I am grateful to Mr. Speaker for giving me the opportunity to raise the issue of United Kingdom citizens affected by the Icelandic banking crisis and the fact that they have or had offshore accounts. We have seen much on the news about the collapse of the Icelandic banks, the Government's seizure of their assets and the subsequent guarantee of all UK deposits in Icelandic banks.
Running alongside that unfolding drama has been the equal drama of the position of people who held Icelandic bank deposits located offshore in the Isle of Man and Guernsey. I shall focus the majority of my remarks on the Kaupthing Singer & Friedlander Isle of Man bank, from which two of my constituents have lost large sums. The first is Katy Watt, who has lost everything that she has worked for throughout her life.
Ms Watt moved to the Isle of Man five years ago to take up a job as a youth worker. The wages of UK citizens working on the Isle of Man cannot be paid into a UK bank account, so she was required to open an Isle of Man bank account. She bought herself a house in Peel, and worked for five years on the island. This summer she turned 60, and decided to retire to Wakefield, where her daughter and friends live. In August, she sold her house on the Isle of Man. The proceeds from the sale went into a KSF Isle of Man account along with her life savings, ready to be transferred to a UK account when she found a house in Wakefield. Like all KSF depositors, Ms Watt believed that her money was protected. KSF had specifically told her that she was protected by a 100 per cent. guarantee from the parent Kaupthing bank in Iceland. She was also attracted by a high interest rate of more than 6 per cent.
Ms Watt had not arranged a private pension, but had carefully saved her money. The money in the KSF account was to buy her a home and provide an income additional to her state and work pension. She is now left with absolutely nothing. She has no home. She is staying with friends and family, but cannot stay with them permanently. She is entirely reliant on her small state pension. When she came to see me in this place it was immediately apparent that her income was such that she now qualifies for pension credit. She is devastated that after a lifetime of working hard and playing by the rules, she is dependent on state benefits to top up her income. I should like to put on the record my thanks to the Secretary of State for Work and Pensions for helping to speed up the payment of those benefits. I strongly advise other depositors who have lost pension lump sums and rely on their investment income to consider whether they are entitled to pension credit and to claim it immediately if they are entitled.
My second affected constituent is Mr. David Speed, who lives in Farnley Tyas, a small village just outside Huddersfield. He recently retired after 40 years' work and sold the small business that he had set up and run. He put the majority of the proceeds into a six-year investment bond, which cannot be touched. He placed the remaining cash, about £200,000, in a one-year bond with KSF Isle of Man, on the recommendation of his accountant. Mr. Speed has a £127,000 capital gains tax bill to pay by the end of January 2009, but no cash to settle it. My hon. Friend Mr. Clapham has a constituent in exactly the same position.
My constituents are typical of many depositors who have lost their money in Kaupthing Isle of Man. Mike Simpson, the KSF Isle of Man provisional liquidator, has stated that there are 8,168 individual depositors with KSF Isle of Man. In total, they have lost £821 million from the bank.
I am grateful to the hon. Lady for giving way. She has done well to secure this debate. She has mentioned two very difficult individual cases, and the whole House will have sympathy with her in that regard. I draw to her and the Minister's attention the case of a company in my constituency, which for obvious reasons I will not name. It is trying to carry on in business despite the crippling problem of having most of its funds tied up in the bank to which she is referring. It feels completely helpless and let down by the black hole of regulation, support and compensation that exists in relation to a bank that it used not because it was searching for high interest but because it used to bank with Singer and Friedlander, which it regarded as a traditional City name.
Many people's funds have ended up in KSF Isle of Man by a variety of routes. I am sure that we will hear from other hon. Members about the routes by which money ended up in offshore accounts. I entirely understand the position in which the company in the hon. Gentleman's constituency finds itself. We need to look into the regulation that took place. As he will be aware, the Isle of Man has a separate regulatory regime, and it is not clear to small investors that that is the case. It was certainly not clear to people who invested in Guernsey that they were not covered by any compensation scheme.
Part of this is affecting some of my constituents. Many British citizens working abroad who had sold their homes were not allowed to open bank accounts in the United Kingdom and had to have offshore accounts. My constituents also had accounts in Guernsey and the Isle of Man, but they put their money into subsidiaries of building societies: in the case of the Isle of Man, Derbyshire building society, which had a subsidiary there; and in the case of Guernsey, Portman building society, which has its head office in my constituency. They thought that in doing so they were extremely prudent, because building societies are regulated by the Building Societies Commission, which in turn reports to the Treasury. Even if a building society has overseas subsidiaries, the whole of its activity must be approved by the commission. When Derbyshire was sold to Kaupthing in the Isle of Man and Portman was sold to Landsbanki in Guernsey, there was a duty on the part of the commission and, by extension, to the Treasury, to ensure that their deposits were properly safeguarded, but it appears that that did not happen. I think that there is a case against the commission and the Treasury on this point.
I shall leave the Minister to answer the question of whether there is a case against the Treasury or the UK regulator.
I have sympathy with depositors who find themselves in this predicament. How many of us read the small print on our credit card bills and financial statements? People think that funds have been transferred and will be safe. We have watched what happens when a tsunami hits, and we know that when the water goes out we should run to higher ground, but none of us knew that until a couple of years ago when we saw the devastation that was caused. Now, we all know that the Isle of Man and Guernsey are completely separate regimes, and that banks can collapse and fail, but that has not been part of the British psyche for the past 70 or 80 years, although it might have been part of our grandparents' psyches having lived through the Depression in the '30s. It is fine to be wise after the event, but we need much more clarity when people are being sold financial services products such as bonds to alert them to the risks attached to those products.
My hon. Friend has been generous in giving way. I have a constituent who invested in Derbyshire Offshore, which was sold to Kaupthing Singer & Friedlander, and another constituent who contacted me had the prescience to query the equivalence of the guarantee given. A building society guarantee—bearing in mind that there have been no failures of British building societies ever—was regarded as robust. A guarantee offered by an Icelandic bank was certainly not equivalent, and he detected that. Could he get access to his account and trade it in? No, not without the penalties that were levied. In some cases, the societies that sold on their accounts bear some responsibility.
Indeed they do.
Of the £821 million that has been lost, £450 million is made up of private personal deposits. The balance is made up of bond companies and corporate accounts. The majority of those private depositors are UK citizens. According to the website for KSF Isle of Man depositors, around a quarter are resident in the UK. If we extrapolate that number, we could be talking about as many as 2,000 people. The Manx Government have now extended their depositors compensation scheme to be equivalent to that of the UK, so it will cover deposits of up to £50,000. Unlike the FSCS in the UK, the Manx scheme is not funded, so as yet there is no money in the pot to be given as compensation.
There are question marks over how the FSCS will work in practice. It will require hundreds of millions to become fully funded, and the likelihood is that any payments made will be stretched out over many years, which will be of little comfort to people who may be in their old age and looking to that money for their retirement income. Half of those 8,000 private depositors would be entirely covered by the FSCS if and when it pays out. Half—perhaps some 4,000 people, including my two constituents—would lose tens and in some cases hundreds of thousands of pounds.
I am pleased that this matter has been raised, because huge numbers of people were affected by the collapse of Kaupthing Singer & Friedlander bank in the Isle of Man, but does the hon. Lady accept that the collapse was due largely to UK Government action? It is because of Government action here in London that the bank, which did not need to collapse, was folded. Does she agree that the Government in Britain should have liaised with the Manx Government and the Icelandic Government before taking the action that led to this disaster?
I will leave the Economic Secretary to reply on the actions of the UK Treasury. It was clear, however, that the banks were in trouble and had been for some time. I do not think that we can blame our own Government for taking action to protect UK investors—
The hon. Gentleman might wish to; I am not prepared to do that. I am not clear what happened with the transfer of the £500 million—whether it was transferred from Iceland to London, or from the Isle of Man to London. I understand, though, why people are extremely agitated.
I will make progress, because I want to talk a little about bonds.
The compensation scheme does not cover people such as my constituent, Mr. Speed who invested in bonds. I have a letter from Royal Skandia, with whom Mr. Speed invested his money. It informs him that
"the deposits are held by and in the name of Royal Skandia and are therefore deemed as a corporate investment. As such the Isle of Man Depositors compensation scheme does not cover these deposits."
The letter continues:
"There is a parental guarantee by Kaupthing Bank hf registered in Iceland that covers these assets. This was put in place in September 2007. It is currently unclear if this guarantee will be honoured. The Isle of Man government has made representation to the UK government which is responsible for defending the Isle of Man's interests internationally requesting them to press the government of Iceland to honour Kaupthing's guarantee".
It is important to remember that we are dealing with Icelandic banks. People have mentioned that 100 per cent. guarantee to me time and again. They were putting their money into an institution that had a parental guarantee. It now looks unlikely that that guarantee will be honoured by Iceland, as the bank's liabilities were many times the sum of Iceland's GDP.
Another very important group of people have also lost everything. People who were investing for their retirement through the self-invested personal pension, or SIPP, have also lost out. They are UK residents and UK taxpayers, but no onshore bank will accept SIPP deposits because they are held in trust. They have to be placed offshore. The Manx authorities will not accept that those are retail deposits, so they are not covered by their compensation scheme.
All hon. Members are grateful to the hon. Lady for her generosity in giving way, which we appreciate. Many hon. Members, including my hon. Friend Simon Hughes, have constituents who are affected. The hon. Lady was right to draw attention to the Icelandic guarantee, and we are keen to hear from the Economic Secretary what the Government have to say about the fact that they sequestered funding held in the UK banks for KSF Isle of Man. It could be argued that that money could be used to refund at least some of the deposits held by the unfortunate people caught by the problem.
That point has been made. The Chancellor said at Monday's Treasury Committee meeting that the Isle of Man is
"a tax haven sitting in the Irish Sea".
The Isle of Man's tax status may be useful for some non-British residents—and perhaps for some super-British residents—but depositors pay a 20 per cent. withholding tax at source in the Isle of Man. So anyone who is a basic rate taxpayer in the UK no longer has a tax advantage from putting their money into an Isle of Man account. That is not properly explained to people when they take out such investments. Depositors declare their income from deposits to the Government of the country in which they reside via a year-end tax return. Obviously, people who pay tax at the higher rate can pay that extra 20 per cent. at the end of the year.
My constituents are British people, living in Britain, who have lost the money for which they worked throughout their lives. They now rely on Britain to support them and defend their interests. As my hon. Friend Mr. Todd said, many were originally savers with the Derbyshire building society. I know that my hon. Friend Judy Mallaber has affected constituents who were with the Portman and Cheshire building societies. A few people, such as my constituent, Miss Watt, worked in the Isle of Man. Some worked for British companies, some worked for the UK Government abroad and others worked for UK charities abroad and are not allowed to have accounts in UK banks because they are not resident.
I do not pretend to be an expert in matters of international finance and banking, but I have had to learn a lot in the past few weeks. I emphasise that the transfer of money has been raised.
I would like to deal briefly with the situation of Landsbanki in Guernsey. Savers will receive 30 per cent. of their savings from the liquidator. Some people who invested in Guernsey were not aware that it is not part of the European economic area, and they are not therefore eligible for even the basic £15,000 compensation scheme that applies in Iceland. Serious questions need to be asked of the accountants and independent financial advisers who advised people to invest offshore. They clearly did not explain the risks involved in offshore banking.
Let me end with some questions for my hon. Friend the Economic Secretary. Will Treasury officials meet representatives of the KSF Isle of Man depositors to allow them at least to put their case? Will my hon. Friend obtain details of all KSF Isle of Man depositors who are UK residents and who may owe tax to the Revenue? Can he write to me with details of the number of people affected? The Manx Government will have automatically transferred them to HMRC. Will he ensure that HMRC deals sensitively and appropriately with people who have lost everything? Will he do everything in his power to ensure that Iceland honours its commitments to those depositors? Will he write to the Isle of Man liquidator and request that he make himself available in London for a meeting with depositors to explain his actions fully and their options to them? Will he also write to the Isle of Man Government and urge them to press ahead with their compensation scheme for depositors who have lost up to £50,000? Once those people have been dealt with, the nature and scale of the remaining problem will be much clearer.
I cannot overestimate the stress that those affected are experiencing. Samaritans are working with the website to support people through this period of intense stress. Their lives are in limbo, their plans are on hold and their futures are uncertain. I ask that all parties—the Icelandic, UK, Isle of Man and Guernsey Governments, the liquidators, the regulators, HMRC and the banks—work together to bring this unhappy episode to a speedy and satisfactory resolution.
I congratulate my hon. Friend Mary Creagh on securing this Adjournment debate. I am sure that the whole House will have sympathy for the plight of her constituents. Let me say in advance that, although she was generous in giving way, I do not intend to give way during my reply, given the time constraints.
The Icelandic economy has experienced increasing difficulties in recent months. Growth has slowed and the currency exchange rate has depreciated; this has been coupled with high inflation and high interest rates. In July, the International Monetary Fund's mission to Iceland concluded publicly that the Icelandic banking sector faced significant risks. On
Amidst that turmoil, the Financial Services Authority determined, on 7 and
The Government have also committed themselves to protecting in full retail depositors in the Icesave brand of the UK-based branch of Landsbanki. That guarantee does not extend to retail deposits with branches or subsidiaries of Landsbanki or Kaupthing that are located overseas. The guarantee extends only to retail deposits held in the UK.
The Treasury also made the Landsbanki Freezing Order 2008 on
The problem with Icelandic banks did not originate in the UK, but in the Icelandic banking system. Although the Government understand that many people have been affected by the failure of Icelandic banks, the oversight of overseas accounts is the responsibility of the relevant regulatory authority in that jurisdiction. As a general principle, arrangements for depositors in banks in overseas territories are a matter for the Governments of those territories. As the Chancellor said to the Select Committee on Treasury earlier this week:
"The British Government's obligation must be to depositors who have put their deposits into UK banks."
Let me turn to the specific points raised during the debate. It has been suggested that action by the UK authorities caused the failure of Kaupthing Singer & Friedlander in the Isle of Man, by requiring funds to be moved to the UK sister company, which it promptly shut down. I assure the House that that is not how things happened and I want to try to explain how events unfolded.
First, the business models of many banking operations in the Crown dependencies involve the practice of up-streaming deposits for Treasury management by the parent company. Before 8th October, KSF Isle of Man had taken to depositing funds with KSF UK, a practice that resulted from concerns that the Isle of Man authorities had about the position of KSF Isle of Man's parent company in Iceland. That is to say, KSF Isle of Man appears to have determined that placing money with the UK sister company was more prudent than placing it directly with the parent in Iceland.
I understand that this action was taken following discussions with the FSA in which certain aspects of the regime applied by the FSA to KSF UK were described. I want to say clearly that my information is that the FSA did not advise or require these deposits to be made. Furthermore, I understand that those discussions did not extend to the giving of any specific assurances by the FSA—for example, that KSF UK would be able to repay the money, or that KSF Isle of Man would be treated preferentially in the case of an insolvency. And at all times, the supervision of KSF Isle of Man remained the responsibility of the Isle of Man authorities. The FSA had no power over it.
My understanding is that KSF Isle of Man had some £532 million of deposits in KSF UK, and can be expected to recover a proportion of this from the insolvency process. It is my view that, given the lack of clarity that remains about the winding up of KSF in Iceland, depositors of KSF Isle of Man are likely to be better off than if those sums had been deposited with the parent company. However, under UK insolvency law, KSF Isle of Man ranks like any other creditor of KSF. KSF Isle of Man will have been fully aware of this. It could have chosen to put its money elsewhere.
Indeed, KSF Isle of Man was only one of a number of depositors with KSF UK that was not protected by the UK Financial Services Compensation Scheme. Other depositors included local authorities, building societies and charities. The FSA could not have given KSF Isle of Man advance warning of events, any more than it could have done so for other parties, as to have done so would have been highly inappropriate.
On the question whether depositors in the Isle of Man or Guernsey had any choice in the matter of opening offshore accounts, or whether non-UK residents are forced to open accounts offshore, I can confirm that this is not the case. There is no legal bar under UK financial services regulation that would prevent a non-UK resident from opening a new bank account here. When an account is opened remotely, more onerous anti-money laundering checks are, quite properly, required because of the increased risks involved. This might well be a factor in the willingness of some UK banks to offer new accounts to non-residents. However, this would not be a burden for customers who move offshore but wish to retain existing accounts.
A point was made about Derbyshire Offshore, and I want to make it clear that no member deposits were moved to this subsidiary by the society, other than on the instruction of the member depositor. Depositors in Derbyshire Offshore would not have been covered by the UK FSCS before they were transferred to Kaupthing Singer & Friedlander, and it remains the case that, when they were transferred, they were regulated by the Isle of Man authorities and would have come under the Isle of Man's compensation scheme.
Corporate bonds and similar debt securities issued by banks are not covered under deposit rules, because they are investments rather than deposits. If a bondholder suffers a loss as a result of the failure of the bank that issued the security, they may, for example, have a claim against an adviser who gave advice in relation to the purchase of the bond. If that adviser were in default and unable to meet that claim, there would be a protected claim under the investment business rules of the FSCS, which would be paid by the FSCS, subject to the relevant limits and the normal eligibility conditions being met.
My hon. Friend also mentioned Guernsey. It is certainly not my understanding that depositors in Guernsey lost everything when Landsbanki went into administration on
I have tried to address the main points raised by my hon. Friend, and I sympathise with her constituents over the situation in which they find themselves. KSF Isle of Man is a matter for the Isle of Man authorities and, as she will be aware, PricewaterhouseCoopers has been appointed as the provisional liquidator. It is engaging directly with the administrators of KSF in the United Kingdom. Depositors with specific queries should contact the provisional liquidator and the Isle of Man authorities. Given the issues that my hon. Friend has raised, however, I would be prepared to ask officials to meet her to discuss the situation—
The motion having been made at Six o'clock, and the debate having continued for half an hour, Mr. Deputy Speaker adjourned the House without Question put, pursuant to the Standing Order.
Adjourned at half- past Six o'clock.