as Liquidators Provisionally), who hastened to reassure depositors that asset realisation was unlikely to be treated any differently under liquidation or the SoA.[41-01 Again, however, it is important to note the extreme anxiety, frustration and anger that comments such as these evoked among the retail creditors at this point in proceedings.
In the event, at the creditors' meeting on 19` h May, the SoA was soundly defeated when it failed to gain the required majority, either by number or by value, in the class of partially protected depositors (those with deposits over the compensation limit). While it was approved by a clear majority of lower-value (fully protected) depositors — no doubt worried by the 10MT's dire predictions over the credibility of the DCS — it is worth noting that had these two classes of depositors been grouped together (as initially proposed by IOMT in the original court proceedings and resisted by counsel to D.A(;), the. SoA would still have failed by value in the combined class. Somewhat: embarrassingly for the IOMT, it also failed in the third (small) class of creditors not eligible for the D(.2S, where a single very high-value creditor was able to bring down the SoA single-handed, something which could perhaps have been foreseen by KSEIONEs joint liquidators (provisional, as the case may be, hereafter referred to as the "P—s"), the 10MT or even their advisers, and thus saved a great deal of wasted time and money. WI
The time allowed by the Court, via successive adjournments, for unproductive negotiations and attempts to develop a SoA the Court felt could be put to creditors delayed the activation of the DCS and the Liquidation distributions by at least 7 months. The first payments to creditors were made almost a year after the bank had collapsed.
"Throughout this time, depositors saw nothing of their funds beyond the limited payments made under the two Early Payment Schemes (a mere £1000 in late January and up to a further L9000 in February), again causing much distress and suffering to many. For some, deprived of essential retirement income or suddenly finding themselves without access to funds from a recent: house sale intended for the purchase of a new home (notably by expats in the course of returning to the UK to retire after long years of working abroad), the first distributions in September /October 2009 simply came too late. Again, throughout these discussions there was little or no information about likely recovery levels made available to creditors, and some were left with the impression that all their savings had disappeared for good.
We understand that the abortive SoA cost IOMT over 0,000,000 in fees paid to its external consultants (AlixPartners) and its legal advisers, as well as a great deal of its own management time. Flaying been treated so poorly throughout the discussions surrounding the SoA, creditors were further incensed when the IONIT declined to pay the costs incurred by the JLs in assisting them and AlixPartners in developing their proposal for the SoA, thereby reducing the amount available for distribution to creditors as a function of engaging in a process that had failed to meet with creditors' approval and which failed to meet the clear criteria laid down_ at: the. outset by DAG representatives to the LONIT. When it also became clear that the IOMT had declined to voluntarily pay DAG's own legal costs, amounting to several hundred thousand pounds, incurred in successfully opposing the So.A, most retail creditors were understandably furious.
Finally, DAG (which is funded by depositors' and bondholders' donations) haul to apply to the Court for an order that its costs be paid. But rather than awarding DAG its costs
6
202 from the IOMT, which is what DAG rightly expected (costs normally following the event in Manx law and, in opposing the SoA, DAG was undoubtedly the successful party and the IOMT the unsuccessful party), the Court ordered that DAG's costs be borne by the bank. The had not promoted the SoA, save (we understand) reluctantly in the later stages at the instigation of the Treasury, yet an order that DAG's costs be paid by the bank means that those costs have to be borne by its creditors. Oddly, submissions made in Court on behalf of the bank appeared to support the IONIT's position that DAG's costs should be borne by itself the bank) rather than the IOMT. In handing down his judgment, the Deemster acknowledged that there was "a strong cer•gument that this Order, which is that sought fg Treasury, runs counter to 7reasury's avowed cicuM ... that their sole motivation is to assist the general body of creditors and ... will inevitably diminish the amount available to the general body of creditors". [45]
Even more tellingly, theiLs declined the Deemster's invitation to make an application for their own costs in relation to the scheme to be paid by the Treasury. In these circumstances, the Deemster had tittle choice but to refuse an application in this sense by [)AG, despite the fact that he had "no doubt that the Liquidators Provisional have incurred very considerable costs which, if not reimbursed by the PrOMOtCrf (71. the unsuccesful Scheme, will inevitably lead to possibly a quite material diminution in the assets available for distribution." In his judgment, the Deemster continued: "The Liquidators Provisional were of course specifically empowered by Court Orders of 29'' January 2009 curd 19' 1i February 2009 to conduct such work, but this would not prevent them from seeking an Order that their costs thereof be paid othenvise than out of KSHOM. Nevertheless, the Liquidators Pnvisional have made a firm decision that they will not seek an Order against Treasury fOr the reimbursement of those costs in whole or in part. In those circumstances I take the view that this must be a matter forr the Liquidators Provisional and perhaps the creditors who may, as A/1r Chambers submitted, take the view that the I..iquidators Provisional have acted in dereliction o/ duty in Piling to pursue such an Order" [451
As if all this were not remarkable enough, DAG's application that it be awarded its costs relating to the costs hearing itself was refused by the Court, so that DAG. (and hence its depositor supporters) had to bear the considerable costs it had incurred in obtaining a costs order in its fimour [451
The reasons why the SoA was regarded as disadvantageous to depositors from a legal perspective are discussed in some detail in a document produced by DAG, in consultation with its lawyers, in May 2009 to assist depositors in their analysis and vote [391. It maintains, among other things, that the SoA contained numerous examples of situations where the IOMT would have obtained a better position for itself than under a conventional liquidation and that, given likely recovery levels, the risk it was taking (in refraining from claiming its share until the liquidation had paid out 70ptc, to all creditors) was exaggerated. [see KSFIONIDAG Qualitative analysis of SoA.pdfl
We continue to believe that the 'ma promoted the SoA primarily as a means of avoiding the anticipated reputational damage to the [OM associated with a bank in liquidation and to avoid activating the unfunded and, as of October 2008, largely inadequate DCS and perhaps to avoid closer scrutiny of the events leading up to the collapse of KSHOM.
The primary importance attached to protecting the reputation of the IoM was stressed on numerous occasions, starting with Mr 'Bell's opening statement in the emergency Tynwald debate on 9`'' October 2008 for the approval of the new DCS regulations (as
7
203 KSFION1 and the Financial Supervision Commission (FSC) jointly petitioned the Court for a winding-up of the bank): "we haoe beet/JO/lowing developments very closely and assessing bow best to respond for the good of the Island, its people, its reputation as a premier small international _finance centre, and its banking and other businesses and the people who work jOr them." The IOM's customers seem strangely missing from this list, which we see as the first of many signs that Mr Bell is in fact more concerned with the island's reputation than with the protection of the luckless depositors who place their funds there. It has been reported that, at the February court hearing, the Attorney General expressed his belief that a divergence from the well-trodden path of liquidation was justified in this case "particularly as there are other clear reputation issues jiff the Island involved'. [28]
We also firmly believe that this process caused retail creditors nothing but unwarranted delay in the distribution of funds to creditors and created additional anxiety, hardship and stress at a time when they had enough to consider following the collapse of the bank with their life's savings in it, and that there was no consideration paid by any of the authorities to the interests of the customers that had relied on the IOM authorities' regulation and governance of KSFIOM. The misconceived terms of the Sol and the time taken to seek to implement it are further evidence of this neglect.
3. The Depositors' Compensation Scheme
On 9'h October 2008, the day KSFIOM collapsed, an emergency sitting of Tynwald unanimously approved new DCS regulations, hastily drafted to replace those in place and unchanged since the first DCS was set up, equally hastily, in the wake of the collapse of another bank, BCC.I, in 1991, at which time it took tern years to pay out the full compensation it guaranteed to depositors. While the new regulations included some significant improvements for which the depositors of KSFIONI have cause to be thankful (notably a belated increase in the maximum guaranteed compensation from 75% of j:20,000 to 100% of L50,000 for individual retail depositors), it remained far inferior to depositor compensation schemes in place elsewhere, notably in the UK.
Specifically, the DCS remained unfunded, with levies to he collected from participating banks only after a bank default and then to a limited amount pe.r participating bank per year, although the possibility, not previously included, for the DCS Scheme Manager to raise additional funds by borrowing was added. Depending on the amount of any such loan, it could still therefore take many years to pay out, leaving the severe criticisms levelled against the old scheme by the FSC in April 2008 largely unanswered. At a meeting on 24th April 2008, the FSC Board had noted: "'The Isle of Man has no central bank. The Government has no power to lend to banks and cannot offer emergency liquidity facilities to the banking sector: The Depositors' Compensation Scheme, currently under review, could only provide limited protection over a protracted period."151 On 29`h April 2008, at a meeting with the directors of KSFIOM to discuss FSC concerns over the situation in Iceland, the CEO confirmed: "The IOM Depositors' Compensation Scheme is a serious /OM political problem. In a worst case scenario, it would take years to pay the compensation due to depositors." [61 (see Appendix 1 for a more complete review of the background of the DCS prior to 9th October 2008)
On 24' October 2008, Tynwald approved an amended and further improved version of the DCS, extending the eligibility criteria to classes not previously covered and providing, for the first time, the possibility of Treasury funding of up to kl 50m in respect of
8
204 defaults in any one financial year in order. "to share the burden with the banks". Mr Bell pointed out that the whole foundation of the island's financial sector was at stake (again, the principal reason evoked was not the better protection of depositors). Nevertheless, the DCS remained — and remains- unfunded in advance of any default.
It is our belief that this basic deficiency in the DCS as formulated was one of the driving forces behind the desire of the IOMG to find any way to avoid triggering it, either at all or at least for as long as possible, in order to allow time to patch up its short-comings and thus avoid the shame and disastrous public image which would result if it failed to deliver (as would surely have been the case heel it been triggered immediately). Indeed, the inadequacy of the DCS was cited more than once in Court by the to-NIT and its counsel as an argument: for supporting the Sock. We have seen no evidence that there was ever any real intention of achieving a better monetary outcome for depositors by means of a SoA. In the following months, it was frequently stated, in support of the SoA, that the SoA would "assure DCS equivalent payment.,", or again that it would ensure that depositors with entitlement under the DCS would receive "tie less than that to which they mould be entitled under the 065". Such assurances were obviously a minimum requirement for any alternative to liquidation and the DCS to be even considered, but it soon became clear that there would be nothing more to be gained and a possible price to pay in other respects (see Section 2).
In the event, by the time the DCS was eventually activated following liquidation on 27'h May 2009, Treasury funding of up to f,150m (finally f,73m as direct funding for DCS compensation of KSFIOM depositors) had been agreed by 'Tynwald and steps taken to provide for an interest-free government loan (f:l20m agreed by Tynwald on 17' July 2009), to be recovered over time from the bank levies and liquidation dividends. This government: funding package of 093m in total enabled the DCS to pay out to all DCS claimants their full entitlement as up-front payments (to be recovered in large part over time from the liquidation) in a single payment in October 2009 — much sooner in fact that would have been guaranteed by the two payments planned under the SoA (the second being one year after the start of operation of the Scheme).
Once triggered, seemingly overwhelmed by the large (but surely predictable) number of over 6000 claims, it took a further 4 months before the first DCS payments were received by depositors, a month or more after the first distribution by the Liquidators of KSFIONI. Since then however, it is our view that the DCS has operated reasonably efficiently and we have few complaints, other than related to a lack of clarity over the assignment of depositors' rights to the DCS.
While it was understood that complete assignment was necessary in order to ensure the DCS could subsequently recover all the monies due to it, partially protected depositors were assured at the outset that if and when the DCS had recovered from the Liquidation the full amount of the compensation payment paid to them, their rights could be reassigned to them. This has proved not to be possible to date, as the Liquidators now insist that, under the TOM insolvency legislation, each and every such reassignment request has to be approved by the Court, at the expense of the individual depositor concerned. While this issue is not of great practical significance at present (liquidation payments due to DCS claimants are forwarded to them by DCS with a delay of around two weeks), it may become important if and when the dividend ever reaches 100%, at: which point interest may become payable in the liquidation (but would not it seems be claimable under the DCS).
9
205 The DCS would appear to have been — and to continue to be - missold to potential customers. Few are aware that it is fundamentally not of the same nature as the UK compensation scheme, being unfunded prior to a bank default. Counsel for the 10MT has reportedly admitted that, as formulated, it was (and therefore still is) inadequate in practice [28, 331. We believe that this inadequacy played a significant role in the huge delay of roughly 12 months after the collapse of the bank before full compensation was finally received by those it claimed to protect.
4. Communication with depositors by the IOM authorities
Communication with creditors throughout has been generally poor and often non- existent, particularly in the early days.
On 8`h or 9'h October 2008, an impersonal press announcement was posted on the bank's website with the stark information that in order to protect the interests of depositors" KSFIOM and the ESC: had resolved to issue a joint petition for the appointment of a liquidator provisionally and that the FSC had suspended KSROM's banking licence with immediate effect. This same announcement, still present on the home page, concluded by saying that the Scheme -Manager of the DCS would be meeting " as soon as appropriate" to consider the activation of the Scheme, after which depositors woi.ild be contacted and invited to make a claim. Subsequently, on 13 th October 2008, the first information to customers, headed "What has happened?' was posted on the site by Mike Simpson as 1...iquidator Provisionally (LP), Three further updates were posted in October, but gave mostly soothing words and tittle hard information.
The first letter effectively 'informing' all depositors that their bank had collapsed was sent: by Mike Simpson on 6th November 2008 and began "45 yore may be are' reI . 22)as appointed as Ligaidator Provisionally of the company at the Court of Justice of the Lyle of Alan on 9 October 2008. Prior to my appointment the Isle of Man Financial Supervi4on Commission suspended the company's banking licence." Thanks to the power of the Internet, many depositors were indeed aware that their bank had collapsed and were receiving immense support through the website set up by a handful of depositors in the days immediately following the collapse, from which the Depositors' Action Group sprang. But one can wonder how many depositors, not users of the Internet and/or not having had recent need to contact the bank, were not so aware, and may have discovered their plight only through this letter, one month after the collapse. No letter was ever sent to depositors by the Directors of the bank and no words of sympathy were forthcoming. Depositors had to wait until 16th December 2008 to receive, from the LP, final statements of their accounts as at 9th October 2008. Apart from the documents and voting papers for the SoA {not received by all depositors — see below) and, later, those for the election of the Committee of Inspection, the only other official communication to depositors (excluding via the website) was the Official Receivers & Joint LP Report on the bank period from 9th Oct 2008, sent on 17th July 2009.
During the first worrying weeks, while the LP understandably got on with his basic job, anxious depositors desperate Cot information and any signs of support from the IOM authorities, were left waiting every evening for reports from an e.xpat depositor who had installed himself on the island. No-one in authority stepped forward and took responsibility or was accountable.
10
206 The attempts initiated by John Spellman in December 2008 to involve members of DAG productively in discussions re possible alternatives to liquidation foundered at an early stage through the with-holding or at best the late communication of the sort of detailed information needed to allow serious analysis (see Section 2 and Appendix 3).
On 23rd February 2009, following the latest adjournment of the winding-up petition, the Court accorded extended powers to the JLs to allow them to act in conjunction with the Treasury to "consider, prepare and promote (including in amsultalion with creditors) a scheme (.,1- and "to nominate cm itYormal creditors' committee ... to assist /them/ ...". [29] It is arrangement..." not clear whether this was intended as a directive from the Court or simply a possibility. Whatever the case, and to the best of our knowledge, no such consultative committee was ever formed.
It was at the instigation of .DAG that more informative communications with the ,ILs were opened via a weekly telephone call system, allowing depositors' questions to be collected together and submitted for answer where possible. DAG also pushed for, and eventually obtained, more frequent and informative updates on the KSHOM website.
The package of SoA documents represented a poor presentation of highly complex arrangements and was likely to be largely unintelligible to the average (o.r even above average) layperson. 'T'he final version was produced only shortly before the creditors' meeting on 19" May 2009 and the whole package was sent by post as late as 27' April, with proxy votes to be received in Douglas (by post, fax or email) by 15th May. The Formal Scheme regulations ran to 53 pages and the accompanying Explanatory. Statement, including voting forms and instructions, to a massive 7'1 pages. Creditors were urged to read the documents in full and to take time to consider them. Given the size and complexity of the documents, the time allowed was almost impossibly short — just over two weeks at most, and less for many overseas residents with normal postal delay times from the UK of up to a week. it is difficult to imagine how anyone with no prior knowledge of the Scheme being developed and who had not Followed the discussions on the DAG websites or received DIC.;'s (necessarily) last minute advice and analysis based on consultation with its lawyers could come to an informed decision in such a short time and many must have simply followed the recommendation of the 51,s who, despite their apparently rather weak support for the Scheme, concluded: " On balance and based upon the reformation available to them, the Provisional Liquidators therefore recommend that creditors vote in favour of the Scheme."[37)
There was worse to come! For reasons never fully elucidated, but almost certainly due to mismanagement by the mailing firm used by PWC, many depositors outside the UK and IOM never received these documents at all, while others received them only with considerable delay — in some cases after the 15th May deadline for receipt of proxy votes. While many were able to assess the Scheme and vote by down-loading the documents from the website (not without difficulty for depositors, some in far-flung outposts, with limited computer and Internet facilities), it remains unknown how many others — lacking the benefit of Internet access were simply unaware that a vote was taking place at Unbelievably, complaints lodged with PWC were dismissed by both the J.1.,s and the Court on the grounds that those complaining had been able to vote by downloading from the Internet. Obviously those without Internet didn't even know there was a vote and were therefore hardily in a position to complain! We believe that PWC neglected their duty by failing to follow up with the mailing company the reason for the late o.r non-
1 1
207 delivery of so many of the packages to a whole range of overseas countries, including France, Spain, Australia, USA, Canada, Japan, Thailand and S. Africa {we are aware of at least 131 members of DAG living abroad who had received nothing by 15th May; 50 of these were in France, where there was definitely no postal disruption at that time). Not surprisingly, attempts to do this by DAG were thwarted because they were not the clients.
5, Efforts made to ensure 100% return of depositors' funds
Depositors in KSFIOM are the only retail creditors in the Kaupthing Group in Europe who have not have been fully recompensed through the actions of the governments where the group operated. In all European countries with the notable exceptions of the [OM and Guernsey, government stepped in promptly to rescue its hapless savers caught up in the wake of the global financial crisis. The responsibility of the [OBI towards its depositors was clearly recognised by Chief Minister Tony Brown when he said, at the UK Treasury Committee inquiry in February 2009: "The Isle q• man takes the stance that we are reipoirsible fir oar crifiths".1201 We firmly believe it is high time that the TOM faced up fully to that responsibility.
It is our understanding, from confidential sources which we believe to be reliable, that in late November 2008 serious consideration was given to an [OMT Om to assure a 100% pay-out to depositors in collaboration with the banks on the island, most of whom, we are informed, expressed their support. However, for reasons which remain obscure, this plan never came to fruition. Instead the Treasury appointed AlixPartners to produce a scheme which would avoid liquidation and the triggering of the D(:S.
It is our further understanding that consideration was initially given to borrowing by the IOMG in order to pay depositors in full, but that this was also rejected - it would appear by AlixPartners. It has been suggested to us that, having been appointed on time cost basis, AlixPartners may have been reluctant to support an arrangement that would have put an early end to their lucrative contract.
In June 2009, the UK Treasury Committee Report on the Banking Crisis included recommendations that the UK and -10M Governments work together to resolve the KSFIOM issue.[441 To date nothing appears to have happened.
KSHOMDAG continues to call on the IOM authorities to seek and implement an arrangement which restitutes KSFICW's retail creditors' funds to them in the shortest possible time. Given the high eventual recovery now predicted from the assets of the bank, the amount needed for the [ON[ Treasury to bridge the gap is relatively small and most of the money needed to stand in our shoes now would be recovered over the next few years through the liquidation. Depositors, unlike governments, have finite lives. Many are elderly and may not live to see even the currently predicted 90% or so of their funds returned; funds which they need now and not in 5-7 years time. The reputation of the TOM has undoubtedly suffered through its insensitive handling to date of the KSFIOM affair. We believe that such a gesture, late as it would be, would not only bring to an end the continuing suffering of the retail creditors whose lives were shattered but would also go a long way towards restoring lost confidence in the Island as a world-class financial centre.
12
208 Appendix 1: Background relating to depositor protection in the TOM prior to 9th October 2008
The IOM Depositors Compensation Scheme (DCS) was established in 1991 in the wake of the collapse of I3CCI and remained basically unchanged until 2008. During these 17 years, neither the level of compensation (a maximum of 75% of L, 20,000 per depositor) nor the maximum levies collectable from the participating banks in case of a default, were increased to keep pace with inflation or the changing global financial situation. The Scheme was unfunded; a fund was to be created as the need arose following a bank default through levies on the participating banks of up to fixed maximum amounts per bank per year. It could therefore take several years to collect sufficient funds to make the guaranteed compensation payments to creditors of a failed bank. There was no defined time limit for compensation payments and no possibility of either government funding or borrowing by the DCS Scheme Manager to speed up payments. The Scheme was largely untested; prior to the collapse of KSFIOM in October 2008, it had never been called upon since the collapse of BCC( in 1991 (for which it was hastily set up) - when it took almost 10 years to pay out.[2]
In October 2007, following widespread international disruption in financial markets and an increase in the UK's compensation limit to L35,000, a review of the IOM DCS was called for in Tynwald, In January 2008, the Financial Supervision Commission (FSC), charged by the Treasury to carry out a "review of the DCS and other methods of depositor protection", met with the Isle of Man Bankers Association (lc:MBA) and collected data from IOM banking licenceholders.
On 60 March 2008, the ESC issued a Consultation Document seeking the views of all banking licenceholders and other interested parties on three options for change identified after discussion with the .IoMBA: (a) to remove the DCS altogether (option regarded by the BC as "it/acneWe- Jri) reputational reasons"), (b) to keep the IX.:S unchanged or (c) to revise the current DCS. In case of option (c), the highest maximum compensation proposed (among several options) was L25,000 (75% of L33,000).[3] In the first of two responses to the Consultation Document, the Positive Action Group (PAG) commented "The ES(' primary role in the DCS mew be to ensure good protection fir all Depositors. It is not to find a solution that protects Banks / Government from increased cost / contributions. The PSC' Consultation paper does not come over as taking public protection as its overriding objective in reviewing the status quo." [,-.1]
On 240 April 2008, in relation to their growing concerns over Icelandic risk, the ESC Board noted that "The Isle of Man has no central bank. 'The Government has no power to lend to banks and cannot offer emergency liquidity facilities to the banking sector. The Depositors' Compensation Scheme, currently under review, could only provide limited protection over a protracted period."[5] On 29 ° April 2008, at a meeting with the directors of KSFIOM to discuss the FSC concerns, the FSC.: CEO confirmed: "The 10M Depositors' Compensation „Ccheme is a serious IOM political problem. In a worst case scenario, it would take years to pay the compensation due to depositors." [6]
On 25° June 2008, despite the concerns expressed by the FSC, Treasury Minister Allan Belt informed Members of Tynwald that, having received and considered an initial report from the BC% he had concluded that "the most appropriate position at this time was to defer- a decision on any change to the existing Scheme, bat to keep the matter under constant review'. [7]
13
209 Following this decision, PA( chairman Roger Tomlinson commented: "The announcement by Treasug is a non decision. Minister - Bell promises to keep the matter under constant review That will be of no comfirt to any Island savers if in the meantime there was a collapse of their licence holder. The consultation exercise conducted by the ES'C, flailed to take into account the concerns of ordinary depositors. It was directed at the financial institutions taking deposits over a very short period. Consequently of the 19 responses 17 were from these deposit-takers. It is hardly surprising that most of them opted to retain the current scheme. Inevitably the outcome of the exercise was skewed in Jamul - of the licence holderr, not savers. [Ve jelt that the PAG submissions represented the interests of the customer and also ultimately safeguarded the reputation of the isle of Man as a responsible financial jurisdiction. Ve sincerely hope that Treasury will immediately reconsider their decision." [81
It appears that PAG's hopes went unanswered. Questioned by the Manx Herald as late as 2nd October 2008, Allan Bell confirmed that "the position of the DCS is under regular review, but to date no firma' proposed amendment to the existing< DCS has been made„ given the fact that final decisions had not been taken in other relevant countries in relation to their schemes ..." and that they would "continue to monitor developments, incluckg whatever proposals emerge in relation to the further coverage of deposits in releoantjurisdictions." [91
Just five days later, on 7e October 2008, the IOMT issued a press release concerning "proposed arrangements to revise the DCS". After giving assurances that "The Island's many strengths as a jurisdiction make it well placed to weather the current financial storm", Mr Bell announced that the IOM's maximum deposit protection would be increased to 100% of L50,000 for both local and international individual depositors. He explained that lie was "aware that people both on and off the Island care /ookirg to me for leaderchip and clarity ..." and that he would be seeking Tynwald approval at the October Tynwald (programmed for 21" October). It was made clear that the new arrangements had not yet been agreed with the banks when he added that consultation with them would continue "in the period up to the October Tynwald " .[101
However, as KSFIOM teetered on the brink, an emergency sitting of 'Tynwald was called for the 9' October 2008 to seek approval of the proposed new DCS regulations with immediate effect. Late on the 8", the news broke that KSFIOM had applied to the Court for a winding-up order and Tynwald 'Members were well aware that the Court was in session as 'Tynwald met on the morning of 9 th October. Many Members reported having received anxious late-night calls from panicking constituents. Introducing the debate, Mr Bell emphasised that "we have been 1bl/owing developments very closely and assessing how best to respond fir the ,good of the Island, its people, its reputation as a premier small international finance centre, and its banking and other businesses and the people who work for them." The Compensation of Depositors Regulations 2008 (SD No 826/08) were unanimously approved. 'The maximum compensation was thereby increased to (100% of) .L50,000 per eligible depositor. The maximum levies to be required from the banks in case of a default: were correspondingly increased (without prior agreement of the banks). 'There was however, at this stage, no fundamental change in the funding mechanism other than to allow the Scheme manager to raise additional funds by borrowing; there was still no standing fund and no provision for Treasury funding (this was added only in an amendment on 23rd October 2008).
14
210 Appendix 2: Key events following 8 th October 2008
8/9 Oct 2008. At 21.43 on 8th October 2008, the KSFIOM Board resolves that KSFIOM is unable to pay its debts and should apply for a winding up order. On 9 th October 2008, a joint petition for winding-up is presented to the Court by KSFIOM and the ESC. Michael Simpson of I'wC is appointed Liquidator Provisionally. Hearing adjourned until 24 th October.
9 Oct 2008. New DCS Regulations are hastily approved with immediate effect at an emergency meeting of Tynwald. Maximum compensation for individual depositors increased from L15,000 (75% of L20,000) per individual to (100% of) L50,000. (See Appendix 1 for more details.)
23 Oct 2008. Tynwald approves an amended version of the DCS. Compensation up to a maximum of L20,000 for charities and other classes not previously eligible and a provision for Treasury funding of up to 050m are included. Mr Bell points out that the whole foundation of the island's finance sector is at stake. He also points Out that the bank (KSHOM) has not yet failed and that representations to delay its winding up are to be made in Court the following day. [11
24 Oct 2008. First Court hearing for petition to wind up KSFIOM. Requesting a delay to allow time for attempts to save the bank, the TOM Treasury (I0\["[) says it expects the Icelandic government to honour the parental guarantee and that the UK has agreed to represent the interests of the TOM in negotiations. Stephen Harding, acting for the [OM'I', refers to "high level meetings" taking place in London that day between the UK Treasury, the IFSA, [OM Chief financial officer Mark Shimmin and ESC CEO John Aspden. Hearing adjourned to 27th Nov. [12]
27 Nov 2008. Second Court hearing for petition to wind up KSFIOM. Treasury requests a 60-day adjournment. Despite the absence of positive results from the "high level talks", and denial from UK that KSFIOM funds were ring-fenced, IOMT has not given up on them; FSC now prepared to allow time to explore possible alternatives to liquidation. AlixPartners has been appointed by IOMT to explore possibilities of restructuring with a view to achieving "more fir depositors than /through liquidation and D C37" . Treasury lawyers admit that preventing reputational damage to IOM is a consideration behind the decision to try to avoid liquidation. Treasury requests a 60-day adjournment for AlixPartners to "develop a plan that will meet with approval ...". KSTIOMDAG requests a much shorter adjournment of 14 days. Hearing adjourned until 29th Jan 2009. [13]
11 Jan 2009. A delegation from IOM government (I0MG) goes to Iceland to meet the Kaupthing Resolution Committee and concludes there is "no realistic prospect in the short-term that f ands can he recovered 'ion/ it ender its parental parantee." [141
15 Jan 2009. David Lovett, of AlixPartners, states in an affidavit that they have advised the IOW that a Scheme of Arrangement (Sort) "could be firmulated and proposed to the creditors of KSTIOM" and that such a proposal is "now under construction". The stated aims of such a scheme would be to "(t) assure DCS equivalent payments, (a) provide a streamlined claims process, and PO accelerate payments to creditors in a scheduled and structuredjashion." [15]
15
211 17 Jan 2009: DAG issues a Press Release which states, among other things: "Despite goodwill, effort and confidentiality by those representing the KSFIOM Depositors Action Group, they have yet to see anything to convince them that the suvuestion of an alternative to liquidation is little more than an attempt to prevent the Depositors Compensation Scheme (DCS) being triggered. The activation of the DCS would not only cost the ION.1 Government and local banks dearly but would expose the scheme for what it is; namely an inadequate and outdated guise of protection that contains so many provisos and matters open to legal interpretation that the Government is refusing to explain clearly how it would work. if it were to he put into action." [161
20 Jan 2009: Tynwald approves first Early Payment Scheme (EPS1) to provide a maximum payment of L1000 to eligible KSFIOM depositors. Liim made available from Reserve Fund to meet claims and administration.
29 Jan 2009. Third Court Hearing for petition to wind up KSFIOM. David Lovett of AlixPartners outlines details of a "Potential Scheme of Arrangement" which would ensure that: depositors with entitlement under the DCS would receive "no less than that to which they would be entitled under the DCS'". It is anticipated that depositors can expect "the same final recovery under either the liquidation/ DCS or the proposed "SoA)", but that there would be "various advantages" to the benefit of depositors under the SoA. These potential advantages appear to be in terms of (i) possibly accelerated payments and (ii) a small financial advantage in the event that the overall dividend to creditors was less than 60p/ L. Treasury requests a further 60-day adjournment. Concerned by the stress and anxiety increasingly expressed by depositors as this matter drags on and by unresolved questions over possible effects on depositors' rights of legal redress under a So A as opposed to a liquidation, DAG requests a much shorter adjournment, with further clarification on this and other issues to be provided sufficiently in advance to allow proper analysis. The Court accedes to DAG's request. Hearing adjourned until 19' February, with affidavits to be filed by Treasury by 12' February. [17-191
03 Feb 2009. UK Treasury Committee evidence session. In response to questions from Michael Fallon MP, IOM Chief Minister Tony Brown states firmly that the IOM has its own compensation scheme, accepts its responsibilities and is endeavouring to rectify the situation. He further asserts: "I do not think the UK Government is responsible for the financial eilfilirs of the 1051". Fie denies a suggestion that KSFIOM has not been put into liquidation because of concerns about the IOM's ability to resource the DCS, adding that the IOM government has made f,150m available and the banks L200m and that: he is satisfied that they have the resources to cover an estimated net cost of around L50rn. There is no suggestion of a possible 100% rescue plan for depositors. [20j
05 Feb 2009. Second Early Payment Scheme (EPS2) to be approved by Tynwald. Provides For a second 'early payment' to 'defined account holders', subject to a maximum aggregate payment under EPS1 and EPS2 of L10,000. Claims to be made by WE March. [211
19 Feb 2009. Fourth IOM Court Hearing for petition to wind up KSFIOM. Treasury seeks a further adjournment. In an affidavit dated 12th Feb 2009, Mr Bell expressed his belief that the SoA "would oiler clear and tangible benefits to all types of creditors of K.STIONI". In contrast to the previously described 'advantages' of the SoA, it is now put forward that the great advantage of the SoA to depositors owed L50k (or less, presumably) is that they are guaranteed -- by Treasury - to get that amount, now apparently uncertain under the DCS. The alleged deficiencies of the DCS seem now to
16
212 have become the main argument in favour of the SoA. The Attorney General believes a divergence from the well-trodden path of liquidation is justified in this case "particularly as there are clear reputation issues for the Island involved". Treasury requests a further adjournment sufficient for the proposed Scheme to be put to creditors. DAG opposes any further adjournment: on the grounds that, despite the time already allowed to develop a comprehensive plan, the proposals remain sketchy and incomplete, with no financial benefit over liquidation, and that their previously expressed concerns have not: been satisfactorily addressed. DAG maintains that the Scheme promoters have failed to make out a case that their proposals present any significant advantage to creditors, while potentially compromising their rights. An independent group of higher-value depositors is also highly critical of the proposals presented, which they regard as "deeply flawed" and, while not ruling out possible future acceptance of a much-improved SoA, express a strong preference for liquidation rather than implementation of the current SoA. After much deliberation, and despite serious reservations, the Deputy Deemster rules that "the Scheme should fie allowed to develop further". Hearing ad journed until 9' April. [22-281
Depositors are stunned by yet another adjournment: of almost two months. In the opinion of the Manx Herald, reporting on the proceedings, the Deputy Deemster was persuaded to grant a further adjournment "not so much on hon., good the alternative, and yet to be nailed down, 5o4 will be but by how poor a safety net the DC'S is by comparison". [281
The Court Order (dated 23 Feb 2009) grants extended powers to the Joint I,Ps of KSFIOM to allow them (i) to act in conjunction with Treasury to "consider; prepare and promote (including in consultation ivith creditors) a scheme of arrangement...", (ii) "to nominate an informal creditor 1' committee .. to assist them; ..." and (iii) in conjunction with 'Treasury and its agents, "to finalise the terms of a scheme of arrangement and explanatory statement ..." and "on being reasonably satisfied that such scheme has a reasonable prospect of being approved 'by the crediton- and the Court/ ... to do all such things as may be necessary to secure the approval, sanctioning and implementation of such a scheme". [291
24 Feb 2009: Mr Bell questioned in Tynwald over Court decision of 19th Feb. Questioned in Tynwald over implications of the latest adjournment, Mr Bell says that Deemster Corlett has been persuaded the scheme of arrangement represents the best outcome for depositors as repayments would be at least as quick if not quicker. He admits that: there is as yet no formal agreement with the banks but "nu are very close to it". Commenting in iomtoday, Lou Huckvale (depositor) points out: that in a meeting with Mr Bell on 28' January he was assured, in company of others, that the banks were on board and all necessary documentation was already in their possession. [301
19 March 2009: Tynwald agree to support SoA and to provide extra money to provide cash flow.[311
Mid-March 2009: Representatives of DAG meet with 10M representatives in London. Present from 'TOM: Mr Spellman (IOWI), AlixPartners and Herbert Smith. DAG members and their UK legal advisers are presented with facts and figures intended to convince them that the SoA is advantageous to all depositors in comparison with liquidation and are assured that scheme documents (in preparation) will reflect this view.
3-8 April 2009: DAG is finally provided with a copy of the proposed SoA. late on Friday 3rd April. The Explanatory Statement is received in its final Form only on 8' 1' April, the day before the Court hearing, and the worked examples of how it might
17
213 operate around 7 pm that same evening, clearly putting DAG and indeed the Court) under considerable pressure. Having considered these documents, DAG concludes that the Sol is only of (possible) advantage (in terms of guaranteed timing) to depositors with lower-value deposits and of disadvantage to the remainder. DAG instructs its lawyers to oppose the Scheme.
09 April 2009. Fifth IOM Court Hearing for petition to wind up KSFIOM. Despite opposition from a broad band of depositors, but with some minor concessions on behalf of "owl:, the Court gives permission for the Sol to proceed to a vote of creditors, to be held on 19' May. Mr Hacker, for Treasury, apologises for the short delay given to depositors to consider the latest proposals, but adds that in any case he doesn't think, strictly speaking, they have a right to it anyway! Arguments are again made that the DCS cannot he relied upon and that the Sol is the only option that guarantees fully protected depositors (those under the DCS compensation limit) certainty in repayments. Counsel for DAG counters that he cannot imagine a situation where politically or economically it would be acceptable for the IONIC, to allow the DCS to default. Notwithstanding that it finds the Scheme "not a model of clarity", the Court agrees that it can be put to a vote of creditors, for them to decide. Following representations by DAG, the Court rules that the vote should be conducted among 3 classes of creditors: (i) those with rights under the DCS whose claims Call within the DCS limit (fully protected), (ii) those with rights under the DCS whose claims exceed the DCS limit (partly protected) and (iii) creditors with no rights under the DCS (unprotected). be accepted, the Sol would need to be approved by a majority by number and 75'!/0 by value in each class. [32- .341
9-22 April 2009. DAG opposes the Scheme in its present form, but continues to press for more favourable terms. It seems "eery clear to D/IG that the 1-0M government wants the Scheme to yo through and does not n)ant liquidation". D,AG proxies are appointecl to enable depositors to vote according to the agreed DAG position at the time of the vote. [32, 351
22 April 2009: Tynwald approves new regulations which, in the event the Sol is approved, will require [OM banks to contribute the same amount to the Sol as they would under the DCS. This seems to offer no additional benefit to KSFIOM depositors. (35]
23 April 2009: The IOM Court approves modifications to the SoA. Following news from the Administrators of KS.FUK that the estimated total distributions from KSFUK should now be at least 50p/L, Treasury amends the proposed Sol. The guaranteed DCS-like top-up payments will now be paid in two tranches instead of three, with payments of L35,000 (or the full deposit if less) within the first 100 clays and L50,000 (or the full deposit) within one year. In addition, Treasury will receive no payment under the Scheme until all creditors have received at least 70% of their claim (previously 60%). [36]
27 April 2009: A letter and full information package on the proposed Sol and voting procedures is sent by the j1.,s to all known creditors of the bank and also posted on the bank's website. [37i The vote is to be held on FY' May and proxy votes must be received in Douglas (by post, fax or email) by 15th May or handed in at the meeting. The formal Scheme regulations run to 53 pages and the accompanying Explanatory Statement, including voting forms and instructions, to a massive 71 pages. Creditors are urged to react the documents in full and to take time to consider them. Despite the apparent weakness of their support, the .11.,s recommend acceptance: "On balance and based upon the
18
214 into' rmation available to them, the Provisional Liquidators therelbre recommend that creditors vote in wou• of the Scheme." [37]
In the event, for reasons never fully elucidated, but almost certainly due to mismanagement by the mailing firm used, many depositors outside the UK and IOM never received these documents at all, while others received them only with considerable delay — in some cases after the deadline for receipt of proxy votes. While many were able to assess the Scheme and vote by down-loading the documents from the website, it remains unknown how many — without the benefit of Internet access - were simply unaware that a vote was taking place.
1 May 2009: DAG makes available to depositors a document incorporating advice from its lawyers and observations from other lawyers and other depositors with the aim of explaining its opposition to the SoA. On the basis of its legal advice, DAG maintains that the SoA is disadvantageous to depositors from a legal perspective and concludes that: "the slim merits of the So/1 are far outweighed by its disadvantages" and that "liquidation will almost inevitably be quicker, simpler, cheaper and conducted more openly than the proposed ,S'o/1". [38, 391
18/19 May 2009: Speaking live in a Manx Radio programme on 18th May, IC.):M Treasury Minister Allan Bell says that a fitilure to vote in favour of the SoA would be " damaging to the interests, certainly sections of the depositors, as they wouldn't get their money so quickly, ... there would be a fire sale' of assets, rather than the managed sale of tassels which we think, would give a higher return to the depositors; and one or two other things". This warning is repeated in an early morning live interview on the 19`h May (day of the vote), when it is asserted that liquidation could close the door to any possible sale of the business. 1 ...,ater that day, Mr. Simpson (JI.,) reassures depositors that he doubts whether asset realisation would be treated any differently under liquidation than under the SoA. [401
19 May 2009: KSFIOM Creditors' Meeting to vote on SoA At the meeting of creditors held on 19th May 2009, although approved by class 1 (fully protected) depositors, the SoA fails to gain approval, either by number or by value, in class 2 (partially protected depositors) and is therefore soundly defeated. Interestingly, had classes t and 2 been grouped together (as originally proposed by Treasury), the Sol would still have failed by value in the combined class. Somewhat embarrassingly for the .K.}MT, it also failed in the third (small) class of creditors, not eligible for the DCS, where a single very high value creditor was effectively able to bring down the SoA single- handed, something which could perhaps have been foreseen by the JI,s, the IOW or even their advisers and thus saved a great deal of wasted time and money. [411
Immediately after the vote, Treasury Minister Allan Bell announces: "We will seek to achieve a similar outcome fir creditors with claims under L50,000 as would have been achieved under the Soil ..." and adds "We continue to believe that developing the Soil provided the creditors with a viable alternative and was in the hest interests of all of the depositors". [421
27 May 2009. IOM Court Hearing. The Court accepts that the creditors have voted down the SoA and .KSHOM is finally placed into liquidation. [431
19 June 2009. UK Treasury Committee Report on the Banking Crisis. Conclusions include recommendations that the UK and IOM Governments work together to resolve the .KSFIOM issue. [441 To date nothing appears to have happened.
19
215 23 June 2009: IOM Court hearing to consider award of costs incurred by the SoA. Judgement 30 June. DAG requests that its costs in respect of the SoA and the Winding- Up petition be paid by IOMT or, alternatively, jointly by the Treasury and KSEOM. After a long deliberation, the Court finally rules that DAG's costs be paid out of the assets of KSHOM (and thus be borne by the body of creditors). It is acknowledged that the scheme documentation was "a fiendishly complex piece of work" and that it was not surprising that much time, effort and costs were expended on trying to penetrate the fearsomely complex wordier of the Scheme and its Expkmatog Statement in respect of which it seems perfectly /air that legal advice should ham been taper ..,". 1./AG also applied for the costs of the to be paid by Treasury, but in the absence of an application frorri the j1..,s themselves this was not surprisingly denied. t45]
17 July 2009: Tynwald approves a £193m Government funding package (L73m direct Treasury funding as per the DCS regulations and a further 0.20m interest-free loan, recoverable over time from the bank levies and liquidation dividends). This should enable all fully-protected depositors to receive their full .DCS entitlement in a single payment in September this year. [46]
04 Sep 2009. First dividend payments of 24.8% received by depositors claiming directly in the liquidation.
Oct 2009. The DCS pays out! Roughly 12 months after the collapse of KS.FIOM — and 4 months after liquidation - depositors claiming via the DCS finally start to receive payments. With the help of Treasury funding (now incorporated in the Regulations), the DCS finally paid out fully to all eligible claimants in a single payment (and thus much faster than would have been achieved under the Su/t).
20
216 Appendix 3: The Informal IOMT/DAG Committee set up in December 2008 to consider alternative proposals to liquidation: a statement by four DAG participants.
In December 2008 members of the steering committee for the .KSFIOM Depositors Action Group (DAG) were contacted directly by John Spellman the former Finance Manager to the Isle of Man Treasury (To MT) initially via the DAG website and then directly by phone and email, for the purpose of establishing an informal committee (IC) and to seek indicative support to alternative proposals to the liquidation of KSFIOM and triggering of the Depositors Compensation Scheme (DCS).
During a series of telephone conversations and email exchanges, the members of the DAG steering committee asked -Mr Spellman if all possible routes to repatriating depositors with an immediate 100% of their money had been explored. Mr Spellman verbally listed all routes of possible resolution that had been examined to date and told the DST that none of the options were feasible at that time due to unknown asset recovery from Kaupthing Singer & Friedlander (KSFUK) [Ev 6j, however, Mr Spellman did say that should the asset: recovery be better than anticipated the :tom]: would consider working with a third party to 'bridge the gap'. At the time it was said that there were two potentially interested third parties. [Ev 1, 6, 10) information created early misplaced optimism that the IoNIT were working to find a full and satisfactory resolution and formed the basis of the decision for the members of the DAG steering committee to agree to work with Mr Spellman in finding a solution and alleviating the hardship being experienced by many caught up in this financial debacle. Therefore the IC was established to represent depositors with sub 1...,50k, supra 00k, small business account, bondholder and money in transit. The IC was asked to keep all correspondence and documentation confidential at the time. Members of the IC met with Mr Spellman and Alix Partners at IoM offices in London on 12th January 2009. Mr Spellman presented the IC with a suggested alternative to liquidation and DCS in the form of a Scheme of Arrangement (SoA) and sought to canvass the IC for their opinion on the value of moving forward with presenting this SoA to the creditors of the bank. The actual detail (proposed numbers) of the SoA was not produced. The IC requested first a full explanation of how the DCS would work in practice so that they were able to consider the relative merits of this option versus the proposed SoA. Mr Spellman was unable to provide this information in any adequate form as the machinations of the DCS were unknown having been untested to date, but there was weight and emphasis given to the fact that the DCS was at that rime unfunded (and by implication unlikely to deliver). The IC in fact drafted its own understanding of the DCS and submitted this to M.t Spellman for his confirmation however despite canvassing IOMT legal opinion including the Attorney General, Mr Spellman was unable to confirm or deny whether the understanding of the scheme as outlined by the IC was correct or not. [Ey 161
This was one of the first indications to DAG steering committee that despite the global banking meltdown the .10MT and the FSC were not prepared for the situation that had arisen nor, unlike all other European territories, were they working to put depositors' needs at the top of its agenda. IC stated that they expected any intervention on behalf of the IoMT to be as an attempt to find a full resolution for depositors as was happening around the world, especially in respect of other Kaupthing depositors.
21
217 The IC awaited information in relation to the quantitative and qualitative merits of both the SoA and the DCS, but again due to constraints from the loM Attorney General (AG) this was consistently delayed. It was soon apparent that despite all the pleasant words and assurances, 110011C within the loMT was prepared to put in writing anything concrete relating to the DCS or the SoA, The [C. grew increasingly frustrated since tong telephone exchanges and mails were resulting in no new information. [[iv 9] These delays meant the .DAG would be unable to make a considered opinion and take legal advice in advance of the impending court hearing of 29' E' January 2009. After several delays, a basic and extremely inadequate paper was produced containing no substantial quantitative inEmmation on which the IC would be able to make any comparison or decision. Throughout the communication while awaiting the watered clown document it should be noted that Mr Spellman stated more than once that if the IC felt unable to support the SoA it would not he taken forward. [ElE,v 1, 5]
Reluctantly the members of the DAC.; steering committee came to the conclusion that the dialogue between themselves and Mr Spellman was not progressing as they had hoped and were therefore unable to provide any opinion on the merits of supporting a SoA. The DAG instructed its lawyers Eldwin Coe to conduct: all future correspondence with Mr Spellman and [(Art' legal advisors on their behalf. This move led to the DAG being defined as 'litigious'. [Ey 14]
With no information in respect of the SoA or the actual SoA being provided before the court case of 29th January 2009, DA.C,' legal representatives found themselves with no alternative but to oppose the position being taken by 10MT Counsel. It should be noted however that nine identical letters were submitted at the last minute by individuals living or visiting the Ic.Z1, at the time as a supporting appendix to the affidavit: of the IoNIT.V171 DAG steering committee and legal representatives were very disappointed that these individuals had seemingly been encouraged to openly support the Sol in this way despite having received no detailed information or legal advice. As a result it appeared that there was a conflict of views amongst depositors which was not the case at the Cane it was a situation that nonetheless undermined the wishes of the majority and created a perception of disunity amongst the DAG and the misperception that the IONIV had considerable support for its position.
On 30th January 2009, fbIlowing the court case, Edwin Coe wrote to John Spellman [liv 15]. Mr Spellman and the IoNET legal representatives failed to respond to this request demonstrating a disappointing degree of contempt: and by this time it had become the strong opinion of the DAG steering committee that there was actually no incentive or willingness on behalf of IcAff to find a solution to repatriate depositors with 100% of their deposits, but instead the motivation was to find a solution to avoid bank liquidation and triggering of the DCS and protect the reputation of the EOM first and foremost. In fact we had reason to believe that the 10MT were putting the views and requirements of depositors who were local [OM residents ahead of the rest. [Ev 14]
At: the court: hearing of 19 1' February 2009, the IoNtT sought adjournment of liquidation for a further, period of dine, despite rejection of the proposals by the DAG steering committee and their legal team, the very panel the LoNfr had canvassed for opinion on behalf of the broader creditor base. As a result, the DAG were forced to fight what turned into a lengthy and costly legal and political battle for over nine months in order to eventually ensure the SoA was quashed and the bank could go into liquidation and trigger the DCS. During this time many depositors struggled financially and the legal and consultancy costs to the IoNIT were significant. To the horror of depositors and the
22
218 surprise of DAG legal advisers, the Deemster at a later date agreed that these costs should be covered by the liquidator thus paid for by depositors even though depositors' representatives had given the Io.MT an early indication that the SoA proposals were inadequate and would likely be rejected.
The whole costly exercise was never going to succeed without providing adequate information to depositors. The IoMT was told this at an early stage and yet were determined to pursue a path retaining external consultants to 'advise' them in this process. At the end of the day the cost of proposing the SoA incurred by the IoMT served to exacerbate an already unacceptable position for depositors and compounded the general opinion that the IoNIT was not operating on the basis of finding the best possible solution for depositors. It: seemed that there were other powers at play and depositors still believe that the truth behind the failure of the bank, the. actions of its directors' and the IOM regulator and their roles in its demise, and the subsequent actions of the [oNft" and its advisers must be told.
Truth and clarity was all the DAG was seeking from the outset yet in contrast there was continual stonewalling and misinformation that appeared to have an objective beyond that of helping distressed depositors in their time of great financial stress and hardship. KSFIOM depositors were given the impression that they were fighting much more than a situation resulting from the vagaries of global financial markets, instead there were. deeper political and financial objectives at play.
23
219 References
1. KSFIOM/PPDG joint Response to the First Interim Report of the Tynwald Select Committee on KSFIONI: http://www.ksEiomdag.com/inclex.php2 . op ion=corri kb&tas = a r {fekartic: le 100&I temid 106
2. Isle of Man repays 60% to BCCI depositors. Tax-news, 15 Aug 2001. httpl/www.ionitoday.co.im/news/Two-decades-on-from-ban09s.6061089.jp
3. Consultation with all banking licenceholders on options for change to the Isle of Man's Depositors' Compensation Scheme, ['SC, 6 March 2008. httpilw,,vwgov.i.m/libLclocsifsc/Consultative/clonsultariontobanks6308Final.pdf
4. Positive Action Group submissions to FSC Consultation document on options For change to the DE.:S, 24 & 31 March 2008: http://ww •.positiveactiongroup.org/PAG DCS Submission I.pdf / \vww.positiveac :long roup..org/PIG DCS Sub.missio a 2.hd f
5. Letter from FSC to KSFIOM MD 25 April 2008, evidence supplied to the Tynwald Select Committee: fscfile1.7.pdf, pp 89-90.
6. USC notes on a Meeting with KSFIOM directors 29 April 2008, evidence supplied to the Tynwald Select Committee: Iscfile -1.7.pdf, pp 79-81.
7. Review of Depositors' Compensation Scheme, 10M Treasury News 25 June 2008: hrtn11\.. ■,v,govitn/libioewshreasur2Jreviewofdenosito,m1
8, Positive Action Group Press Release 4 July 2008: http:„/"vositiveactiongroup.oug/h trn pos i or comp e:nsafion.11trn1
9. Treasury dithers over increase in investor compensation, Manx Herald 2 Oct 2008: LLwwwmanxh erald. coin/ index.php news13.19.html
10. DCS limit increased to [50,000, IONI Treasury Press Release 7 Oct 2008: IittJ)ilvAc.-..A.v.voci:irn/Iibiciocs1 c12 ress Relea sesL8 l007depconvscherne.pcif
11. Tynwald votes to put El 5Orn of taxpayers' money on the line. Manx Herald, 23 Oct 2008. h ay./ / www.manxhe raid. corn/ index. p hp / bus ine ssi_328. [I mil
12. Petition to wind up Kaupthing Singer & Friedlander is adjourned, IOM Today, 24 Oct 2008. httg:i /www. io rntoda...co. ini./ news/Petition- to-wind - up, Kaupthing.4627802.
13..KSF (I0M) continues to be the subject of a slow death, Manx Herald, 27 Nov 2008: hi: tp://wN,vw.manxherakl.c.:orn/inde.x.p hp 7 business /349.html
14. Chief Minister returns 'empty-handed' from Iceland, Manx Herald, 11 Jan 2009: http://www.manxherald.u .)mLindex.Rhp/business/370.11tmI
15. Second Affidavit of David C. Lovett., 15 fan 2009: http://_www.ksfiorndepositors.oresitesiwww.ksfiomdcwsitors.olesr/Signed
()/0200fficlavir.%20o0/020David%20' )/020C%201...ovett%20-%202:51108.pdf
24
220 16. While Isle of Man is busy saving reputations, depositors are left to watch as other territories quickly enact rescue strategies. KSI 7IOM Press Release, 17 Jan 2009: http:/Lwww.ks.liorrIclepositors,arg/press-release/while-isle -man-busv-saving- reputations-deoositors-are-left-watch-other-territories-qui
17. Third affidavit of David Lovett, 28 Jan 2009: h tp:/ www. ks fiomdep os ro rs. org/ s Les/ www. ks fiomdep os itors. org/ files /Thi rd- A Ffidavit-o f-David-C--Love u-26.01.09.od
1 8. Affidavit of John Wright (for .DAG), 28 Jan 2009: http:/Lvww.ks floinclepos itors. oresi Les /www. ks fiorndepos ito rs. o rg/ files DAG- Affidavit-090128.pdf
19. KSHOM petition of 29 January 2009 — Isle of Man Court Judgment: http://www,jlidgments.im/content/j910.htm
20. Banking Crisis vol 1 - oral evidence, Treasury Committee, House of Commons, 1 April 2009, page 197, Qs 1447-1450: littp://www.publications.patliamenLuk/patcm200809/cmselect/cintreasy/144/ 144i odf
21. KSFLOM Early Payment (n° 2) Scheme, Government Circular 04/09, 5 Feb 2009: httRIP,vwNvg-ov.iinaLtdocs / Esc1Press Releases /ksfeps2doc.ocif
22. Third affidavit of Allan Bell, 12 Feb 2009: .httiLLiwww.kstiomdel:}ositors.org/sites/www.kstiornctenositors.ori,Lfiles/Third 1 20AFfidavit')/020ofV020Allan'420.Roberri)201301%20(signed)-142df
23. Affidavit of Gabriel Moss QC, 12 Feb 2009: www, ks tiomdepos i tors. mg/ s ites/ www. ks fiorndepos ito rs. or files/ A friday it%20o tu.420Ga b riel%20,\ loss'1/4)20()C-142cif
24. Fourth affidavit of David Lovett, 13 Feb 2009: http://www,kstiorndepositors.org/sites/wwwkstiomdepositors.org/tiles/Fourth %20Affidavit%20oP/020Davici(V020C 11/020I,ovett-l.pdf
25. Third affidavit of John Wright, 18 Feb 2009: httvl/www.ks fiornclepositors.arg/sites /\,v\,m.ksfloindepositors.arg/ files /3rd-- A Ff.j\V,t2d1-
26. Letter from group of depositors to the IOM Court, 18 Feb 2009: h ttp: /./ www. ks tiomdepos ito rs. o rg/ sites /www .ks fiorndepositors.arg/ files / KSFIO M - tt- From- largejLepsitors to-H DCortett-18022009.pdf
27. KSHOM petition of 19 Feb 2009 — Isle of Man Court judgment: httf): iwww.udg-ments.im/content/J917.hun
28. Mt' [OM gets another reprieve but DCS exposed as a financial 'fig leaf', Manx Herald, 19 Feb 2009 http://wwwmanxherald.corntindex.ph business/403.html
29. Isle of 'Man Court Order, 23 Feb 2009: http://NvwN,v.ksfiorndepositors.org/sites/www.ksflomdepositors.org/ files/200902 23161501648.p.df
25
221 30. Bell hints at agreement with banks over KSF funds, iomtoday, 24 Feb 2009: h ttp: www iomtoday. cairn/ news TB ts-a t-agreement-with.501051 J:4
31. Tynwald backs 'Treasury's SoA for KM .? (TOM) to tune of 080million, Manx Herald, 19 March 2009: http://www.manxheratd.corn/index41112/comment/429.html
32. The legal position on the Scheme of Arrangement, KSFIONIDAG, 19 April 2009: http://www.kstiorndepositors.org/public-pag -e le at-psition-scherne- arrangement-190409
33. Demister Corlett gives in to Treasury — KSF (IOM) SoA. to be put to creditors' vote, -Manx Herald, 9 April 2009: bay/ www.manxherald.com / index„pho / business / 485. h tint
34. .KSHOM petition of 9 April 2009 of Man Court judgment: http:/ www. udgme n ts. im/ content / 31.htni
35. KSF (IOM) DAG unconvinced voting 'Yes' to SoA is best option, Manx Herald, 22 April 2009: hty://www.manxheraId.comlindex.php/ business/494.11cm!
36. Affidavit of Kenneth McGreal 23 April 2009: htrp://www.law- man. com/ Lib vary / news - 5.pdd f
37. Final details and documents relating to Scheme of Arrangement proposed to KSFIONI creditors and arrangements for voting on 19 May 2009: hrtp://wwwkaupthingsingers.caim[Paqs/Scheme0fArrangernent.asp
38. Proposed Scheme of Arrangement, KSFIOMDAG, undated c. 19 May 2009: hap: / wv,,,v,.ksflomdepositors.arg/vublic-pag_tipr000sed-schenic-art an :gen-ten
39. KSFIOM Scheme of Arrangetnent ("So.A.") Summary of Qualitative issues, KSFIOMDAG, 1 May 2009: ht /./ www. k stiomdep ositors.org) s ices / www. ks Eionidepos ito rs. o tg/ FilesLIKSE10 N NOOSE: tENI A R.R.N.N G T%20S UMMARY'V0200E- 'A.)20Q L."A1_,LT.:1TI VRY020ISSUES,odf
40. Did Bell deliberately give potentially misleading information to influence KSF (IOM) Sol, vote?, Manx Herald, 20 May 2009: http:/b,v,,vw.manxheraliicorn/inciex.php/business/523.htinl
41. Report to Court of meeting of creditors to vote on SoA, 22 May 2009: http://www.kaupthinviiiv$1,. :s.co.im/Files/I0M/Scherneafirrangement/M %20Simpson%20Affidavit%2022%20May%702009%20(2).pd1'
42. Treasury responds to KSF IoM depositors vote, 22 May 2009: httpi / www,gov. im/lib / newsl cso/ treasury res ponds.xml
43. IOM Court Order placing KSFTOM in liquidation, 27 May 2009: http:// WWW. taw-.man. com/Lib ra ry /news -77. pd f
44. Banking Crisis: The impact of the failure of the Icelandic banks: Responses from the Government and the Financial Services Agency to the Committee's Fifth
26
222 Report of Session 2008-09: htLpi//wwwoublications.parliamenrulapa/crn200809/cmsetect/crntreasy/656/ 656.pdf
45. Isle of Man Court Judgment on DAG Costs hearing of 23 June: http://www.judginents.im/content/J964.htrn
46. The Isle of Man's response to the global financial situation as of 17 July 2009: http://www.gpvialLso/faci gfs.xmi
47. Affidavit of Peter Clucas (Gains): how//www.govirri/tib/docs/fsiRressReleases / a ffidavitpclucas. pd f
27
223 224
Appendix 7
of I ; c
i4 ti1k11 (INTERIM) RE )0I;IT ()ETRE SET iECT C.O:‘,1".,IIT FEE ON KA UPTIFINC, SiNGER t4iND 3iRiEDLAM..)ER (ISLE OE MAN) 1,i("4ff
13,espoiise of ?h1(. KSFIONIpo.';itonJ- Action .Group (KSIT(..)MDAG)
(intoriiin) roi2t .,rt (Report) or the Nt•loct Cominittce ttp[mintoil 1.).) ,0;1...1 Tynwald ii) 20. l`) 44ft5 is is.aed in June 201 twd cont.orns ti-s( imirt inquiry, randy invoszh..!.:.i.tioil tht:. Causes Ot tht.' colt:Ipso. 01 Kiluptkiilg, N4an) Fil (Y1/2.1) and r;).1 ol Cottintic.)n. tt'(')...-.'nsurittg 0CK`.1: 1 dopoi:;ttors'
rht.. 1,?..epor! 0.4444 ori.tseiltet! 1.0 4443 itin! 0 1./ JUL 2 (:4 1!) ;!l iinnt:iiidirekt to roe. olozioo ptit Forward tF.. ...... it treti ritti thc Tri.rai•urs., shouh!
;.-'04.1s/..104' 0/ 14 (0/10)1 fu r4titit..a0t1 (40 tato. thati ,1 ).?e(?04/.,,0.r 2010 fr% 21.004 111 that, as a result. neitiitcr the not. tho Rettortknendiijoas have aii , 4)4144ed hytuotal.d,
01ADAC! 4 4131( !fi'Vt!! ;i n n ! !!!! 1:044 0.11: 1,11! !!!!!! (hia 3!!,_!!!!!14;•!,. tr.) !!!...
roiinost.int III( 11;0 re td11 urcidUor:.., toark Sas 1111E 10 .0i; c..3C P!!!!":!:!1:4' [..)+_:!340;!!:'.01'!•! (si'i)Ci1) 1111?.reti0011:-;I: ;1e ,,.ordirliJ.iy rrotk 'LTD °. r001e.44. or the RitTout, 1101 i.e.-Tor:se ki; the Rc.f.:ort hoen it,ritiot;red 130 the ba:iis or inrotinii.dioni thrilt c:. coktiiniiv. to re ,,!!;!0!,.• !./;;;;!. 01!:: COC!Itli!!.!:!_"!:.! ra.a.d(..! !And ,,! ,!!!!! !Hic!cring it in tlli. coritia\ii own. 1'11.0£i 1..1110311.
i thi3 i•rcio, 004' rcvotist.i is itdo.kdod to hi;.?.khki!.ht. ...itk:d0 of 4:i:int:erg to us to ok,:untsiaki..;es isurroundi.n},iit et..tivss r)rio.: .,KSHOV.3 conElps,...., and iho tne pitriipectii4.t..; reiti6'; d000sitoris tind boicy,ikotiors in KSHOM..• fiakin3iti tihths ikto Elio onabIt; the ION( b•tb f, ciCkilkce.; the. ,Atoricci to 51-12i;
0441. al. the 0130441 Cl. } iirpctPiC the ishald's 14151410110I1 00 it finiAkcial cektrt: adequatcly ciorttkituo 0011 ou the T.ON( awhoriiks to sod: arid in-qq.„:0100t.- ill artaugetnent which restitith-i;i3 KS retaii eirodiors' run& to thew,
/1111 copy o,/ the uvailabl,-.! 144m: 1:1-nwal(/ 01)1(1;5', Legi:Vollw Suildliws, /)1140;% (S, uff:1 tan all .i7)147 0/624 6.'3.5520, Fox . 01624 tii'? $,-5 2 5.- e-,,natt. Reporc mcw vrtder 'Reports' and ttRi! 1(w';.4-4,-(1 traascripts. Ow oral' ev, icte)!Li
um:to . 11ai-10040-1,4` 111.144,4'14.4--.i2,-,151Wajd...,0.1:Z.j.I.11 Mc.? Written (?Vide !C 143a410 ctvatiabht by the ,S'eLct Coinoziwe moo 110 constetwd
225
C;ent), .1:tifoinmtit;;-
v;ish to 7.11:nik tha commht:eo for the extensive re),•iew:fficy have 'conducted and in particular for inviting us to provIde both written and orni evidence, togO.her with addi:ional questions raised as progressed. A (area amount of C'.vidCileE2, has been collected arid tnneh or this is available on the Ivnio,,nicl it. posse is as folIows; some inOi• con want and queries are set ()IL; in the new section of thisresponse.
were iincoiirn ii2iiid Iiy some or the probing questions posed lay the member:i.; - or the („.loinnintee to both thiti Direethrs die CD) Ot FSC ti"w ort.d evidence sessions. It is hie:idore particularly disappointing that the conclusions molly drown from the evidence oktaii:ed be it iotaily Independent and objective corn :mitten intiniiy. L,';',0ceover, it is evalent that any criticism, however mild, which could iriminee negath,.',.ii> 011 the a or the hsteat Matt as a )Norld ;class la ntaicial centre lus been either withhold c,rerun/ restricted to the main body or the It.epott and Crum tins Suinimuy whl.th voLire bresenwcf ibr ;.ihnti3va i1 1yn ,..v1ild,
sitteac coo cf:t,si o ns ei,meerninii, the or the ,tetiosis !lie lit the 6 inoens tnia); t‘o the. afte;.•- ri-;;:;;;; wi!Lh had ..;otrT:ccU r2(1. ru th in ridation to the proposal oh iile 1)irectois to transfer rinds to sister bank K ShiJK, in Let .alort a tricans tirreditein,/, eKposure to kict,nid: hi2 1 L,, Nh') -.711./ 1."7761 tA ihur dkirt! nit!, /iii),Lt;:k ;--)141;., ictrittiLi,(1L.:i)iitii-z,, ni 0 ," (11 OW /0C,%- .Mtilc:- (16('>',.1
bi...!0?;110/11:: NA: dc":70jty CI:Mil:Jen:CI Z1( //IC ri:1!/,'! .. .; ? (11)
nowt,n,er that conclusions are in no \--voy re:lected in tin: linal which append.: to exorternte hail; the Di tor:, and the It 1•e4tulator:ii how i:esponsibility whatsoever for the demise: OE' the hank, poftraying eOilaPsr--% a11 consequence olevents outside tll.. isle or Mon tied thus beyond it: cote o!.
that and ()it Ihe hosts or the available evidence, we consider that the Llfit.1 situald hose Insiskiii its origin :4 plan or .slich.erint.i fund.s poientiti priiblems they fern- I:tilt cis csarly I,icatch otinially to tliat cx;ristirci K-titythi t lg snould be reineYed, biut this subsequentiy became .,viiiered down to a redaction ()r direct expasure to I<.t.tupthitig hr, the Icelandic patent, only. We been H find Lady written t.,,videtico or the basis or that :change position. and the ain- itt)rs Report ttispartntly ace( it, v,iithout. ratadicr corriment, ;die or the Cli.0 or the F'SC: as to the Boards underlying intentions, notwithstandin their resolution, We eat; tipm -i the to he held accountable fist Jilt; significant elintie. in position and its huge conisegthences fbr retail creditors o
We ids° consider that the s,--.-,IT,contliissed railute or the FSCll to monitor the situation with KSFUK hon.: the earl of May 2008 onwards is tantarnoillif to negligence and ktrIke:= the case ror an ciarly settlement with retail creditors compelling. The 1;::ck of any commentary from the authors of the Repnit an this specific point-, is also of great, concern to
We also consider that the Directors or both KSHONI and The Ott.(rbyshire (Isle of Man) CrD(ONJ should have batiti more transparent and open in the information they gave to IDIOM depositors at
226 !he arise of the take.-over by KSFIOM. In this regard, we are also at a loss to understand the appointment of Mr R O'Shea as specialist adviser to the Cominiaec on the technical aspects of banking regulations the very person who we understand was the Managing Director of 'IDIOM at the time et' its take-over by KSFIONE, and find it dirricktit to believe there was no potential conflict al: interest over this arrangement,
Several of the Committee's Rec.)untmendations, ilomNy those aimed at improving "occe.v,',. to proper 050w banks (R,..!cornmend:flion 4), proposinr,,, the drawing rip of "coHiicc .:., , piarp; even 0 de tgrioiWi)-1 When s.roi lic.; risks have been Identified by tins FSC (Recommcndiition ./) ittd iE21 '`..qepN be3ing euken Jar ire risk (;:f.motizcr. krihav'' (Rucorlum .:(1ion 8), would npaeai to r:::-Ileet i'ec.ognitiop. h the of exisinle in dchNuaci(; w#1i2,h to contriiluted to the lure !A KS[ii0M. 1- hes(' however are not wade explicit in t he (.oneiiistons to the Repoo.. It would appear tint, while a atiaeas W concern were identified in the course of the inquiry. in the Committer ticla )rovoi i,inw. ilhng to the difficult concltisions that the evidence shield led it to reach.
227
DiRAiLal f,:onumentR mid ueri,es
Cinrcerninf,, the compronnse (Ner the ESC resolutiop (e remove exposure to fcetand The cvidcnce has Nhown cloarly thdi, the FSC," was well aware, from at least ik/inuch 20N. of the or'icnin. , i run:mei:al sittiii!ion in 1.,.x1anci, the l'SC, io tt5 iiire.dik took steps k 1'(.'move CU leeiand, a!Ity.,,•cd ik; rcso!ntion KSF[OM to remove a!! expo6tirc Kat.tpthing Grout) io d)& “ii,a(ci.efi down (oral evidence, of f'S(iT Cla) John Baden ()102!) ;Is part Qt an i.n..linitted "coippromi.s.;.? In neornmodate the perecivt..id- conn-nerei;ili :weds of KSFION,1 [.)art Corti?:.' (no1.1') 1111d allowed fmnits ftorn !.:-.Ziatn1 to he placed with 1,.:SPR.Y.\:('s sister bank hl they cornsinued to rettlain .n.iirt:::-.;iiyeNposed to Icciancli.
in note ou.:ti. ,NeAr..Aii .f..h;a rtnii.in-,.:ineffi that oeLtiti .al beRvecil tite i3o.:trd ine ,..qinnii on 2 Nit:I. ,: 2008 and al a !cue: . to K...... ;'ri()N1 do ,....annont.:2:1 in I hc to ;;Yen oil.} t+ k.0,c. bcful-ty HX;1..IV 11.; S
I. • i O. Nr...1]; tes:olveti I ccplitc1I1t'IPt th.r( -yhouiti ot Thu, 1,o 1%; ,/,?; r or.d
.Y!!
f:C. (7! I f.: (?
C{.)11c.blcie ;';11 14e..7.i tr f! (,,17.1/ (1 1).:.7U! I Crtij
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i:;,t ut " (;_'''("•'. Thu (1:e1:' (.i() (()/-(0,.0.T.,.. ifs 012. Liii:%1 In 11Ce le • Oir;-',,-J1.."1.!.ci ( t . 0:1•unp "No." (1)330). f 0!; ,; poh at., taken into ,:.oni-ikicti.nion 1''a n . ; U. n con(Co.:0;u) the .. •o;i)3 willii:g/;.:ii,..7-17'70:11/2o not. rc: ,..:ovdcd is (11....! 111(; )i(2,..//riOng 100;',6 TO co Iv/ . (he ii..m/.) in inc bin o f " , 2-Y
soIiiiiar. ripiaci:Iv; run& wiith Oix u:g on 22 •/.) a5st(LiiPzi.:c l,%.,...??(e the ',;;//fre.! from KSK ( 11 fat d I S -1.tbSi WY (! XpOSiir;I:- I all rl Ned Within its taV 1)0 if Cy a iR (1;frcp j(.11c Iii,:;,i.i9147.:1:1,Td 1.!?4! UK s?eb.Tidiar'y 4,v1 ftIcilit'W'e o11)aiwlcos stint to riw .rhould !Mai rvi.plict.:6/. ' pi:);-,2 27; 1.2.5), , RiA,11 :9',.viedf-tA i.. thin thin COMPrOrTliSC 3CILIC1011 to the toinaM,15„;'(.; The s1rm.vioP1'" provicfe a 109'."-.6 c --uar,:lnic teimy lull and tit m. an i.:..,,so!,,.Vas:); A-14-ol would 1.),:e (FSCill ,J1 , 27).
228 11 is our view that although a written e-witirunttion regarding the liquidity of KS11.1K was received rront the bSA in May 2008, the exchange between the FSC and FSA on this subject was deem ilr-11-kxlinto end (lid HO t seek to deal with the issue W-ling Ibrwdrd at In that exchange, the [SA uletely co:Ili:at-led to the FSC what its liquidity treatntent of KiSFUIK was as at 21 May 2008, heing lhe date or ticpo:•iit 7lo 8 daYs ( - sight is 6' which they had rdready the PS C lry the [SC subsequently permitted or encouraged telephone on 20 May 2008 (FSCrile1.7, )agc 5:1). ' the entiy KSI:10M into aniangements that. went w=ill beyond that Liquidity period, against a Aeloirop ;.twtare that the VD ot. K.SF1OM was tiithippy with heiwl, constrained by liquidi!y or such a short tcnor l i
wc. thre is also no suintestion thin !he 1.:Sr. sought or obtained the conlirmation from KS1 1 (..1K required by die [SC Bodrd. :1CrOrdini;Iy imposed ba71 the 1St.: tunic not rtilly rmq. and :vet no stitt.:tion \vas imposed by the h"Sc.
Asi.Alen, ['SC at:_kno ,,Yledged in his ovidca,.. 2 that the tailed to r, ,,o;ntia W.. ithAtId KSii','K's kquiditl, and oni:ittoa fr,..mt the end cf May on ,,yin.tis 11n1 haYe done so. Not 0!11 „, '‘hai had formed [hie view thin the hirshies:, need-, of KSHOM as expressed by ihc Al) or 1(1.;11(.T\-1, mere more importain than die prolection ns retaii but it ;_ilso stig;:-iests that the f":-;!:.' rici2lkicrit. in perfortnint.! t1ieir ro€e. ih;ii iifL zwl..hors. L1i :11,2 Ri:c....out commer-: or, (his NI1 ,,cliHr a: al.
si,Tm.s no doubt that ffie 11.1iii.m: imok.mv,31t die th:d tOt t't'i( hoard on 2 iViay 2,0iM ass ,<; conrcibutory racMr 1)1 thc..13 1.mi.L:„ acA...... ,,Tt!..6d drat tr,ui not 1).;!er„; iu f 2008 ills ;)st have survived and that ttr: faiLur...,. to cliyse .with detrinkulhit k.e.) crvdi(nrs_ When tIske:il. .;root) (3/ 1`,-trr 1:!bh-crty so, Ho„.. ?Nita h'.cah.v.;,, o!;\,/iol opi,nitioo (Q.3.± 1 }
” C (''..7)7.. haV 1f:1 !11; firs is Q.,-..)ed through the ho that tile has thc H 101 kepui I s Conclusion "trc, noe. f/no 001 (1.1 part thc (1Hty (“..wiaitv 2/151 i.i (t fcetoi 1? cilt , whici; coittillrw,:f:1 the th(!
Cemccining (a) rcqcaions ESA efar‘ the PSC- emphasi:;. and blame is ple,ced by the authors of the Rcr,,ort (::.sikir,2 of the FSA to ecrnintinicate adequately with FSC on a nur.nt:_er of critical issues. While this was clearly E.L,:,unain!.; (as ha.F., hccil s1..1:rd tl-R; 79) tlatt(.. rollowiny, the Katipthinj Groupin JanitnHy 2007. KSETOM became a direct subsidiary o1' Kaupthing hr (the tx-ux.V Q0E-IT:My with a conseglica change al 'home rei?ttliitor from the ItSA to the tectandle reQuiator, the €"M1 , Despite this change or status (a specificity of KSU among ION't banks) and the existence ors Menloratithirii or the (not rererre.d to in the Report), ----- ---- FSC'i t'o crf with KSFR)M, 20 :vi.:1.,;/ 2008. " . your r14,vii.olr.s.- vhoq:11;:ca: have cowbInecer have ,5ecn o; the back
there wfron ;1-:E? h',411;;:: 'New 0:"■14■ 0(.-.!Per ii r,v, Sr:a:When/ frOn! the .1-.S.1. 111!-( C1- , CO,'][2. ■ !EN?1,'; hirsT ;I:L;(“012. .11C(WAry:' l flit - dim fitir (walyne ■ !(." OM( cviS clime or .1, obn Aspckn, Q997
229
It"::3(.‘. appears to have continued to rely aq.;arently almost exedusiveiy as it ;timed disaiitrous results - tin the FSA, John Aspden's comment on this was: "Osteits'ibly, tin ii isoii it ::1,;d inalerkriiso ehe tact that the F.1',4 fett th(' ff 1L'ir.j a host mpervisoP. of K.azwan -,v FricilLwac?' lii loikion, and if wet Blot the parwil or fear! supavisor glaze group, (oral e ,,tidenoe, without comment in the P.ettiort, 96). This is undoubtedly correct, but the kick or any entary on this :situation is disturbing.
(1,,} cl ot' dilig,..nce Kzt,,pthireg Committee raised cluestions about the due diii-v,euce undertaken by 1."` ,..“.: at the tine of" tlati :take, S&J:" N:atpfhin., in 2205 {5i. 52). This wait, understanckibiy hunted het...a:Ise the 10M batik was at that. titne Hatbsidiary otithe (11( hank (which also explains bon. Silearer Cil(t ot- the iJ• hank) hod no reason to infOrrn the FSC or his nr:neorits, t:iltho ,agh ztoe tiid inbalm ; the th e ce. ,; ;Lifatm: rcspousi,ble - of theta). We note however that the Conmlifkie h"thicil to C the Ft.t)C.. to the signlrican; chaniic or slants ot"K:-J 2 101,1 lanualy 20(1"/ dnect sithsititary of' Ktintidt.lin: hi .liteland). that point it liee.tnne very tra.ic'h a matte:1'1 .°r the FSC itu„c::fit.iate and saintry iii iet tii.. prt.'qiosed
the take-ove• all,r0lOM and ifornitition ,ro'ffeleil to custrmk,rf 'ahol.mt, the leciandic ?am:anal in flit:: financial it: late ( it S ,dronna that the I.:SC did no; ex:di -nine ci , ioroattl,/ the oroposcd oC LIDRN at:d die not eeni.. .efu with ;he rate (if der);,:-..;AOr; fOrdHy ;h 1:11.`ii. :WO -0[Aati:Al. to be p().Cntia;ly JOhn ,' \.:;pdOn 10'. ," 61a( il,R! illy .:ry dq.,...1SkOri not alerted to this bactin :my way and ,shy did tile l:"Stf itt least not i)in a halt qui,:st rot- depositois' ofti...3n LvcrL KISFIUM. late N'Iat'Ch when FSU. alatmed by thai situation C;t,d. :hey 11c0In is SHON4 0 p.2a1 tint it :lit:li•:I:It to understand that the ("otmuinec Hve satiarnid, provided, ;hat the 1) r'. prc,vided infOritiatitta: l tl. tala.i.ovecol iDi.:.");i1 :mil the nature Kfloptiting hank to he :lepositors. rain Mir iriroruiation, thc.v. did not. rhe provided by Mr. Doltier:i/ to ihe Commit:tee rear seiectivi.i, as to be intislt:::adinv: the itifOonation setu out to :lir: "[D.R.)M customers in Fchrtt:u7 vias to int:hided in the evidence he provided I,-0:2,1d. itiontfis aher the take-over had oetailred) ror the product in 2008, primr to its launch in Jane )08, and which was obviously' not sent out to t,:uatomers i.U-i f".K.Sf:10i'vl".. The ,:vah tir conitision between these difftreot docuraurits in Mr lJobeityls oral evidence anti incorracl assertion that these were given to every customer Q909) m us t hate heen to Lire tithe ot: the Conrunittev (to whom the relet/ant documents had been KSHOMD/-1.(..i). \\:"c can only usstu nt, the,/ overlooked it when they conchick i l took place f-,q,-qw.e.:-fn- (In,A1) f1 61 on :17,--ecior,', >. Califimy volution ;0 tilt", In nni a t( -M pia ,}irj[:' ((1.)01,q tine hlke (1'..,;!.!• r .1),r0.11. 7 1.) . . Q,4!.} 230 ct the inrormation that was in fact provided, it is hardly surprising that Dr Downs, along with many other Derbyshire depositors, was " wick r the i mp re ssi o that K. au pihing was n north Enn)pea;? ra tu. th an Icelandic" 05), since that was ,,s.karly the impression thc Director:3 r4). cOrlVey. Thc obvious question is why were they so keen to disguise the real identity or the parent a time when we now now that the financial community was already worried about the sltuatinn in Iceland y? Coucein lug the .Plire,llaf Guaranke P ar,.=1:111 (i Liar attlec remains in dispute and subjeul_ to a decision ol the le,e1=lic court. Ehe fiuid outcome, it was to be acceptel without cgesticit Kovthing Winciing.up tite light -11 thiS and given (he i-iorriev,lizt provi(ic, d ucgardir” , th:‹i du i'ditlettaken ;Any?), ho)1h expresscd the process by winch it was let and hiwiis on which the Cnyi n.:iipec. it should 5. (.'enNTrii with efralca h3' bank Direct() rri eta! counect.ed par/in v i(1..{ utc.:c- revealed tkat the 'el:nal -10,', was to lrnEn with the bark en C.ii ° October tip' wiv,i)uil oicciiwisii" 1111(1 th:i: lie ',VIAS at CD; LiHIC - 0w a ',I. ar.? 1,%‘.-.1jor h pi hi ?1,9, ro . (Qs 413, 061) Mr Doileriy' ,.: inftr ulus t sum '`_..'.tore the colh ■ipse (Qs 411:343)), :w•orii of ille Reporq, criakc tto or; i 1 '000 o!.;“.!; 111.1 7-4). 110 1117! th!.: ,:OU:111i51.2.. Wnsf.'1V itive io \%IACil It Howlicd{.; .,2 :hat ma.111 diiy,lostiors ,Aei- otinaliiH X111 , ti tiCe. Fc!-CO:',F,L;&!ti Cc=?ffiqiCi. .\•11 (.1:;11t21 .1 ;.15 1)0111 1111 1 : SC COMW:17..;:-S, Wi and );`,I. (and i1ther i()N1 guolipsi (. (,YP:))11.rs 2 thiit shotihInot 1.€1',G Mr Cuslien lilt anent: liSC moclings disco t! and 1.11at CCdn'A.'d T.11 51031 1' if1 sonie eoin.::ern that 111 1' neither :\iir Cashen nor the FSC '...verg able or rinif!'jit'A 1)y :11;,.; et' an'y suck inimitcs (Os a ko P.,epoc, recomi-neilds thai rewiL Reconimertdatiorl it thidt tl-te Cohiritihcc chose i. ilppoich Philip O'SheiA tidviseiL the lc. aspects or banking regulations, Mr O'Shea paTtieipated in all hut one th L(.: evidence sessions, when he was introduced by the chairman ;15 "our (specialist) adviii. When thanking him in "Ilvawid far his assistance, he was described as "a f 0 rwc r nac4i recto+. of r,e Rap I(" . What has ; howevez (to tho best ,ar Our knovdedgQ), never been publicly stated is than at the time ot' the take-over or 'IDIOM by KSHOM, Mr O'Shea was not. only a Director or Close 1-tank hut: also the Managing Director or TD{OM. In. this iota, we UrnkrStUld he e=ras effeetiv ,dy responsible for the day-to-dny running ormIOM and Cot' implementing the policy of continuing to market Derbyshire products and recruiting now customers right up to the day of sate. We further itridersiland that his instructions were riot to divulge to prospective customers Ihe forthcoming 231 Katipthing take-ovor. in the light of this, we find it difficult to believe that he could /v.:main unconflicted and impartial over the events Au -mm;(1in this. 7. Concerning fiersonn(J R stalling , Wc. note the comments by Mr Aspd ,:m" and M. Cashen" aw-w. the s!.affing icvels at Ittc FSC.: 1..or the one hand) and tl e nuctibr of sui[ubly-qua'iact people available an the IONI and are concerned drat !hi 11;:i..`; bccrl it:entitled as an is,-;;, x,, it has not been addrsscd R..;:porrs Corr: I: Mr Aspdcn, and (1.): 2041 , 73,-xeniso , tioughwn, with uyi_?,,,y r:?s,iwet. or real nt).,, .0 aad we :WI our wridng. vobarrifert,w intmeti.:v about .(1fs;.us'sion 1,4;:z :1 re -Y11'.0,9();'d sluff lve art' ,fier no/ il./.1ve the irmey -gf that. . ." Cas) ,24, oral cvidefico (Q245) "Thigvt,4 oa f ri smca pool (if Uri (Ire is,''.and 1.-clumi cab', the rigbi profi.:wNhinal background wul Imofesstupal exiu:riceriee..5a the of ibiere.51 hos henna a issue lan ,ii?1,27":1/ yere.s . ' 232 Appendix 8 KSFIOM SCHEME OF ARRANGEMENT ("SoA") SUMMARY OF QUALITATIVE ISSUES This document has been produced at the request and for the use of depositors of KSFIOM and members of DAG, and incorporates advice obtained from DAG lawyers and observations from several lawyer depositors and other depositors. It does not analyse the position on amount and timing of possible recoveries, as that has been done elsewhere. It is not legal advice and is not a substitute for legal advice. Readers are referred to the final paragraph. This summary adopts the definitions set out in the SoA. A Summary The Explanatory Statement circulated by the IoM authorities with the revised draft SoA contains the less-than-ringing endorsement that its purpose "is to create a financial outcome for Scheme Creditors no worse than would be achieved if the Company was to be placed into liquidation, but which is intended to enable Scheme Creditors to receive larger distributions more quickly than would be the case in a liquidation." In addition, depositors will get back what they would have got under the DCS within a year. In brief, the following are the reasons why the SoA is disadvantageous from a legal perspective. This document does not deal with the quantitative analysis of likely recoveries in different scenarios (although we note that we consider the graphs contained in the Explanatory Statement to be misleading — we are consulting our lawyers regarding this): The SoA has not been negotiated or discussed at all with the "beneficiaries" (i.e. the depositors). The time limits imposed by the authorities are so tight that a full forensic analysis by advisers is not possible. Financial and other information has not been forthcoming from the IoM authorities, despite numerous requests for it. This information is required for depositors to make a fully-informed decision about the options open to them based on a proper financial comparison of the two alternatives (SOA or liquidation + DCS) and of any other claims they may have. The SoA from a legal standpoint is therefore full of pitfalls, gaps and details that cumulatively work to the disadvantage of depositors and which are, taken as a whole, significant. Many — but not all - of these are described below. • While the SoA has been adjusted to ensure that there is a real timing advantage for depositors with £35,000 or less, and a smaller timing advantage for depositors who have a deposit in the range of £35,000 - £50,000, doubtless so as to attract the support of that group for the SoA, it does not present any advantage to larger depositors over a liquidation. Moreover, the defects in the SoA described in this document apply equally to all depositors. • The IoM Treasury is promoting the SoA as a means of avoiding the damage to the reputation of the Isle of Man that would otherwise occur if a liquidation were to take place, and to avoid activating its DCS, and perhaps also to avoid closer scrutiny of the events leading up to KSFIOM's provisional liquidation. • The SoA contains numerous examples of situations where the IoM Treasury obtains a better position for itself than it would under a conventional liquidation, in terms of information rights and consents given under the SoA. The IoM Treasury is getting much more from the creditors than the little it is giving them in return. It is behaving as if it is taking more risk than it actually is, given the likely recovery levels and outcomes that have been estimated following the recent report of the administrators of KSFUK, Ernst & Young. • Under the SoA, depositors would be giving up potentially significant rights by releasing all the parties involved in the SoA's preparation from any liability arising in 1 233 connection with it whatsoever. This means that depositors cannot sue any of the parties involved in the administration of the SoA. The structure established by the SoA will be costly to administer — in particular as a consequence of the dual roles of Office Holder and Scheme Supervisor that the SoA establishes. In a normal liquidation, the bankruptcy trustee or liquidator undertakes this combined role in a single person. The division is bound to lead to debate and confusion, and consequently increased costs, which reduce depositors' recoveries. Those recoveries, by the loM's own projections, are ultimately no better under the SoA than under their assumed liquidation, and their projections do not take into account any costs. The preparation of the SoA has taken over six months and millions of pounds in fees. It provides that most, if not all, of these fees are supposed to come out ahead of depositors' recoveries. So, both structurally and as a document itself, the SoA represents a system that is overly bureaucratic, unnecessarily complex and simply too difficult to understand; the explanatory notes accompanying it are extremely difficult to follow and are themselves about as long as the SoA (in the case of sub-clause 18.5, almost four pages of explanation are required). The level of complexity of the document lends itself to differences of interpretation and understanding, which in turn will almost inevitably lead to disputes and delays in making the payments that the SoA contemplates. A scheme of arrangement is a court-approved contract, setting out the terms on which the creditors of the bank all agree to relinquish their claims on that bank. In return for this, the creditors are entitled to expect benefits that they would not otherwise obtain if the company proceeded to liquidation. The SoA does not achieve this demonstrably enough to make it worthwhile. Our view is that the slim merits of the SoA are far outweighed by its disadvantages — a view that is borne out by the advice of DAG lawyers and by the weak "recommendation" of the Provisional Liquidators, who have (it seems reluctantly) agreed to sponsor the SoA. At paragraph 10 of the Explanatory Statement circulated by the IoM authorities, the Provisional Liquidators say that the SoA "should be in the best interests of the general body of creditors of the Company". That is not a compelling statement. The Explanatory Statement itself makes it abundantly clear in the language it uses that any advantage over a liquidation is not at all clear-cut. A liquidation is a well-established process for dealing with the assets and liabilities of an insolvent company, and the parties involved will all know from past experience and general knowledge of the applicable legislation what the procedures and formalities are. It will almost inevitably be quicker, simpler, cheaper and conducted more openly than the proposed SoA. For all these reasons, the proposed SoA is not considered to be acceptable. iB Detailed Analysis "Creditors' Committee" This is established and run according to clause 33. There are five members, selected by the Scheme Supervisor. Three are defined by the SoA: (i) TOM Treasury; (ii) a Protected Depositor and (iii) a non- Protected Depositor. The other two members are left undefined. Voting on the Creditors' Committee is by a simple majority and a meeting can be held without the need for a depositor's representative being present because the quorum is 2 234 only three (cI 33.10). This means that the Creditors' Committee can railroad depositors. There is no requirement that a depositors' representative needs to be present in order for a meeting of the Creditors' Committee to be quorate or that a depositors' representative needs vote in favour of a proposal before it is passed. "Initial Report" and Report" These reports are required before each Distribution is made and are prepared by the Scheme Supervisor (who is also the Office Holder, i.e. our Provisional Liquidator) and are confidential to the loM Treasury. They set out the detailed financial position of KSFIOM. There is absolutely no reason why this information should not be made available to the Creditors' Committee and therefore to all depositors. "Post-Insolvency Costs" These are KSFIOM's, the Office Holder's and Scheme Supervisor's costs, which are paid in priority to any Distribution. That is a normal position in a liquidation. They are however unlimited by reference to the scope of work carried out, and how they are incurred. They also run from 8 October 2008 and will therefore include costs of discussing the SoA with the IoM Treasury and providing information to the IoM Treasury and their advisers. These costs are not qualified as "reasonable" costs and they do not need to be incurred "in connection with their roles under the Scheme". We have no idea how much these fees are at present. Nor is it reasonable for depositors to pay the fees incurred in assisting the IoMG and their advisers in drawing up this SoA, which appears may be the case. "Preferential Liabilities" These rank ahead of all other claims (other than Post- Insolvency Costs), which is normal. However, we have no idea what they are at the moment beyond the £0.5M indicated in the summary (draft unaudited) balance sheet as at 8 October 2008. In particular, some may be owed to the IOMG as tax, and there has been no discussion of this. "Scheme" Note that the Scheme Supervisor can amend the SoA at any time - after consulting the Creditors' Committee and the IOM Treasury (who of course are already on the Creditors' Committee, so they get two consultations, one behind closed doors) - "if they consider it expedient to do so and if it is in the best interests of each class of Scheme Creditors to which the relevant modification would apply provided such modifications do not adversely alter the effect or economic substance of the Scheme" (clause 36). This does not protect the interests of depositors. PART 2 —THE SCHEME Cl. 8 — Moratorium Depositors give up rights to sue anywhere in the world, but only the courts of the loM and England recognise the moratorium (or stay of proceedings) that this clause contains. It is not symmetrical and should be. Furthermore, it is not clear what the status of claims for 3 235 "in-flight" funds would be if this clause remained as drafted. Cl. 9 — Winding lip If KSFIOM were to be wound up this would give depositors certain information. Not winding it up therefore continues the regime of secrecy and perceived dissimulation that has characterised proceedings to date. PART 3 — APPLICATION OF THE ASSETS Cl. 10 This describes the role of the Office Holder (as opposed to the Scheme Supervisor). There is no apparent basis for having two functionaries performing the role (combined) that a liquidator would normally have. Nobody has explained why this is necessary or advisable. Accordingly, it leaves the professionals who perform these roles (who are, to begin with anyway, the same people — PwC) in a position where they are constantly referring back to the SoA (and seeking legal advice on it) to determine in which capacity they are acting and dealing with possible conflicts of interest that may arise (for example, whether they can divulge information they have made available in the secret meetings that they have with loM Treasury). That in turn leads to fees and costs for PwC, as well as a difficulty for depositors in ascertaining with whom, and on what basis and terms, they should be dealing. It seems obfuscatory at best, sinister at worst. At present it has not been established that the claim under the Parent Guarantee would survive the implementation of the SoA. CI. 11 Post-Insolvency Costs appear twice as deductions from realised Assets — in clauses 11.1.1 and in 11.3,1. If that is a drafting error, then why this should be, after the amount of time and consideration that has gone into this SoA, is inexplicable. If it is not a drafting error then it is plainly wrong. PART 4 - DISTRIBUTION Cl. 12 Depositors should note that clause 12.5.2(G) means that anyone who has taken over someone's rights to a deposit in KSFIOM since 8 October 2008 is excluded from payments under the SoA. This does not apply to the IoM Treasury itself. Cl. 15 Note that the IoM Treasury has a veto over both the amount and the making of any payment. The Creditors' Committee is merely consulted on this. Of course, the IoM Treasury is a member of the Creditors' Committee. Why is it only the "intention" that Distributions be made as quickly as possible? Why not make it a binding obligation? Cl. 16 This deals with the secret reports that are to be provided to the IOM Treasury before the IoM Treasury approves any payment being made. If they aren't provided in time, then the IoM Treasury need not make a payment under the SoA anyway. Cl. 25 The date for conversion of non-Sterling deposits is 9 4 236 April 2009 — not the date of approval by the court of the SoA; if a winding-up order were made, it would be the date of the winding-up order. Cl. 27 This is a complicated provision that defers depositors' claims for interest over 5% on their deposit after their "DCS entitlement" until other claims have been paid. No explanation for this mechanism has been offered. PART 5 — THE OFFICE HOLDER AND THE SCHEME SUPERVISOR Cl. 30 & 31 The creation of these two roles lies at the heart of many of the problems with the SoA. Even the Explanatory Statement itself oscillates between referring to the Office Holder and Scheme Supervisor as the Provisional Liquidators, since that is who they are and what they are doing. The difference is that under the SoA, the two roles can be held by different persons and that different duties are owed by them to different parties. As mentioned above, there is no basis for this division of responsibilities, with different obligations owed to different people in different ways. All it does is create confusion in the minds of all concerned. And to a sceptic, that confusion only serves one party involved in this. By way of example, the Office Holder is a trustee of KSFIOM's assets for the creditors. The Scheme Supervisor owes duties to KSFIOM only (cl. 31.7). But these aren't owed in a fiduciary manner except as specified in clause 32.1 (cl. 31.7). Nor is he liable in any personal way "in connection with the preparation... or implementation of the Scheme." Why not? Why are the proposers of the SoA so nervous about this that this clause goes over substantially the same ground as clause 35 (as to which, see below)? The Office Holder reports to creditors once every 6 months, telling them of "material developments" since the last update. The Creditors' Committee is updated every three months while the Treasury is a creditor (cl. 33.11.1). Contrast this with the monthly updates that the IoM Treasury gets under cl. 32.2. When the Treasury is no longer a creditor there is no regime applicable (cl. 33.11.2) PART 6 CREDITORS' COMMITTEE Cl. 34 This deals with remuneration. Creditors are to pay PwC's fees at their normal time rates, and no discounts or fixed limits are referred to. Why not? PART 7 - RELEASES Cl. 35.1 & 35.2 Depositors are asked to waive their rights against the Office Holder, the Scheme Supervisor and the loM Treasury "to the fullest extent allowed by law" "in connection with the preparation, negotiation and implementation of the Scheme or any matter ancillary to the Scheme". This provision is to survive the termination of the SoA (regardless of the reason why 5 237 that happens) — cl. 38. This is ABSOLUTELY UNACCEPTABLE. Without taking away from that statement, there has been no negotiation whatsoever with us regarding the SoA, so why is that even referred to in clause 35.1? Cl. 35,2 This provision is relatively obscure in that it appears to make KSFIOM liable for breaches of the waiver by a depositorso that if a "rogue depositor" were to breach the waiver, that will reduce the amount available for distribution. PART 8 - MISCELLANEOUS Cl. 38.2 If the IoM Treasury fails to make a payment due from it for 30 Business Days (i.e. six weeks) "or such longer period as the Scheme Supervisor and the IoM Treasury agree in writing" then the SoA is capable of termination by the Scheme Supervisor — it does not terminate automatically. Firstly, 30 Business Days is far too long, Secondly, its possible indefinite extension by someone who owes a duty to KSFIOM (and not depositors) is clearly easily capable of exploitation by unscrupulous parties and does not protect depositors. There is no sanction on the IoM Treasury if it fails to comply with its obligations. CI. 39.3 Notices by the administrators of the SoA are deemed given after 48 hours of posting, regardless of where in the world a depositor may be, which is clearly unworkable for many depositors. Most documents these days allow for electronic service of notices (i.e. by e-mail). Why hasn't that been done here? Cl. 40 This is a sticking plaster over the raft of conflicts and double appearances by the IoM Treasury by virtue of being both in the Creditors' Committee and a separate party with separate and better — rights than the other creditors. Cl. 41 KSFIOM will continue to be managed from the IoM — but by whom? Depositors are left with no idea. Will the current directors remain? Depositors would be justified in viewing this with scepticism. This summary is not exhaustive. Depositors are encouraged to read the SoA itself but, as it is recognised that it is a very complex document, this summary has been prepared to assist depositors in understanding DAG's opposition to the SoA. It is understood that depositors have different (i) priorities as to quantum and timing of their recovery, and (ii) constraints within the legislative and contractual framework surrounding the provisional liquidation of KSFIOM, which will lead them to form their own conclusions on the best way of proceeding. DAG remains committed to seeking 100% recovery for all depositors. 6 238 Appendix 9 ASEIRMERMUMMEMENSM3550X9N9EZZEPA, Kaupthing Singer a Fdedkind,.: 1se of Man KSHOM DepositorS AC )1-1 ..J ) p Hon Anne Craine MHK Treasury Minister Government Office Buck's Road Douglas IM1 3PZ 7 April 2011 Dear Ms Craine I am writing to you with regard to the creation of a UK and Isle of Man Government Sponsored Loan Trust, a proposal designed to address the predicament of the thousands of higher-value depositors of Kaupthing Singer & Friedlander (Isle of Man) Limited ("KSFIOM") who, having suffered major financial distress caused by the failure of the bank in 2008 and the regulatory failures in the Isle of Man and United Kingdom, have yet to receive a significant part of their savings from the liquidation. Our proposal offers a simple mechanism whereby these depositors, many of whom put substantial sums of pension money in KSFIOM and can ill afford to wait until 2017 to see the return of the major part of their savings, could immediately recover the full balance of their funds. It would enhance both the reputation of the Isle of Man as an offshore financial centre and the two respective governments at minimal cost (estimated, on current projections, to be around £20m over the term of the insolvency). Many of these depositors are non-resident UK expatriates, whose deposits represented the bulk of their pension provision, having retired or worked overseas, and who had been unable to hold or open sterling bank accounts in the UK as a result of the anti-money laundering policies of UK banks. Approximately half of KSFIOM's customers were long-standing customers of the Manx subsidiary of the Derbyshire Building Society, a UK financial institution which had directed non-resident UK citizens to their Isle of Man subsidiary to place their savings. The Manx subsidiary was acquired by Kaupthing hf of Iceland in late 2007 during its aggressive acquisition programme of UK assets. /cont'd 239 -2- In October 2008, the Financial Services Authority and HM Treasury ("HMI') effected the sale of most of the assets of Kaupthing Singer & Friedlander (UK) Limited ("KSFUK") to ING Direct, to protect the retail customers of KSFUK against perceived issues surrounding the Icelandic banking sector, in particular Kaupthing group . A side effect of this transfer was that it rendered KSFIOM, the Isle of Man sister company of KSFUK, insolvent. A significant part of KSFIOM's assets had been placed with KSFUK, leaving it unviable in the absence of liquidity from KSFUK or their parent company, Kaupthing hf in Iceland. Apparently there was no consultation between the UK authorities and their Manx equivalent at the time of this action by the UK authorities. KSFIOM was placed into provisional liquidation, where it remained for nearly a year until the liquidation process started in May 2009. Customers were provided with minimal information during that time about the status of their funds, many of which represented a lifetime's savings and pension provision. Promotional literature on the Kaupthing operation on the Isle of Man referred to the parent bank as a "Northern European bank", benefiting from a guarantee from its parent bank and with excellent credit ratings. Had the guarantee not been in place, the Derbyshire sale and purchase could not have occurred, since the Derbyshire itself had provided a binding guarantee to its Isle of Man subsidiary. The Kaupthing guarantee was promoted as having been lodged with the Manx regulator. Despite being widely marketed in the UK, the Isle of Man and elsewhere, that guarantee has now been held by the Icelandic court of first instance to be invalid and in any event will not pay out in full due to the poor liquidation prospects for Kaupthing hf. Whilst that decision is subject to an appeal to the Icelandic Supreme Court, retail creditors of KSFIOM appeal to the responsible authorities in the Isle of Man and the UK to work together to end the suffering of these British customers by facilitating the full return of their savings without delay. Neither the Financial Supervision Commission (on the Isle of Man) nor the Financial Services Authority (in the UK) is willing to accept responsibility for what has happened to the customers of KSFIOM. As the victims of serial regulatory failures in both the UK and the Isle of Man, they remain the only individual savers left to bear the cost of these actions and failures by the very authorities that exist to protect them — the relevant authorities in all other jurisdictions have ensured a 100% return to Kaupthing's retail customers. /cont'd 240 -3- The UK Treasury Select Committee's Report into the Banking Crisis recommended that the UK and Manx authorities work together to find a solution to resolve the position that the depositors of KSFIOM find themselves So far, nothing has been done to achieve this. The attached document lays out the structure of a proposed Government Sponsored Loan Trust, showing how it could provide KSFIOM's customers immediate access to the balance of their funds, with minimum exposure to the Isle of Man and UK Governments underwriting the scheme until those funds have been fully recouped by the liquidator, forecast to be by 2017. Our proposed Government Sponsored Loan Trust delivers a simple, minimal cost and efficient solution to addressing this issue, without exposing either Treasury to onerous financial commitments. Over two years on from the bank's insolvency, returns from the liquidation of KSFIOM are expected to reach 73% in the near future, with a final out-turn of 91-98%, disregarding claims in connection with the on-going litigation surrounding the parental guarantee, and are predicted to be paid over seven years since the commencement of liquidation. This document has been developed with lawyers to ensure its deliverability and viability. A member of our advisory team will be contacting you to discuss this proposal further. However, we trust that it will be given full and due consideration by both governments and that we can move forward on this initiative with minimal delay. Yours sincerely, Richard Carter For and on behalf of Kaupthing Singer and Friedlander (Isle of Man) Depositors' Action Group The House of Commons Treasury Report into the Banking Crisis — Conclusions and Recommendations — specifically no 16 Those involved in the failure of the offshore subsidiaries of the Icelandic banks have suffered losses to date, and many of those affected are British citizens. On the other hand, we acknowledge the clear validity of the overarching principle that the UK Government cannot cover deposits held in institutions outside its direct regulatory control, However, we believe that the UK authorities should work with the Isle of Man and Guernsey authorities to resolve these issues, especially given the complexities arising from the take over of the Derbyshire building society.; 241 Copies to. Mark Shimmin, Chief Executive Clive McGreal, Financial Controller 242 Appendix 10 Kaupthing Singer & Friedlander (Isle of Man) Limited (KSFIOM) Proposal for a Loan Trust Scheme for KSFIOM Depositors by KSFIOM Depositors Action Group 1. Current Position 1.1 We refer to the following source material: 1.1.1 The House of Commons Treasury Report into the Banking Crisis — Conclusions and Recommendations — specifically no 16 Those involved in the failure of the offshore subsidiaries of the Icelandic banks have suffered losses to date, and many of those affected are British citizens. On the other hand, we acknowledge the clear validity of the overarching principle that the UK Government cannot cover deposits held in institutions outside its direct regulatory control. However, we believe that the UK authorities should work with the isle of Man and Guernsey authorities to resolve these issues, especially given the complexities arising from the take over of the Derbyshire building society.; http://www.pubHcations.Eartiament.uk/oa/cm200809/cmselecticrntreasy/402/402.pdf 1.1.2 The transcript (Hansard Early Publication) of the Proceedings of the Select Committee of Tynwald on Kaupthing Singer & Friedlander (Isle of Man) Limited and the Depositors' Compensation Scheme held on Friday 10 th December 2010 (and specifically the evidence of Dr Downs); http.://wwwynwald.or9.ini/Epers/earycornmittee/eptf1012 lkedf 1.1.3 The second affidavit of Aidan A Doherty, a Director of Kaupthing Singer & Friedlander (Isle of Man) Limited sworn in the administration proceedings in the Isle of Man courts dated 24th October 2008; http://ymw .,gov.imilib/docsifsc/PressReleases/2ndaffidavitmradoherty.odf 1.1.4 The written evidence provided by the Kaupthing Singer & Friedlander (Isle of Man) Limited Depositors' Action Group to the Select Committee prior to the proceedings on 10th December 2010; htte://vv.ww,ksfiprndag.com/ingex.ohp?oppn=com kb&task=article&article -152- 1.1.5 The Creditors' reports and updates from the Joint Liquidators on the website of Kaupthing Singer & Friedlander (Isle of Man) Limited: http://kaupthin_gsiagels.co.irn/Pnes/201 -1/March/07Nlacch29:1 as"? 1.2 The latest Report to Creditors and updates from the Joint Liquidators confirm that: 1.2.1 As at 28 March 2011, 61.1 per cent of all Depositors' funds lodged with Kaupthing Singer & Friedlander (Isle of Man) Limited have been paid out and a further dividend of at least 12% to be paid no later than 1 May 2011 has been announced; 1.2.2 The estimated range of ultimate recovery of Depositors' funds lodged with Kaupthing Singer & Friedlander (Isle of Man) Limited is from 91.4 per cent to 97.7 per cent. In addition, and despite the recent unfavourable ruling by the Icelandic court with respect to its validity, there remains a possibility that additional recoveries may be made in connection with the parental 1 243 guarantee said to have been given to Kaupthing Singer & Friedlander (Isle of Man) Ltd by its Icelandic parent, Kaupthing hf; 1.2.3 The loan book of Kaupthing Singer & Friedlander (Isle of Man) Limited is in the process of being realised. This originally comprised approximately 180 loans which, as at 10 December 2010, have subsequently been reduced to approximately 90 loans. Most of these loans are expected to have been realised by the end of 2013, 1.3 The Kaupthing Singer & Friedlander (Isle of Man) Depositors' Action Group seeks 100 per cent. advance payment of deposits. This is on the basis that, as their representative, Dr Downs, stated in her evidence before the Select Committee: "given the exceptional nature of the banking crisis, it would be the right and compassionate thing to do. It is what almost every other government — with the notable exception of Guernsey [in relation to Landsbanki] — has done during this crisis. KSF (IOM) is the only Kaupthing subsidiary in Europe where the people have not been paid out." Dr Downs cites the example of retail depositors of Kaupthing Singer & Friedlander (UK) in London being paid out "immediately' as to 100 per cent. 1.4 In addition, Depositors have accumulating interest claims on their deposits, in respect of periods both before and after the collapse of KSFIOM. 1.5 In Dr Downs's evidence before the Select Committee she also notes that whereas in the UK the deposit protection scheme fully protects the first £50,000 of all Depositors' deposits (regardless of the recovery level and of the size of the deposit), the Isle of Man protects up to £50,000 inclusive of all recoveries from the insolvent bank. (By way of example, assuming a deposit of £100,000 and recovery of 50 per cent, in the UK this would yield £75,000 (£50,000 protected, 50 per cent. of remainder) whereas in the Isle of Man this would yield £50,000 (the 50 per cent payment equals the otherwise protected £50,000)). 1.6 it is noted that the Depositor profile includes both direct Depositors and retail bondholders, holding their deposits through a life company (together referred to in this note as "Depositors"). The breakdown of the original Depositor profile is set out at: http://www ,kaupthingsingers.coim/Pag es/2009/March/13March2009.asp 2. Status of Loan Trust Proposal 2.1 According to the evidence of Dr Downs before the Select Committee: 2.1.1 through their advisers, the Depositors' Action Group has been in contact with Treasury officials in the UK and the Isle of Man to discuss the creation of a loan trust underwritten by both governments, allowing depositors to draw in advance their deposits, which would be largely repaid from the assets of the Bank; 2,1.2 Dr Downs states "we have already got support in Westminster for the idea, so we are really calling on the Isle of Man Government to come to the table and sit down and try and work out the details"; 2 244 2.1.3 At this stage, there is no documented proposal, but the matter has been discussed with members in Westminster and the UK Treasury "and there is expressed support for the idea". 3. Structure of Loan Trust Proposal 3.1 Attached is an indicative structure chart of a Loan Trust Scheme in the Appendix to this note. 3.2 The parties to the arrangement would comprise the following: 3.2.1 Trust: SPV vehicle incorporated in either England & Wales or Isle of Man; 3.2.2 Trustee: Corporate trustee holding for benefit of the beneficiaries; 3.2.3 Administrative Agent: functions to include administration of claims procedure and eligibility of Depositors, monitoring of advance payments to Depositors and return of funds to the Trust in respect of Depositors' entitlements; 3.2.4 Security Beneficiaries: UK and Isle of Man government lending entities, the principal security for whom will comprise the Deposit Portfolio (representing entitlements assigned to the Trust by way of security against advance payments to Depositors); 3.2.5 Beneficiaries: Retail/Institutional depositors with outstanding balances which have not been satisfied by payments received to-date (estimated 4,000 depositors outstanding). 3.3 The operation of the Loan Trust Scheme would be as follows: 3.3.1 The UK and Isle of Man government entities would lend, in aggregate, c. [2200mj to the Trust, which would be secured against the Trust and its assets. The Loan Trust Scheme would need to determine whether such lending is pre-funded or draw down in instalments/on basis of claims. (Pre-funding would be administratively more convenient and avoid potential scaling back of funding arrangements during the life of the Fund); 3.3.2 Individual Retail/Institutional Depositors would apply to the Fund, through the Administrator, for participation in the scheme. Depositors will have the choice and may choose not to participate. Eligibility criteria would include: (a) Retail/Institutional Depositor of Kaupthing Singer & Friedlander (Isle of Man) Limited with outstanding amounts owed; (b) Submission of executed form of assignment of entitlements by way of security only. 3 245 3.3.3 Participation in the scheme would be for a loan advanced against a Depositor's entitlement and to be secured by way of security assignment of that entitlement to the Trust. 3.3.4 The terms of loan, including proportion of advance, would need to be detailed. 3.3.5 On proof of a Depositor's claim, the Administrator (on behalf of the Trustees) would direct the Fund to advance an amount to the relevant Depositor and to countersign the security assignment of the Depositor's entitlement (and such other matters as may be necessary to perfect the security assignment). 3.3.6 The assigned Depositor entitlements will comprise the Fund's Deposit Portfolio, which is to be held by way of security for the UK and Isle of Man government entities to secure repayment of their funding loans to the Trust, These loans will not bear interest, reflecting the low cost of borrowing at a governmental level. 3.3.7 The Administrative Agent would monitor distributions in respect of the Deposit Portfolio, remitting returns pro rata to the UK and Isle of Man government lending entities in accordance with the terms of the underlying loan or other financing agreement. The Administrative Agent will further provide reports of portfolio performance/collections. 3.4 It would be necessary to consider how the assignments would be handled for Depositors whose rights are currently assigned to the Depositors Compensation Scheme. For these Depositors, the amount of advance payment would be reduced by the amount (if any) of compensation received and not yet recovered by the Scheme in the liquidation; 3.5 It would be necessary to consider the requirements for flexibility in the future, including, for example, the impact of a sale of Kaupthing Singer & Friedlander (Isle of Man) Limited as a going concern or an early termination of the Fund arrangements. 4. Documentation We envisage the documentation would comprise the following: 4.1 Trust Deed 4.2 Administration Agreement 4.3 Loan Agreement (UK and Isle of Man government contribution to the Fund) (alternatively bond issuance or other form of financing) 4.4 Pro forma loan or advance agreement 4.5 Pro forma form of assignment of individual depositor's deposit entitlement to the Fund 4 246 4.6 Security documentation over Trust and assets in favour of Government lending entities (if not contained within framework of Trust) 4.7 Umbrella Agreement between Kaupthing Singer & Friedlander (Isle of Man) Limited and the Fund acknowledging the proposed arrangements (and acknowledging notification of each deposit entitlement being assigned). It is possible for the Umbrella Agreement to include additional rights against Kaupthing Singer & Friedlander (Isle of Man) Limited, such as an assignment of the benefit of its entitlements against Kaupthing hf. or other third parties. 247 Appendix Outline Transaction Structure Trustees Corporate KSF Hf Trustee Liquidated returns Assignment by way KSF (loM) Payment directions and KSF (UK) of security of deposit (in liquidation) entitlements reporting/oversight of amounts (in released to KFS (loM) administration) Administrative Agent Underlying individual entitlement Release of Funds to to deposit distributions Depositors on proof of claim Proof of Depositor status and outstandings Depositors (Retail/ Institutional) 6 248 .1,1 X A SO 0 Ai' 3 0 i\.1 Dear Sirs Re: Select T'yriwa Id on Kati pthing ffiqelkt.pcterAgNI)J4c1 Further to your letter of the 2" August 2010, I would comment on behalf of the Manx Insurance Association (MIA) as follows: 1. Eliffoq made in rpkittion to fweaing . KSF (10Mtas aspipq goncpri Given the uncertainty at the time of the collapse and the size of the potential liabilities, I don't believe any further echoes were a realistic alternative. Hindsight and the projected recovery would now suggest that the bank could have been kept as a going concern but that is with hindsight'. What this demonstrates is that although the IGM is en excellent offshore financial centre offering significant advantages the actual size of its economy is a limiting factor. At the time of the crisis, unlike seine eerie major economies in the world, the size of the potential liabilities on the Island in relation to bank deposits stepped the IONI Government from guaranteeing the position thus maintaining the required confidence levels 2, Scheme of Arrangements (80A1 The proposed SOA was fully supported by the MIA and the IOM Government was absolutely justified in its actions, Unfortunately, mistrust and bad PR in relation to the lOM Government motives meant that the proposal was opposed by a relativeiy small but well organised group of depositors who, more for 'a not at any cost' rather than a considered view, succeeded in stopping the SOA proceedings. .1- here is no doubt that if the SOA had gone ahead depositors would have been in a hotter position today. 3. The MIA did make a contribution to the consultation in relation to the update of the DOS and were happy with the process. From an MIA perspective we were of the opinion that insurance related deposits should be specifically excluded ensuring any policyholders with a deposit in a life wrapper were left with no doubt that his deposit was not covered. This is a consistent treatment with all policyholder related investments. 4. The NitA are of the opinion that there. would be no benefit in linking the DOS with the insurance related scheme as they require to be based on different principles and to do so would only cause confusion. Please do not hesitate to get in touch if you require any further clarification. Yours faithfully 1 .\ __X ) ‘° • J t) H oll is MIA Chairman 249 Parliamentary Copyright available from: The Tynwald Library Legislative Buildings DOUGLAS Isle of Man IM1 3PW British Isles July 2011 Tel: 01624 685520 Fax: 01624 685522 e-mail [email protected] .im Price: £21.50