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Icelandic Banking Crisis

Iceland’s banking system and economy has been among the worst hit by the recent financial markets crisis. Three of the country’s major banks (Landsbanki, Glitnir and Kaputhing) have collapsed following difficulties in refinancing their short-term debt and a run on deposits in the UK.

The Icelandic banking meltdown has had a massive effect on thousands of British savers. On October 7 2008 thousands of customers with Icesave were unable to withdraw their funds due to the collapse of parent company Landsbanki. Many UK local authorities, charities, police authorities and other organisations such as Transport for London have also suffered for investing heavily in Icelandic banks.

Gordon Brown announced that the British Government would launch legal action against Iceland over compensation concerns for the 300,000 UK savers affected by the Icelandic banking collapse. The Chancellor of the Exchequer added that the Government would foot the entire bill, estimated at £4 billion, for UK. The assets of Landsbanki in the UK, along with assets belonging to the Central Bank of Iceland, and the Government of Iceland relating to Landsbanki, were frozen by HM Treasury on 8 October 2008.

Kaupthing Edge

Internet bank Kaupthing Edge was a full UK regulated subsidiary of Icelandic bank Kaupthing, and had been the top paying savings account. On the 8th October, following the collapse of Landsbanki, the UK Financial Services Authority (FSA) also declared Kaputhing Singer & Friedlander - the UK subsidiary of Kaupthing Bank - in default.

The British Government used its powers to transfer all Kaupthing savers' money to Dutch Bank ING Direct in an effort to protect UK savers. Similar action was taken for Heritable Bank (part of Landsbanki) meaning it is also now part of ING.

Operating this account remains the same. Both deposits and withdrawals can be carried out (though there is a backlog) via the Kaupthing Edge website, which now features ING's logo. For the time being, the old 6.55% rate of interest is still being offered to ex- Kaupthing savers as a decision about future rates is yet to be made.

Protection

Savers with Kaupthing used to have full UK registered protection, meaning they would receive £50,000 from the UK’s Financial Services Compensation Scheme (FSCS) in the event of the bank collapsing.

However, savers now receive the same protection as customers with ING Direct. This means that if ING Direct were to go bust, 100% of the first €100,000 (around £78,000) will be guaranteed. But it is important for savers to note that this protection is provided by the Dutch Investor Protection Scheme and not by the UK scheme, meaning it would have to be claimed from the authorities in the Netherlands.

Outstanding Payments

A large number of customers that attempted to transfer their savings from Kaupthing to other accounts prior to its collapse, either by BACS or CHAPS, were left concerned after funds failed to appear in their destination accounts.

Both the FSCS and payments organisation APACS said that after some delays a large amount of transfers have now started to filter back to Kaupthing (now ING Direct) accounts.

In a recent statement, ING said: “Kaupthing Edge in the UK is being run by Administrators and we have now received their confirmation that all outstanding payments will be released by Thursday 23 October and we would expect these to start arriving in the destination bank account on Friday 24 October.”

Icesave

Icesave was launched in October 2006 as a UK deposit programme of
Icelandic institution Landsbanki. The bank offered a range of savings accounts to personal savers in the UK and the Netherlands.

Icesave’s short history came to an end last month following the collapse of parent company Landsbanki. The bank was declared in default on Wednesday 8 October by the Financial Services Authority (FSA) and the Icelandic portion effectively nationalised, meaning savers would have to claim compensation to get their savings back.

Unlike Kaupthing Edge, it had opted for the ‘passport exemption’ to the UK compensation scheme, meaning if it were to collapse, the first €20,000 should have been paid by the Icelandic compensation scheme and the remainder of the £50,000 from the UK scheme.

But due to the solvency of Iceland as a country, UK Government officials questioned whether the Icelandic protection scheme had enough funds cash to fully compensate all UK savers. As a result, the Chancellor Alistair Darling stated that all Icesave depositors cash (not just up to £50,000), including interest, will be protected and added that people will not lose their tax status for their ISAs.

Claiming money back

The FSCS announced that more than 200,000 retail depositors with savings in Icesave UK will get back their savings in full through an accelerated electronic payout system, due to launch in ten days time.

The FSCS said that it will write to everyone who had savings in Icesave to detail how the process will work and then contact customers again with instructions on how to complete a short electronic process to finish the transfer.

Commenting on the FSCS website, Loretta Minghella, Chief Executive of the FSCS, said: "We have been working hard to establish a way of compensating retail depositors of Icesave without the need for a paper-based application process. We will be contacting retail depositors to tell them how the transfer process will work and when they can access the system.”

“The automated payment process is expected to be in place in ten days time and the first payments are scheduled to start in the second week of November. We expect to offer compensation to the vast majority of retail depositors in November."

The website adds that Icesave customers’ savings are safe and that the correspondence they receive will inform them of “everything they need to know about how to access their savings, ISAs or term accounts”.

Customers can keep up to date with the latest announcements by visiting the FSCS Consumer page: www.fscs.org.uk/consumer.