Memorandum from the Isle of Man Government
The UK Treasury Committee is seeking to identify
lessons that can be learned from the banking crisis. To that end,
it has invited written evidence on four key areas. The Evidence
from the Isle of Man Government which focuses on Sections 1.8
and 3.5 of the Committee's examinations is set out below.
The Isle of Man Government:
asserts that it is a well regulated
economy and applies international standards to the highest level;
contends that the usual communication
channels between the Isle of Man Financial Supervision Commission
and the UK's FSA were not followed in advance of or during the
has in place a deposit protection
scheme in line with affordable best practice;
is keen to contribute to a debate
as to how international consumer protection may be strengthened
recognising that expectations may have changed; and
welcomes the opportunity to provide
evidence, both in writing and orally, to demonstrate that the
Isle of Man promotes transparency in the provision of financial
services and plays an active part in combating international crime.
Background to the Isle of Man, its Economy and
1. The Island is a self-governing British
Crown Dependency with its own parliament, government and laws.
The UK government, on behalf of the Crown, is ultimately responsible
for its international relations and the Queen, as "Lord of
Mann", is the Head of State and is represented on the Island
by the Lieutenant Governor. The Island has a special and limited
relationship with the EU, under an agreement ("Protocol 3")
negotiated when the UK joined Europe in 1972, allowing free trade
in agricultural and manufactured products between the Isle of
Man and EU members. Apart from matters relating to this agreement,
including Customs, the Island is not bound by EU legislation and
it pays nothing to, and receives nothing from, EU funds.
2. The Isle of Man has had one of Europe's
fastest growing economies in recent years, led by the international
financial services industry. Over the last 25 years, the Island
has developed into a flourishing and internationally respected
offshore business centre providing significant business introduction
into the UK and, in particular, the City of London. Business is
attracted by professional expertise, supportive government, world-class
telecoms infrastructure and sound financial regulation, as well
as by a competitive tax regime. New growth areas include e-commerce,
film industry, international shipping, aircraft registry and space
and satellite business, while traditional sectors like tourism
are still important.
3. Growth in the Island's economy has been
matched by investment in the Island's public services, funded
by direct and indirect taxation. The Island is self-financing.
4. Economic sectors include: financial services
(36% of GDP), construction (7%), manufacturing (7%), professional
and scientific services (21%), tourism (5%), and farming/fishing
(1%). The Island has a working population of 44,000 and an unemployment
rate of 1.5%. Inflation is currently 4.7%. The Isle of Man produces
its own notes and coins with the same value as UK Sterling, for
local use only.
5. For the 2007-08 taxation year overall
Government net spending was £543 million. This funding was
used to provide a variety of services to Isle of Man residents,
many in excess of those provided in jurisdictions such as the
UK. For example:
the basic pension plus supplements
for a married couple, with the wife qualifying on her husband's
contribution, is £217.58, some £72.53 per week higher
than the basic pensions of £145.05 per week in the UK;
free eyesight tests and dental examinations
are provided under the Health Service;
all tuition fees for Island students
accepted into Higher Education courses at UK universities are
paid by the Isle of Man Government without any required student
contribution, while UK students are responsible for their own
free public transportation is provided
for those over 60 years and pupils travelling to and from state
during the past decade significant
investment has been made in new infrastructure throughout the
Isle of Man. In recent years over £500 million have been
committed for such projects as a new acute care hospital, an energy-from-waste
facility, new sewerage treatment works, improved schools, a new
prison and two new water treatment plants; and
the provision of affordable housing
for Island residents has been a high priority and some £200
million has been made available for housing schemes that will
see more than 1,000 additional homes built before 2010. A further
£85 million has been allotted to repair and refurbish public
sector housing and £44 million in grants and loans has been
provided to construct homes for first-time buyers.
6. The provision of extensive public services
and infrastructure within a legislative framework that does not
permit a budget deficit, has earned the Isle of Man a coveted
AAA credit rating from both Standard and Poor's and Moody's credit
rating agencies for the past eight years.
7. The Isle of Man is an international financial
centre but because of its relatively low levels of income taxation,
it has on occasions, been described as a "tax haven."
Such labels are misleading, and may suggest to some a stereotype
of secrecy and weak financial regulation. In recent years the
Isle of Man has proved to the world that it does not conform to
8. The Island is not a secret or closed
jurisdiction; it has no bank secrecy laws. A number of external
and independent assessments of financial regulation have confirmed
that the Island co-operates fully in the pursuit of international
financial crime, and that its defences against money laundering
comply with the highest global standards.
9. The Manx government's policy is to be
both internationally responsible and economically competitive.
At the heart of its taxation strategy is a determination to comply
with current international standards on information exchange whilst
endeavouring to promote good quality business in a low tax environment.
10. A number of international organisations
have assessed the Isle of Man's practices against global standards
to ensure that the Isle of Man does not present a weak link in
the financial system generally.
11. The International Monetary Fund ("IMF")
has endorsed the Isle of Man's compliance with international standards
in such areas as banking, insurance, securities, anti-money laundering
and combating the financing of terrorism. The IMF's Report in
2003, stated that the regulatory and supervisory system of the
Isle of Man complied well with the assessed international standards
and commended the Isle of Man for the attention it had given to
upgrading the financial, regulatory and supervisory system to
meet international supervisory and regulation standards.
12. A further inspection was undertaken
by the IMF in September 2008 and early indications confirm positive
13. The Island is a member of the International
Organisation of Securities Commissions (IOSCO), the main body
responsible for the setting of international standards in the
securities sector. It is also a member of the Offshore Group of
14. The Financial Action Task Force ("FATF")
has carried out its own review of the Island's defences against
money-laundering. Its positive report concluded that the Island
is a co-operating jurisdiction with measures in place which are
close to full adherence with FATF recommendations.
15. The Financial Stability Forum ("FSF")
also considered the effect which offshore centres generally can
have on global financial stability. The Isle of Man was placed
in the top group of centres reviewed.
The Isle of Man Government's comments on specifics
areas of the Committee's inquiry
Securing financial stability
1.8 Possible improvements to the architecture
of international financial regulation and maintenance of global
1.8.1 It is the contention of the Isle of
Man Government that the financial regulations in the Isle of Man
and the protocols that exist between the Island and the UK regulatory
authorities are appropriate to manage financial stability, if
applied consistently. These are well documented and have been
subject to scrutiny by numerous national and international bodies
eg Treasury Select Committee, IMF, OECD, etc.
1.8.2 It is the contention of the Isle of
Man Government that there was a significant shortfall in communication
between the regulatory authorities in respect of the action which
the UK was planning to take in relation to Kaupthing Singer &
Friedlander Limited ("KS&FL") a UK incorporated
company authorised by the FSA to take deposits. This meant that
the Island had no opportunity to make or join in contingency arrangements
for the safety of retail depositors' funds held locally.
1.8.3 This has had a significant detrimental
impact on the reputation of the Isle of Man, a Dependency of the
British Crown, because as a consequence of the actions of the
UK, Kaupthing Singer & Friedlander (Isle of Man) Limited ("KS&F(IOM)L"),
a licensed banking institution in the Isle of Man could not meet
the repayment demands made on it by its depositors. Many of these
depositors are UK expatriates or people living in the UK who are
retail depositors and for legitimate reasons found themselves
banking in the Isle of Man with what had until recently been a
UK banking group ie Singer & Friedlander.
1.8.4 Apart from being licensed by the Isle
of Man Government's Financial Supervision Commission ("FSC"),
KS&F(IOM)L was also authorised by the FSA to conduct certain
activities in relation to UK Regulated Mortgage Contractsincluding
administering, advising, arranging and lending.
Why does the Isle of Man contend this?
1.8.5 The FSC signed a Memorandum of Understanding
("MOU") with the FSA in September 2003. Such memoranda,
while not having any legal or contractual standing, are designed
to facilitate assistance and co-operation between regulators.
The regulatory relationship between the FSC and the FSA (and its
predecessor for banking supervision in the UK, the Bank of England)
has functioned effectively for over 25 years (when the Isle of
Man was one of the first smaller jurisdictions to establish a
dedicated body responsible for the regulation of its financial
1.8.6 Except for the recent events relating
to the Kaupthing case, the FSC has had a good working relationship
with the FSA particularly in relation to all banks and other credit
institutions that are domiciled in the UK and that represent significant
liquidity and/or credit exposures for Isle of Man banks. This
is especially the case where the UK and Isle of Man banks are
both part of the same banking or financial services group. It
is accepted that in the majority of these cases, but not all,
the FSA is responsible for the consolidated supervision of the
whole group because it is the Home Regulator. A good recent example
of a case where regulatory cooperation between the FSC and FSA
worked effectively is in relation to the situation experienced
by Bradford & Bingley plc.
1.8.7 The FSC sought to discharge its functions
responsibly in relation to Kaupthing Bank hf and these circumstances
are set out in the information which follows.. The presence of
this banking group in the Isle of Man goes back almost 38 years
when in April 1971 the Singer & Friedlander Group, a banking
group in the UK, incorporated the existing bank (KS&F(IOM)L)
under the name Singer & Friedlander (Isle of Man) Limited.
In August 2005 the FSA had permitted the Singer & Friedlander
Group to be acquired by Kaupthing Bank hf. This parent/subsidiary
relationship existed until January 2007 when ownership of KS&F(IOM)L
changed from it being a subsidiary of KS&FL to a sister of
KS&FL and owned directly by Kaupthing Bank hf; the word "Kaupthing"
being introduced into the company name, with the London bank,
at that stage. During 2007, Kaupthing Group commenced to upstream
deposits taken by KS&F(IOM)L to Iceland where previously it
had been to KS&FL in the UK.
1.8.8 In December 2007, the FSA and the
FSC permitted the Derbyshire Building Society to sell its Isle
of Man banking subsidiary to KS&F(IOM)L.
1.8.9 During 2008, the two Icelandic banks
(Landsbanki and Kaupthing), marketed aggressively, by offering
high interest rates in the UK for retail deposits from UK consumers,
via their internet product offerings ("Icesave" and
"Kaupthing Edge", respectively).
1.8.10 The business relationship between
KS&F(IOM)L and KS&FL was not removed because of the change
in upstreaming by KS&F(IOM)L to Kaupthing Bank hf. KS&FL
continued to participate in some significant lending opportunities
together with KS&F(IOM)L as well as the latter using KS&FL
for certain settlement transactions. In February 2008, the FSC
visited the FSA to discuss regulatory issues concerning the market
conditions and a specific session related to Kaupthing. It was
evident therefore that both the FSA and the FSC believed there
were common issues to discuss.
1.8.11 At the end of March 2008, when the
FSC became sufficiently concerned with the deteriorating economic
situation in Iceland, it initiated discussions with the Board
of KS&F(IOM)L. The priority was to eliminate KS&F(IOM)L's
exposure to Iceland.
1.8.12 The Board of KS&F(IOM)L offered
to substitute the bank's exposure to its parent in Iceland by
withdrawing deposits from Kaupthing Bank hf and redirecting those
deposits to KS&FL in the UK. A liquidity facility of £185
million was left in place between KS&F(IOM)L and Kaupthing
Bank hf which gave KS&F(IOM)L the opportunity to call for
short term liquidity if it was needed.
1.8.13 Before permitting KS&F(IOM)L
to place a significant amount (48% as at 30 September 2008after
netting off the "liquidity" exposure to Kaupthing Bank
hf) of its total assets with KS&FL, the FSC believed it prudent
to discuss this and confirm two important matters with the FSA:
the maximum exposure that it permitted
KS&FL to have to related parties (including Kaupthing Bank
the liquidity requirements placed
upon it in relation to deposits made with it that had a maturity
date of up to one month.
1.8.14 The FSA informed the FSC that the
maximum exposure that the FSA permitted KS&FL to have with
all related parties was 25% of Large Exposure Capital Base in
aggregate. The FSA confirmed that this included interbank placings
with a maturity of less than 12 months (which is noteworthy because
such exposures, which can be significant, are sometimes exempted.)
Within this limit the FSC was given to understand that there was
to be no net exposure between KS&FL and Kaupthing Bank hf.
The FSA also stated that most of the related party exposures comprised
exposures to related parties situated within the UK. This was
supported by the fact that when the FSC spoke to KS&F(IOM)L
and the FSA regarding the margin on £185 million of additional
collateral (that was being put in place between KS&F(IOM)L
and KS&FL to give some independent security for a placing
by KS&F(IOM)L with KS&FL), some difficulty was experienced
because the margin was regarded as part of the 25% related party
1.8.15 Secondly, the FSA informed the FSC
that KS&FL had to have liquidity available within 30 days
equivalent to 95% of liabilities maturing within 30 days (a mismatch
of no more than 5% out to 30 days). In the maturity band sight
to eight days, no mismatch was permitted. The FSA stated that
certain behavioural adjustments were permitted to the retail deposit
book (except at the time for deposits accepted via the Kaupthing
Edge internet product offering). No behavioural adjustments were
permitted to the contractual maturity date for wholesale/interbank
deposits taken by KS&FL.
1.8.16 The FSC had therefore satisfied itself
the exposure to the parent bank would
be eliminated (except that a line of liquidity was available to
draw upon from the parent if needed and which netted off in the
event of insolvency);
the 60% of total assets of KS&F(IOM)L
that were represented by claims on Kaupthing Group in October
2008 (after netting off the "liquidity" exposure to
Kaupthing Bank hf) were due from KS&FL, a UK bank where all
related party exposures were limited to 25% of Large Exposure
Capital Base and where there was no net exposure to Kaupthing
Bank hf; and,
KS&FL would have liquid assets
to meet all maturing liabilities out to 8 days and were only permitted
to have a maximum mismatch of 5% out to one month.
1.8.17 As explained above, the FSA would
have been aware of the business model adopted by KSF(IOM)L and
of the importance which the Isle of Man regulator attached to
these prudential limits for the containment of risk.
Up until the demise of KS&F(IOM)L the FSC
had no major concern about the way in which the local bank was
managed or about its asset quality.
1.8.18 On 8 October 2008 KS&FL was placed
into administration on application by the FSA. The relevant Order
of Court provides that the Court file shall not be available for
public inspection without the Court's leave. The UK Tripartite
Committee/UK authorities made arrangements for a number of UK
accounts (badged "Kaupthing Edge" accounts) to be transferred
to ING Bank. The FSC has been informed that the funds backing
the transfer of these deposits came directly from HM Treasury
and/or the UK Financial Services Compensation Scheme.
1.8.19 Whilst the Isle of Man has been unable
to verify matters because of a lack of information as can be seen
later, if the limits referred to above were being properly observed
it is unclear why KS&FL needed to be placed into administration
without prior regulatory dialogue, given the disastrous effect
which such a move was bound to have on asset values.
1.8.20 The UK Government has agreed to represent
the Isle of Man's interests in ongoing discussions with Iceland,
including on the enforcement of a guarantee given by Kaupthing
Bank hf. However, it has been pointed out that under the terms
of international loans granted or to be granted to Iceland, the
country will be bound to treat all creditors pari passu and the
UK Treasury has subsequently informed the Isle of Man Government
that the parental guarantee is a "creditors issue" which
should be pursued directly with the Resolution Committee of Kaupthing
1.8.21 As mentioned above, a high degree
of co-operation normally exists between the FSA and the FSC, supported
by a MOU. This notwithstanding there was no prior indication to
the FSC by the FSA that KS&FL was to be placed into administration
and that KS&F(IOM)L's claim on KS&FL would be affected.
Such regulatory co-operation and dialogue is to be expected in
critical situations, and as had happened in dealing with other
situations previously. In the Isle of Man's view there was a breakdown
of regulatory co-operation in this instance.
1.8.22 Prior to the placing into administration
of KS&FL, arrangements (backed by UK Treasury and Bank of
England/UK Financial Services Compensation Scheme Ltd funding)
were apparently made in advance to ensure that retail depositors
with KS&FL (that is in effect all UK situs accounts belonging
to individuals) would receive back 100% of their deposits. No
opportunity was given to the Isle of Man to see whether KS&F(IOM)L's
retail depositors could participate in these or other safety arrangements,
even though the FSA knew of KS&F(IOM)L's high reliance on
1.8.23 The basis on which the application
was made for the UK administration Order for KS&FL was not
explained at the time though some details have come to light in
subsequent Select Committee reporting. The underlying Court documents
cannot be disclosed without the Court's leave. The FSC has requested
access to them from the FSA but this has not yet been granted.
1.8.24 At the meeting of Creditors of KS&FL
held in London on 1 December 2008, it is evident from the votes
cast, that the UK authorities (in the form of the UK Financial
Services Compensation Scheme Ltd) did not vote for the Liquidator
Provisionally of KS&F(IOM)L to join the Creditors Committeedespite
the fact that he is in effect representing the interests of the
over 10,000 depositors who banked with the group through KS&F(IOM)L
and has an indicative claim of £600 million against KS&FL.
The FSC understand that this makes the Liquidator Provisionally
of KS&F(IOM)L the largest creditor of KS&FL apart from
the UK Financial Services Compensation Scheme Ltd.
1.8.25 The Statutory Instrument, The Kaupthing
Singer & Friedlander Ltd Transfer of Certain Rights and Liabilities
Order 2008 (the "SI"), made by HM Treasury under emergency
powers created by the Banking (Special Provisions) Act 2008 effectively
provides for the immediate transfer of retail depositors to ING
Direct NV. It also imposes an overriding objective on the administrator
to effect ING transfers as a priority over all other administrative
Paragraph 27 of the SI, under the heading of
"Moratorium on payment to related companies" states
1. "Kaupthing (KS&FL) shall not
make any payment, dispose of any property or modify or release
any right or liability to or for the benefit of a related party
without the prior consent of the Treasury, and any such purported
payment, disposal, modification or release shall be void.
2. No related party shall exercise any right
of set-off or combination of accounts in respect of any debt owing
by Kaupthing (KS&FL) without the consent of the Treasury,
and any such purported exercise shall be void."
1.8.26 KS&F(IOM)L is a related party
as defined. It will be seen that the effect of the paragraph in
this SI creates an exceptional variance to the usual process of
1.8.27 During December 2008, the FSC had
sight of the Estimated and Redacted Summary of Statement of Affairs
for Kaupthing Singer & Friedlander Limited (KS&FL) (in
Administration) as at 8 October 2008. This indicates some £3,025
million of loans and advances are due from "Intercompany"
(related) parties, including £2,300 million from Kaupthing
Bank hf. It appears from a note to that Statement that there is
a net amount due from Kaupthing Bank hf of £900 million.
This net amount would be 150% of what the FSC calculate may have
been KS&FL's Large Exposure Capital Base. The Statement is
less helpful than one would expect because it does not quantify
the sums due to related parties. The aggregate for related party
exposures reported on the Statement are also significantly greater
than the £531million (before netting off amounts due to group)
reported in Note 41 to KS&FL's audited financial statements
for the year ended 31 December 2007.
1.8.28 Moreover, as explained above, KS&F(IOM)L
funds were placed with KS&FL on the understanding that any
exposure of KS&FL to the remainder of the Kaupthing Bank hf
Group would be contained within the prescribed UK regulatory policies/restrictions
applying to it in relation to related party lending and liquidity
mismatches. It would appear from the Estimated and Redacted Summary
Statement of Affairs that these policies/restrictions were either
not applied or were subsequently relaxed significantly or were
breached in a significant manner.
1.8.29 Furthermore, the UK freezing Order
made by HM Treasury against Landsbanki assets (Landsbanki Freezing
Order 2008) was publicly construed by many as a freeze of Icelandic
assets generally. This perception, even though the generality
was wrong, exacerbated an already tight liquidity position for
Kaupthing Bank hf Group as a whole.
1.8.30 In conclusion the Isle of Man contends
that a solvent bank in the Isle of Man has been made insolvent
by the actions of the UK authorities, when the UK was attempting
to protect its own position against Iceland. Had the existing
regimes and protocols been adhered to then the situation, if not
avoided, could have been managed with significantly less impact
on the Isle of Man.
3.5 The protection of UK citizens investing
funds in non-UK jurisdictions.
3.51 The Isle of Man Government and its
regulatory authorities have designed and implemented comprehensive
consumer protection regimes, based on international good practice,
over many years. However, the IOM appreciates that the international
financial community now wants to understand how the current market
conditions have occurred and is happy to co-operate in that exercise.
3.5.2 The Isle of Man has a Financial Services
Ombudsman Scheme which is a free, independent dispute resolution
service for customers with a complaint against an Isle of Man
financial firm such as a bank, insurance company or financial
adviser which the firm has been unable to resolve. It became fully
operational in January 2002. The role and powers of the Scheme
are set down by law and the Ombudsmen are appointed by the Isle
of Man Office of Fair Trading. It has powers to order payments
up to £100,000 for cases where a consumer complaint is upheld.
3.5.3 The Isle of Man has a depositors'
compensation scheme (DCS). The DCS partially compensates depositors
(wherever resident) if a bank in which they have deposited money
fails. To pay compensation, a DCS fund is created (when needed)
from contributions made by other banks in the Isle of Man and
the Isle of Man Government. The DCS compensates people who have
money in current and deposit accounts in the Isle of Man up to
a limit of £50,000 per individual depositor and up to £20,000
for most other categories of depositor (companies, trusts etc).
There is no "standing fund" of compensation (ie money
is not collected in advance).
3.5.4 The Isle of Man also has a scheme
to compensate investors in authorised collective investment schemes:
Isle of Man's Authorised Collective Investment Schemes' Compensation
Scheme ("ACISCS"). 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 due if a manager or trustee of an authorised collective
investment scheme fails to repay an investor when required by
the terms of the scheme. Compensation payable is calculated as
100% of the first £ 30,000 and 90% of the next £ 20,000
with 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 (ie money
is not collected in advance).
3.5.5 For life assurance companies, the
Isle of Man's Life Assurance (Compensation of Policyholders) Regulations
1991 ensure that, in the event of a life assurance company being
unable to meet its liabilities to its policyholders, up to 90%
of the liability to the protected policyholder will be met. Unlike
many other policyholder protection schemes, the Island's scheme
operates globally, providing protection to policyholders no matter
where they reside. The scheme would be funded by a levy on the
funds of the other life assurance companies.
3.5.6 All authorised institutions are required
to provide details of the various compensations schemes within
their literature to ensure that depositors/investors are familiar
and cognisant of the protection regimes in place.
The Isle of Government prides itself both on
its quality of financial regulation and on the responsible stance
it takes to consumer protection. It contends that UK citizens
can invest in the Isle of Man with confidence.