House of COMMONS







Tuesday 3 February 2009




Evidence heard in Public Questions 409 - 607




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Transcribed by the Official Shorthand Writers to the Houses of Parliament:

W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935


Oral Evidence

Taken before the Treasury Committee

on Tuesday 3 February 2009

Members present

John McFall, Chairman

Nick Ainger

Mr Graham Brady

Mr Colin Breed

Jim Cousins

Mr Stephen Crabb

Mr Michael Fallon

Mr Andrew Love

John Mann

John Thurso

Mr Mark Todd

Sir Peter Viggers


Memoranda submitted by Landsbanki Guernsey Depositors Action Group and Association of Independent Financial Advisers


Examination of Witnesses


Witnesses: Mr Ziggy Sieczko, KSFIOM Action Group, Councillor Richard Kemp, Local Government Association, Mr Neil Dickens, Landsbanki Guernsey Depositors Action Group, Mr Chris Cummings, Director General, Ms Amanda Davidson, Deputy Chair, Association of Independent Financial Advisers (AIFA), and Dr John Low, Chief Executive, Charities Aid Foundation (CAF), gave evidence.

Q409 Chairman: Welcome to this evidence session on the banking crisis affecting every man in Guernsey. Could the witnesses identify themselves and where they come from for the shorthand writer, please?

Ms Davidson: I am Amanda Davidson. I am the Deputy Chair of AIFA. I am also a practicing IFA.

Mr Cummings: I am Chris Cummings. I am the Director General of the Association of Independent Financial Advisers.

Cllr Kemp: I am Councillor Richard Kemp, Deputy Chair of the Local Government Association.

Dr Low: I am John Low. I am the Chief Executive of the Charities Aid Foundation.

Mr Sieczko: I am Ziggy Sieczko, the London Coordinator for the Kaupthing Singer & Friedlander Isle of Man Depositors Action Group.

Mr Dickens: Neil Dickens, a depositor in Landsbanki Guernsey and also the Chair of the Action Group on Guernsey. I am British but live in California.

Q410 Chairman: To what extent do you think the statement made by the Chancellor of the Exchequer about the Icelandic authorities' willingness to meet their obligations exacerbated the situation?

Mr Sieczko: It would seem from the transcript that we saw of the Chancellor's discussions with the Isle of Man that the Chancellor's open air statement saying that the Icelandic authorities refused to meet their obligations in the UK did not quite add up to what was said in that discussion. To say that was defamatory would be putting it mildly. Kaupthing Singer & Friedlander UK got put into administration as a result of its inability, according to the FSA, to meet its obligations. We have to question seriously whether that inability was brought about by the running of the bank or caused by such defamatory comments from the Treasury and from the Chancellor himself.

Q411 Chairman: Councillor Kemp, it was reported that councillors had followed Treasury advice by investing surplus money in order to deliver the highest return for taxpayers. Did HMT advise investing offshore?

Cllr Kemp: We do not get specific advice from the Treasury; we get particular advice from the Audit Commission and there are rules agreed with the DCLG. That advice is to get the best possible return across a spread of investments. There was no advice to invest abroad, but there was no advice not to. In line with the general guidance which local government was given, a small element - and we are talking about 5% of the total investment of local government in overseas banking - seems reasonable.

Q412 Chairman: Do you think the code of practice for Treasury management and investment needs to be changed and, if so, how?

Cllr Kemp: First of all, I think all of us need to be looking at doing things very differently in the light of circumstances. I think they were robust. Certainly we will work with CIPFA to amend them in light of this report and in the light of the DCLG Select Committee report on Icelandic banking which is also taking place. So change is in the air, change is needed, but we are partly waiting for the results of this Committee's inquiry before moving forward.

Q413 Mr Crabb: Dr Low, how badly affected have charities been by the failure of the banks in the Isle of Man and Guernsey, as well as the onshore Icelandic bank subsidiaries?

Dr Low: It has been quite serious. The extent of the problem is not known because a number of charities have chosen not to become public on it. We know that at least 86 million was tied up with a group of charities that were invested. There are figures which are in excess of 200 million being suggested partly from the websites of the banks involved. It is having a major effect. We are seeing charities having to cut back on services. For example, one of the children's hospices has had to stop its 'Hospice at Home' care and withdrawn that care for children because of this.

Q414 Mr Crabb: Are you aware of any code of practice produced perhaps by the Charity Commission or any other authority advising charities on how they should invest?

Dr Low: The Trustee Act 2000 sets out the duties of trustees and is the only statutory instrument that governs the behaviour of trustees, with the duty of care and so on. The Charity Commission has issued guidance but it is not non-statutory guidance on how investments should be handled. Mainly this is about diversification, taking appropriate advice, review and so on, but there is nothing statutory beyond the Trustee Act 2000.

Q415 Mr Crabb: In that guidance is there any reference to investing offshore?

Dr Low: No. That is not an issue that the Charity Commission has a view on. The trustees have an obligation to get the best return they can, taking into account the risks associated with those investments. My biggest concern is the lack of information to trustees about these banks and these accounts. We have poor information on credit rating and we have no sense, other than league tables of interest rates, about the sustainability and the risk associated with each of these regulated bank accounts. I do not think it has been in any way transparent for the trustees making decisions about investments as to where the money should go given a balance between risk, sustainability of the bank and the return that is likely to be achieved.

Q416 Mr Crabb: Are you aware of any charities that looked at investing overseas and then chose not to for exactly the reasons that you have just described?

Dr Low: Anecdotally I have heard of one or two that have considered that and not done it outside the UK. The protection that is available under the Financial Services Compensation Scheme is extremely vague and uncertain. Charities had no easy way of understanding whether they would be receiving any protection or not. Therefore, a number of charities did look outside the UK and chose not to, but that is anecdotal, I could not give you hard evidence on that.

Q417 Mr Crabb: Finally, what support have you received from the Government regarding the charity sector's losses?

Dr Low: There has been very little support, frankly. I was involved with a group of others in the umbrella groups working with the sector. I met Lord Myners and the Minister for the Third Sector regarding the Icelandic crisis and the effect on charities. I called for an interest free relief scheme that would not have cost Government anything given their view on the situation, but that was not forthcoming. There was an adjournment debate on it and Government simply was not willing to treat charities any differently to any other wholesale investor. Even though Government has chosen to bail out high net worth individuals to the full amount, money that is held in trust for public benefit has been put into a pool with wholesale investors, which is grossly unfair.

Q418 Mr Fallon: Councillor Kemp, given the evidence we have had repeated today, that the Chancellor's statement was at best injudicious and certainly exacerbated the situation, do your members believe that there is now a case for the British Government compensating you?

Cllr Kemp: We certainly believe that we have acted on the best advice available from ministers, from Parliament, from regulators, from the credit reference agencies, a whole variety of people. We are asking for two things. One is to be treated equally with every other class of creditor. We have difficulty in understanding the differences between the two systems because two of the banks are English registered so we understand the administration system here, but we are not as clear about what is happening for the banks in Iceland and particularly what discussions the Government is having with the Icelandic Government outside the ordinary discussions about creditors in a failed situation. We have been helped by the Government in the short term by allowing us to withdraw concerns about Iceland from the equivalent of our balance sheet for this financial year so we do not have to take it into account. We will be looking, if we cannot get the money back, for capitalization of the money because some councils would find it very difficult to pay their sums back in one year, if the crunch came to it. So we would want capitalization to spread it over a period of years, in which case it would be manageable, but we have had refusal for that at the moment from the Government.

Q419 Mr Fallon: What I asked you was whether you thought there was now a moral case for the Treasury to reimburse councils given the way the Chancellor himself mishandled the state of affairs in Iceland.

Cllr Kemp: I would make it wider than that because I do not believe it is just the Chancellor; I believe that there are a series of failures within the system. I believe there is a moral right, but it is not just the Chancellor's, it is the credit reference agencies, it is a whole range of things. In some we invested properly on the advice of all those people, including the Chancellor and we should have our money back.

Q420 Mr Fallon: Dr Low, is that your position as well?

Dr Low: Yes. Money which is held in trust is publicly donated money specifically for public benefit. The credit rating agencies were suggesting that these were doubly-rated banks right up to the end. It is unreasonable to suggest that these banks were any worse than any others. Should a charity trustee be penalised for choosing an Icelandic owned bank which is UK registered as opposed to RBS which had the same rating and yet failed under very similar circumstances? It is just the way in which Government is allowing them to fail that is the issue.

Q421 Sir Peter Viggers: Did you see the crisis coming?

Mr Cummings: I think, along with the rest of the regulatory structure and policymakers, there were some indications that the housing market was overheating certainly, but we were not in a position to judge and foretell the extent of the problems that we now see.

Q422 Sir Peter Viggers: Do you think your members are vulnerable to the charge of having mis-sold investors with accounts based offshore as low risk?

Ms Davidson: No. In terms of risk, offshore can present a greater risk for investors, but there are often very good reasons for advising that a client should invest offshore. Sometimes it is purely a rate, sometimes there can be tax considerations to take into account and sometimes there are benefits from passing money down generations.

Q423 Sir Peter Viggers: In your submission to us you said that "it is the product provider's responsibility to ensure there is clarity ... regarding the product's purpose and its associated risks". Is that not rather passing the buck?

Mr Cummings: We do not think so. We undertook some work with the Association of British Insurers which was also shared with the FSA, our regulator, in trying to tease apart the respective rights and responsibilities of each partner. The ABI, as the people who designed the products, has a responsibility for making sure those products are fit for purpose and well targeted and, if the risk profile of them changes, to inform the market. As IFAs we have a duty to our clients to challenge the product providers to make sure that they are being open and honest with us, but we can only know what we know at the time. The FSA has tried to help this situation by, for example, in the with-profits area, instructing product providers to produce documents called PPFMs (Principles and Practices of Financial Management) to expose their inner workings, but unfortunately that is only in the odd case. As IFAs we ask questions and we constantly prod product providers to give us more information, but ultimately they have commercial reasons for maintaining the integrity of their product design.

Q424 Sir Peter Viggers: Do you think the product providers were open and frank enough about the risks involved?

Mr Cummings: I would imagine that they were caught out by the speed of events in a similar way to the rest of the economy and the UK public. If they became aware of risks, they should have had a duty of care, not a regulatory responsibility, to expose those risks and keep their customers and us as IFAs informed of the changing risk pattern.

Q425 John Mann: Councillor Kemp, you said earlier that 5% of assets invested overseas would seem reasonable for any one authority. What percentage would be unreasonable?

Cllr Kemp: Again it would depend on the range of spread. If it was all in one bank in one country, that would be one issue. If it was a range of spreads ---

Q426 John Mann: Let us take Iceland then. What would be a percentage investment in Iceland that would have been unreasonable?

Cllr Kemp: Perhaps 10%.

Q427 John Mann: So 10% would have been unreasonable?

Cllr Kemp: Yes.

Q428 John Mann: Do you give guidance on that?

Cllr Kemp: No, we do not.

Q429 John Mann: Why not?

Cllr Kemp: The Local Government Association is a member body. Individual councils take advice from a number of places. They take advice principally from the district auditor, part of the Audit Commission which had their own money invested in Iceland, they take it from the credit reference agencies and they take it on more than half the accounts from Treasury management advisers.

Q430 John Mann: You said that money had been invested properly on the basis of advice given, but Fitch Ratings on 22 May produced a special report on Iceland which went to most of your members because they pay Fitch for this service and this says unequivocally that Iceland is "high risk". Why did your members continue to invest in Iceland after 22 May?

Cllr Kemp: Basically they did not.

Q431 John Mann: Some did. Why did those continue when they were paying Fitch Ratings for this special report which says quite unequivocally that Iceland is "high risk"?

Cllr Kemp: First of all, there began to be a disinvestment. As you will appreciate, money is put in an investment for a period of time. If we were disinvesting now and discussing this, 680 million would have been withdrawn from Icelandic banks. Two or three councils continued to invest up to the last minute. Those who have already conducted their own internal enquiries into why it has happened and how it has happened are robustly changing their Treasury management systems, and we can make evidence of that available to this Committee if you would like.

Q432 John Mann: I think it would be helpful. It would be helpful to get your view on why certain councils decided after 22 May to disinvest - perhaps we would like to congratulate those councils on their wisdom - and why other councils continued after 22 May to continue to invest. Would that not appear to be rather reckless?

Cllr Kemp: No. If you look in detail at what happened after that report, you will find that the recommendation from the credit reference agencies went down one grade and they were still high in the investment categories. There are six categories of investment and Icelandic banks went down from the top to the next to the top, so there was a marginal downgrading.

Q433 John Mann: It does describe it as "high risk". It is an extraordinary report. I would suggest some of your members did not read it.

Cllr Kemp: I think if you read the report and then look at what happened to the credit references, which are the people who get paid to look at those reports, to understand them and then advise people like councils on, you will see that the effect was not as great as you think it was. I am satisfied the vast majority of councils, having read that, will have then discussed it with their advisers and their advisers were still recommending they invest.

Q434 John Mann: Could you also in that note include details of what discussions with those who continue to invest they had with their credit reference agency so we can see if there is a weakness in what advice the credit reference agencies gave particularly after 22 May to your members? A note on precisely what happened would be very valuable.

Cllr Kemp: Yes. This is being investigated heavily by the DCLG Select Committee and we have presented evidence to them which we would be happy to supply here.

Q435 Chairman: Mr Mann is saying that after 22 May the credit ratings agencies mentioned that Iceland was high risk. That being the case, if local authorities kept investing there, do you think they had total culpability?

Cllr Kemp: No, I do not because that is only one of the elements of advice that local authorities and others deal with. They have been paying people to provide Treasury management systems ---

Q436 Chairman: Let me get it clear again. Even though it says "high risk" you think the local authorities who invested after that 22 May date do not have any responsibility, do you?

Cllr Kemp: Again, if I could make it absolutely clear, the risk rating went down from the highest possible grade to the next highest and was still in the level in which the credit reference agencies were advising investment.

Q437 Chairman: But it said it was "high risk". Is it not a red alert if someone sees "high risk"?

Cllr Kemp: We would be happy to supply you with the details of what the credit reference agencies were saying and the minimal downgrading that occurred.

Q438 Mr Brady: What proportion of your depositors that you represent are British expatriate citizens?

Mr Sieczko: From our polls we believe that between 55% and 60% of depositors were expatriates.

Mr Dickens: It is a third in Landsbanki Guernsey.

Q439 Mr Brady: For how many of them would it be fair to characterize them as being wealthy tax exiles?

Mr Sieczko: I would not like to put a number on that, but I would say a very small amount of them compared to the people I have been speaking to.

Mr Dickens: It is certainly not the case.

Q440 Mr Brady: The typical depositor that you are representing, could you give an image of the kind of situation that they were in and why they have put their money in those banks?

Mr Dickens: The predominant depositor is a depositor from the Channel Islands, Guernsey and Jersey, a high street bank, and then there are a third of the depositors who are expats and who, given the research that we undertook as an action group, it seemed very clear are unable - and I myself personally was unable to open an account in the UK - and had no choice but to open an account in the Crown Dependencies.

Mr Sieczko: It is pretty much the same thing for depositors with accounts in the Isle of Man. Most of them have worked for aid organisations, UK structural engineers abroad or they have retired abroad. They are hard-working people who have done what the Government told them to do, that is, save up, do not rely on the State and put your money somewhere safe. They were not allowed to open a UK bank account. A lot of them were in the Derbyshire Building Society believing it is a UK building society, it is protected and they have been left by the wayside now.

Mr Dickens: I was just about to add that 94% of depositors in Landsbanki Guernsey are British. A good number, myself included, had an account with Cheshire Guernsey. We are not tax dodging millionaires.

Q441 Mr Brady: You both mentioned the difficulty of British expatriates opening bank accounts on the mainland and yet we have heard from the Chancellor, amongst others, that the so-called "know your customer" rules do not prevent that. Is it your view that the British mainland financial institutions have been misinterpreting those rules and misapplying them?

Mr Dickens: I think the "know your customer" clause is taken to an extreme. With the research that we undertook as an action group of originally 58 banks but which is now 57 because one was taken over, only two banks would allow a British expat depositor to place their monies there and they had to be present in order to do that. What it comes down to is a UK address. Indeed, if I may add, Simon Bain said in the Glasgow Herald, in an article on 8 November, "All banks contacted by The Herald were puzzled by Mr Pearson's statements. The banks all said that 'the need for a UK address' was due to the Government's money laundering regulations." I tried to open an account after I had left the United States here in the UK and I was unable to do so.

Q442 Mr Brady: Is that your experience and would that have been reflected in your advice to expatriates? Would you have advised them that it would be difficult, if not impossible, to open accounts with mainland banks?

Ms Davidson: Yes, indeed because there is also a further declaration that you have to be a UK resident in order to open some of the UK bank accounts and that would not have been open to depositors who are not resident in the UK as well as the UK address issue. So that certainly would be something that would be taken into account for an adviser advising their client in relevant circumstances.

Q443 Mr Brady: If you are a British citizen who happens to be an expatriate for a period and therefore you have to invest offshore, is it your view that it would be reasonable that there should be some kind of financial safety net provided by this country?

Ms Davidson: One would hope there would be, but what is important is that the depositor should understand what the safety net is.

Q444 Mr Brady: What advice are you now giving to British expatriates? Clearly they are still bound by the same "know your customer" rules that make it difficult to do one thing. What are you telling them they should do?

Ms Davidson: That depends on their circumstances and their tolerance for risk. The process is the same in terms of determining what level of risk a client is prepared to take, that is both whether expatriates or UK residents, and assessing what would be appropriate for them. In terms of an explanation of risk, that is an interesting question that comes to both UK residents and also non-UK residents.

Q445 Mr Brady: Where should a risk averse expatriate deposit their money?

Ms Davidson: In a form of risk-free investment, but that is very hard to get and they would need to understand what risks there would be, including what compensation there may be as well.

Q446 Mr Breed: Notwithstanding the reason why you and the people you represent were unable or unwilling or whatever to put money into the UK, it was put offshore partially because there were lower taxes and better returns and therefore they did not contribute in any way to the UK Exchequer. Why should the UK taxpayer bail out those accounts?

Mr Sieczko: It is an interesting but incorrect point, if I may say so. This goes back to our Chancellor making comments about a tax haven in the Irish Sea. You expect a person in his position to know a little bit more about European legislation and particularly the European Savings Directive under which we all pay withholding tax in the Isle of Man. If you are a UK resident you will pay standard rate withholding tax and will be remitted back to the Treasury, the same Treasury that is now refusing to back us and refusing to help us out at all. Likewise if you are an expat and you happen to be living in the European Union, Spain, France, Italy, Germany, the same thing will apply, the Isle of Man will collect the money and remit the money to the European state where these people are residents. This is not tax avoidance. This is nothing to do with the tax position. Yes, we had good rates in the Isle of Man. We did our due diligence on the bank. We had a parental guarantee. People believed they were doing the right thing by saving for their futures. We are talking about pensioners here, not about multi-millionaire business people. It is a diabolical accusation to accuse these people of being tax dodgers or going to the Isle of Man for a tax haven.

Mr Dickens: Let me add that 80 million specifically from the EU Tax Directive comes back to the UK Treasury from Guernsey every single year. Those individuals under the EU Tax Directive are taxed at source. People like my father on Guernsey and the predominant number of people in the bank are taxed at source and contribute to the Guernsey Exchequer as much as they contribute to the UK Treasury. In the case of expats, I come back to the point with regards to applying for a bank account in the UK, what is ironic is that there really is not any difference between applying for an account in the UK and applying for one in the Crown Dependencies other than proving a UK address. That is ultimately the reason why people place their monies in the Crown Dependencies, because they are unable to open an account in the UK. As Ziggy rightfully says, we are talking about 80% of the people that banked with Landsbanki Guernsey, like my father, paralysed, unable to ever work again, that are pensioners. We have had one who has died, we have had threats of suicide and we have several in their nineties who are facing their final days not knowing presently if any government is going to step up and help them.

Q447 Mr Breed: I think that is right. I think you mentioned earlier on that it is about a third who were expats. Whilst the stories that you indicated there are indeed tremendously sad and I think we all sympathise with those and I am pleased that we have been able to get you to put that on the record, that cannot apply to every one of the account holders in Guernsey and the Isle of Man, can it?

Mr Dickens: There are a number of expats who are pensioners, who are based in various places throughout Europe and who, as a result of the collapse of Landsbanki Guernsey, are now going to be relocating back to the UK and living off the state, and they absolutely have no choice.

Mr Sieczko: The numbers can be slightly deceiving. The numbers could be a lot higher than that because when people opened these accounts they might well have been expats, but there are a lot of people who were in the Derbyshire Building Society as a result of expatriate status who are now back living in the UK and they kept their bank accounts. It is a real pain in the neck to change your bank account nowadays. Why would you? It has been a staggering regulatory failure that has led to this.

Mr Dickens: A good number of people have also stepped up and complained that they were asked to close accounts that they had in the UK after they left the UK. So it is not just about opening them, it is about maintaining them as well.

Q448 Mr Breed: Councillor Kemp, do you think it is right that local government should put funds offshore?

Cllr Kemp: Yes, in terms of a spread. It is very difficult to say what is offshore and what is onshore to some extent. HSBC is controlled from Shanghai and Banque Santander which controls the Abbey. There is not such a thing as a British bank. One of the things that the Local Government Association is looking at as we go into the future is the creation of local banks to replace some of the mega banks that have now grown up.

Q449 Mr Breed: But treasurers would have known on individual deposits that they had placed whether that was going to an offshore account or whether it was an onshore account.

Cllr Kemp: Yes, and I think that is an important distinction to make here. We talk widely of Icelandic banks. Of the 1 billion that we largely say was invested in Icelandic banks, 400 million of that was actually invested in Icelandic bank subsidiaries regulated by the British Government. We were getting assurances as late as 6 October by Lord Davis in the House of Commons that these were safe investments.

Q450 Mr Breed: So you believe that professional treasurers guided by council policies were perfectly aware that part of the funds that they were holding were going to be invested in offshore accounts and you were entirely happy about that?

Cllr Kemp: You missed out an important step. Most of those councils have gone for Treasury management and external advice in a variety of ways from people who we pay to be even more aware of these things than we are. We do not claim to be absolute experts in investment issues. We have strategies, we have professional treasurers, but they in turn look for professional advice in these areas.

Q451 Mr Breed: But councillors could have made a policy not to put money offshore as part of their investment profile.

Cllr Kemp: We could have done, but, again, we have the overall advice from the Audit Commission and the DCLG under a set of regulations which we work to which advised us to get the best possible returns given the spread of investment and that would have been against the advice from DCLG and the Audit Commission.

Q452 Mr Breed: In your exchanges with Mr Mann and the Chairman you indicated that a number of councils continued on after 22 May. I suspect that a number of those were already locked in to three-month or six-month deposits and therefore, whilst they may well have obtained the information that was provided at that stage, their ability to exit those investments was probably limited.

Cllr Kemp: Absolutely. Again, if I could give the figure which I gave before, 680 million would have been redeemed by now, but it was stuck in three-month, six-month or one-year accounts and it was impossible to remove it. There is a difference between not putting money in and taking money out which was locked in.

Q453 Chairman: Could you provide us with a written memo on that?

Cllr Kemp: Yes.

Q454 Nick Ainger: Ziggy and Neil have just told us that the majority of claimants are in fact UK citizens, they are not expatriates. Many of those people will have sought independent financial advice on where to put their savings and your members will have advised them to put them in these banks. Why did you give them that advice?

Mr Cummings: There are a range of reasons that that advice could follow. It starts off with a client and their adviser conducting a getting to understand more about the client's aspirations, their long-term goals, Amanda mentioned their risk profile and it is then a case of the adviser recommending a diversified approach which will meet the client's goals. Some clients are very low risk and so investing offshore would not be appropriate for them. Some are looking for better returns and so better returns inevitably come with a slightly higher degree of risk and so on. There are a number of reasons to go offshore. One of them is in a straightforward bank account those institutions were paying slightly higher rates of interest than could be got onshore. There is a tax management issue in that the tax can be deferred for between nine and 21 months before the withholding tax is paid. So from a financial point of view the return, when clearly expressed from a risk point of view, made it worthwhile.

Q455 Nick Ainger: You are accepting that in fact banking offshore or putting your savings offshore actually does represent a higher risk than keeping it onshore, are you not?

Mr Cummings: That would have been part of the discussion that an adviser would have had with their client.

Q456 Nick Ainger: So it is a higher risk to put your savings offshore?

Mr Cummings: I would suggest that it could be a higher risk.

Q457 Nick Ainger: Ms Davidson is nodding when I say it is a higher risk to put it offshore.

Ms Davidson: I am nodding at the "it can be".

Q458 Nick Ainger: In return for that higher risk there is a higher return and there are certain tax advantages.

Mr Cummings: Inevitably it is hard to get a higher return without seeing the risk index notching up a degree or two.

Ms Davidson: In terms of their cash, some clients will seek advice from independent financial advisers but some will also manage their own cash. So it is not the case that every client of an independent financial adviser seeks advice on bank deposits because they are very fluid and rates are readily available in the press and also online. It is a bit of a mix. You should not make the assumption that all IFA clients seek advice on deposits.

Q459 Nick Ainger: In terms of that higher risk that you presumably would have explained to your clients, did you also explain to them about the protection schemes which existed in the Isle of Man or in Guernsey?

Mr Cummings: Of course, the Isle of Man has a protection scheme. The Channel Islands are in a different position. As part of the conversation with a client, getting the client to understand the potential downsides of an investment and the level of consumer protection would absolutely have been part of that discussion. We would have explained not only the compensation scheme but also the parental guarantees. For a client the notion that investing in Barclays in Guernsey is more risky than investing in Barclays in Godalming or Guiseley is sometimes a little difficult, which is why it is absolutely essential that that conversation happens.

Q460 Nick Ainger: So that conversation took place in each case. Were you aware of what could have happened and what actually did happen in terms of the depositor protection scheme, particularly with the Icelandic banks where people understood that they were protected and, as it turns out, they have not been protected?

Mr Cummings: We were absolutely aware of the notion of risk and we would have explained that to clients. We would have explained the protection that they get. We would also have explained the fact that if the client is unhappy with their independent financial advice, they are covered by the UK-based Financial Ombudsman Service, so they could have complained to the Ombudsman if they had not felt the advice was suitable. We would also have talked to them about the credit reference agency and the double or triple-A rating of the institutions. The notion that we could have explained in advance what would happen with the UK authorities and attitude to the Icelandic banks, I just do not think anybody would have had the foresight to explain the circumstances that we saw rolled out over a two to three-month period.

Q461 Chairman: How many complaints have you had from clients about IFAs not giving them advice? I have had emails sent to me on that.

Mr Cummings: We have been in discussions with the Financial Ombudsman Service on this. We have yet to see any significant numbers coming through. Certainly we have issued notes to members, we have addressed these issues in our newsletters and communications with members to make sure that we are reinforcing the good practice that we see already exists.

Q462 Chairman: So this is a clarion call today for people who feel that they have not been given the best advice from IFAs to contact you and the Financial Ombudsman Service?

Mr Cummings: We would be very happy to receive that.

Q463 Mr Todd: When Derbyshire Offshore transferred its business to KSFIOM did you notice any change in risk relating to the parental guarantee?

Mr Cummings: Both organisations had provided parental guarantees.

Q464 Mr Todd: Let me just make this clear. One was a parental guarantee from a British building society and no British building society has ever gone bust; the other was from an Icelandic bank. Did your members identify a difference in the quality of parental guarantee offered?

Mr Cummings: It would have been at that point that we would have sought to have taken a view from our regulator, the Financial Services Authority and the comfort that it expressed.

Q465 Mr Todd: So the answer to the question is no and you therefore would not have advised any of your clients who had previously invested in Derbyshire Offshore of any material difference in their circumstances?

Mr Cummings: We would have brought it to the attention of the individual client, it would have been part of the discussion and that would have been reflected in the advice that would have been given in individual circumstances.

Q466 Mr Todd: I mean ongoing clients who had already invested.

Mr Cummings: Where an IFA was, firstly, aware of that investment and we have to respect what the client wants to tell us, we would have covered that in the non-client review.

Q467 Mr Todd: Did your members note any difference in risk profile from the change in parental guarantee that happened when the transfer took place?

Mr Sieczko: The short answer to that particular question is no, absolutely not, but it goes further than that. They went from being members of the Derbyshire Building Society, which is a subsidiary of a UK bank, to being members of a banking institution in January 2007 that was no longer a UK subsidiary but an Icelandic subsidiary. According to the Chancellor's statement to this Committee in answer to Question 119 by Mr Fallon, he agreed that the reason why the Bradford & Bingley depositors were saved in the Isle of Man was because they were a subsidiary of a UK bank. The fact is that Singer & Friedlander was a subsidiary of a UK bank up to January 2007, including under the ownership of Kaupthing.

Q468 Mr Todd: I want to explore a slightly narrower point. At the point that Derbyshire Offshore transferred its undertakings, I have had correspondence with some investors who have expressed the view that they were concerned about that change and sought to communicate with either Derbyshire Offshore or the Derbyshire Building Society on this material change in the quality of their investment. Have you had examples of that drawn to your attention?

Mr Sieczko: We have had people who actually said they were concerned.

Q469 Mr Todd: Did they do anything about that?

Mr Sieczko: Yes, they did. They did their research on the bank.

Q470 Mr Todd: Did they seek to withdraw any of their investments on the basis of a concern that this had materially altered the risk that they were encountering?

Mr Sieczko: No, not the people I have been in contact with because they did their research in the public domain and saw the ratings of the Icelandic banks were fine and they were not fully informed of the situation about the change in control or the relationship between the banks, the fact that they were no longer a UK subsidiary.

Q471 Mr Todd: What guidance was received by Derbyshire Offshore customers? I have seen copies of some of the material from investors who have corresponded with me.

Mr Sieczko: There is a four-page document that was put out just describing that they were being taken over. There was no mention of a change of risk profile and no mention of a change of ownership and structure. It starts off by saying that Kaupling Bank is a Northern European bank. It does not even go as far as saying it is an Icelandic bank. It does go on to say it has got offshoots in other areas of Europe, including the Nordic countries. It is very non-specific.

Q472 Mr Todd: Have your members explored the duty of care that the Derbyshire Building Society owed to them as their customers originally in securing an adequate transfer of undertakings which would guarantee those investments into the future?

Mr Sieczko: My understanding is that the Derbyshire depositors are indeed looking into that and looking to a wider spectrum as well.

Q473 Mr Todd: I have had correspondence with the building society which has just stonewalled that.

Mr Sieczko: It is an ongoing thing. To every single question we ask to any institution dealing with this situation there is a wall of silence.

Q474 Mr Todd: Have your members had any correspondence with the FSA as to their role in scrutinizing that change in the business?

Mr Sieczko: Questions have been asked of the FSA and I can assure you that the questions are going to be slightly more stringent after the evidence that you will probably be hearing later on this afternoon from Mr Shearer, the ex-Chief Executive of Singer & Friedlander who was present at the takeover when Kaupling took over Singer & Friedlander. The fact that the FSA allowed a takeover of Kaupling really needs to be investigated bearing in mind the chief executive, the chairman of their audit committee, the finance director and the head of the bank told the FSA that they believed that the people at Kaupling were not "fit and proper to control a UK bank".

Q475 Jim Cousins: It is clear that the deposit protection schemes in the Isle of Man and Guernsey were different. In Guernsey they were effectively non-existent. There was one in the Isle of Man. Not only that, but the strategies of the Guernsey authorities and the Isle of Man authorities appeared to have been quite different in terms of their reaction to this situation. Mr Dickens, do you think that the approach of the Isle of Man authorities is to be preferred to the approach of the Guernsey authorities?

Mr Dickens: Yes, absolutely.

Q476 Jim Cousins: Do you agree with that?

Mr Sieczko: You have to be careful what you ask for.

Q477 Jim Cousins: This is without prejudice to all the points that you have made earlier.

Mr Sieczko: The fact is that the Isle of Man does have a compensation scheme and we appreciate that, especially compared to the situation our Guernsey colleagues find themselves in. The Isle of Man scheme is unfunded unlike the UK scheme which has regular tariffs placed upon banks to fill the pot. We have been attempting to get written explanations from the Isle of Man authorities as to how the compensation scheme will work in practice. After everything that we have heard and to date, for reasons unknown to us, we are yet to get a clear understanding of how this compensation scheme will work.

Dr Low: I have to say that the compensation scheme on the mainland is not serving charities well. Not only do the majority of charities have no protection at all under the scheme, but because it is a post-funded scheme that will be charged to the banks the banks will be charging charities, especially the larger ones, to pay for compensation that the charities have simply not benefited from. Clearly there is an issue about depositor class regarding charity public money and how that is being protected.

Q478 Jim Cousins: Indeed there is, but I was asking about the people who are exposed to the risks of ordinary retail deposits. In terms of where we might be going with this issue rather than where we have come from, where we have come from is clearly anachronistic, idiosyncratic, incomplete and full of issues that are not satisfactory. In terms of where we are going for the future, are you saying that in effect what you want is the British system of depositor protection and regulation to be straightforwardly applied in the Isle of Man and Guernsey?

Mr Dickens: I think the action group welcomes transparency. To that end we would like to be able to open accounts in the UK so that all British citizens can be treated the same, fairly and equally, contrary to what the Prime Minister has said in terms of all British savers being recompensed. Truthfully, as an expat, I will be blunt and I will say that I am thinking about moving back to the UK because I am frightened about the 30% that I did get back because right now I do not see where I can place it because there are even questions with regards to the Guernsey protection scheme.

Q479 Jim Cousins: The Isle of Man?

Mr Sieczko: I would echo Neil's sentiments completely. It is important to note that the UK compensation scheme only actually guarantees up to 50,000 of depositors' money. It was the UK Government who decided to top up the rest. I think we need to focus on that and focus on the fact that it was due to poor regulation on behalf of UK authorities that lead to so many people depositing in the Isle of Man because they could not open UK bank accounts. The question is should that same gesture be extended to those depositors? I think the answer is unequivocally yes.

Q480 Jim Cousins: I understand the point you are making and I think it is worth considering, but you do see the difficulty about this, that were we to extend British regulation and depositor protection to the Isle of Man and Guernsey how could we do it just for British citizens? You will see in the newspapers the difficulties you get into once you say British "somethings" for British people. Do you see that as a difficulty? Do you have any idea how that could be resolved?

Mr Sieczko: From an ongoing perspective that would be something for the international lawyers to deal with and I can see the problems with that. Our issue at the moment is specifically with what happened here and what happened in this particular incident in this systematic regulatory failure. The fact of the matter is that due to failures from a UK Government, from the UK FSA and from the Isle of Man FSC our bank failed. This needs to be put right. However the UK authorities and the FSC in the Isle of Man decide to do it, it is up to them, that is what needs to be done.

Mr Dickens: My response is that if you have a British passport - and, of course, that includes the people in Jersey and Guernsey and the Isle of Man - you should have the right to open a bank account in the United Kingdom because the only thing that is stopping one from having an account in the UK is an address. There are very, very thorough investigations that are undertaken when one opens an account in the Crown Dependencies. Practically speaking, the only difference is not being able to present the UK address. So my response would be to allow British passport holders the opportunity to open a bank account in the United Kingdom.

Q481 Chairman: We are taking evidence from the Isle of Man and the Guernsey authorities. What message do you have for us to pass on to them in the evidence session?

Mr Sieczko: I guess the message to the Isle of Man authorities would be we would like some answers regarding the actions of their own regulator, the FSC. I am not sure if that is appropriate, but the fact of the matter is that 48% of assets of Kaupling Singer & Friedlander Isle of Man were placed within a UK bank. The phrase "eggs in one basket" springs to mind. We really need some answers as to why that happened. More importantly, exactly what information was given by the FSA and how does the FSA play a part in that money being in London?

Mr Dickens: We would like somebody to take responsibility. We would like a government to take responsibility. Over the past four months we have been pushed between the British Government, the Guernsey Government and the administrator and nobody is stepping up and taking responsibility for the collapse of this bank. It is all well and good to say there is no moral obligation because there was no regulatory failure, but at the end of the day the bank failed and the states of Guernsey have continued to receive interest on the deposits in this bank for many, many years and indeed from the banking system at large. I think that there should be compensation for people that placed their money in this bank under a parental guarantee.

Q482 Chairman: Dr Low and Councillor Kemp, do you want to make any final comments?

Dr Low: I would call for a separate depositor class for charities because this is public money being held in trust for public benefit.

Cllr Kemp: My last comment is to say that we are offering to work with the Government on these issues. We are part of the public sector, we represent the same people as you do and we would like to be involved at a much more strategic level. We are making that offer of partnership to the British Government to try and resolve the issues that affect local government.

Chairman: Thank you very much for your evidence.

Memorandum submitted by Tony Shearer

Examination of Witness

Witness: Mr Tony Shearer, gave evidence.

Q483 Chairman: Mr Shearer, welcome. Could you introduce yourself for the shorthand writers, please?

Mr Shearer: My name is Tony Shearer. I am former Chief Executive of Singer & Friedlander and a director of a number of companies now.

Q484 Chairman: Why did you leave Singer & Friedlander in October 2005 after the Kaupling takeover, when the initial announcement in April 2005 seems to suggest that you might stay?

Mr Shearer: I left at the end of November. I was not happy to continue to be chief executive responsible to the FSA for a regulated entity with the Kaupling group owning that entity.

Q485 Chairman: Did you say in April that "Singer & Friedlander is well positioned in its core markets and its growth strategy over the last year has yielded good returns for shareholders. The combination with Kaupthing Bank will allow Singer & Friedlander to continue to develop this strategy within a larger financial group"?

Mr Shearer: Yes.

Q486 Chairman: Hope turned to despair within a few months. Why did that happen?

Mr Shearer: I think there were two reasons. The first reason was just an inspection of their public accounts. Just looking at the accounts, particularly the accounts for December 2004, revealed a number of things in those published accounts which caused me concern and those were things that I passed on to the FSA. The second thing was meeting the people themselves. I had met them both in London and in Reykjavik and meeting with the people themselves caused me to form a judgment that these were not people that I wanted to work with. I take my responsibilities in the past and, better still, where I am involved with the FSA very seriously. I think we all owe it a serious responsibility to make sure that businesses are run in a way that we think is proper. I think an integral part of that is knowing that the people you are working with have the same value system that you do and approach it in the same way.

Q487 Chairman: In terms of the inspection of public accounts, you would have looked at that before April 2005 and you would have made an assessment of the personalities you were going to be working with from April 2005.

Mr Shearer: Yes. My opinion of them hardened over the period of time.

Q488 Chairman: Both in terms of the accounts and in terms of personalities it changed dramatically. How did that occur? There has to be some deeper reason for that.

Mr Shearer: No, there is not. I was offered a very nice and, on the face of it, attractive job by Singurdur Einarsson in respect of that and I decided to turn that down because I did not feel that I could sit comfortably in that organisation in that way. It was as straightforward as that. I think it is an essential part in any environment that you feel comfortable working with the people you are working with and if you are not then the money is not worth it.

Q489 Chairman: But you were quite sure you would have felt comfortable to work with them in April 2005.

Mr Shearer: I was not sure. I had serious doubts about them right from the start. Singer & Friedlander, let us be clear, was not the perfect, greatest bank. I am not saying that this was an organisation that was perfect in every way. We had a number of issues that we wanted to deal with.

Q490 Chairman: Like?

Mr Shearer: The business in particular, particularly the asset management business. We had a business which I thought was a relatively low quality business in the asset management business. I was not happy with the quality of that. I wanted to shift the emphasis away from that. I also felt that we had the opportunity to make a much better proposition to our clients in the private banking sector. The group had grown up over the years with some significant subsidiaries which were quite exciting; things like Collins Stewart had been a part of the group. There was a similar organisation in Sweden in Carnegie. I thought these organisations had received a great deal of attention and time and the core business which we had in 2003/04 had received, in my view, very little attention and that is where I thought the opportunity was.

Q491 Chairman: Can you outline the role at the time, before the takeover, of Singer & Friedlander's Isle of Man office?

Mr Shearer: Sorry, I am not quite sure I understand the question.

Q492 Chairman: Could you outline the role of Singer & Friedlander's Isle of Man office at the time of the takeover?

Mr Shearer: It was a subsidiary of the bank. We had quite a complicated group structure. It was a wholly owned subsidiary of the Singer & Friedlander Group. It was doing a similar private banking operation. It had a bit of a trust business which was a serious problem, a really bad quality business in my view and so I took steps to close that trust business down. Leaving that aside, it had a small asset management business and in addition it also had a private banking business where it took in deposits and lent money out to customers. It was a small scale mirror image to some extent of the UK business.

Q493 Chairman: Why do you think Kaupthing purchased Singer & Friedlander? Were there ulterior motives there?

Mr Shearer: I do not know for sure. I think they were looking for an acquisition. They wanted to grow. There was a limited number of companies around for them which were possible targets in that way. I think they thought that we were relatively cheap because we were not making an adequate return on capital in the shareholders' eyes, and therefore I think they thought this was an opportunity to buy us and it would be a good fit for them.

Q494 Chairman: You would not have questioned them technically at that time?

Mr Shearer: They first bought their shareholding, 9.5% or 10%, something like that, in November 2003, and that seemed a very strange transaction. None of us had ever heard of them. We did not know who they were. We had to do some work on them. We then met them at a social lunch. At no stage did we ever have any discussions about the business. They did not come along to us and say, "Look: we have just bought 9.5%. Tell us about your business". We did roadshows at the end of the published accounts. At the year end and the half year we did roadshows and went out to the major shareholders. Anybody who had got 1% or 2% we went to see, sat down and talked to them and met with them. They did not want that. It was quite extraordinary. Even when they went to 19.5% they still did not want one of our roadshows. They were very different. They ran their business in a very strange way, and certainly when I went to Reykjavik and spent a couple of days in Reykjavik in 2004 I realised it was a very different operation.

Q495 Chairman: What did you realise?

Mr Shearer: That it was a very different operation.

Q496 Chairman: Yes, but what do you mean by "a very different operation"?

Mr Shearer: Everybody there was incredibly young. It was a young group of people who were very inexperienced. There was not a balance among the management team. They were all pretty similar young people, a board of directors who, I think, except for one person who was either Danish or Swedish, I cannot remember which, were all people from the same community within Reykjavik.

Q497 Chairman: You did say that was 2004 when they were inexperienced so you had doubts then, but you still welcomed them in April 2005, did you not?

Mr Shearer: I had doubts right from the beginning. Let us be clear what my responsibilities and obligations were then, Chairman. My obligation was made very clear to me and that was to do what was right for the shareholders and the shareholders alone. The board were absolutely told that they had no responsibility at all to anybody else - customers, staff, depositors, you name it. If we had accepted shares in Kaupthing as part of the offer then that would have been an entirely different matter. We would have had to assess it, "Hey, you are getting some shares in Kaupthing and we think these are good pieces of instrument". My chairman and I, when we saw Sigurdur Einarsson in early 2005, made it absolutely clear that the only thing we would contemplate was cash, and that was because we simply did not trust them.

Q498 Chairman: Witness your double-barrelled shotgun approach to the FSA on the television last night and your leaked memo to the Committee in The Times this morning, why are the poor FSA in this? You mentioned that the FSA was pointed to the information that would indicate that Kaupthing was not "fit and proper". What information was that? When was it conveyed to the FSA?

Mr Shearer: First, whatever happened on the television last night or in the papers this morning is absolutely nothing to do with me. I took a call from Channel 4 News yesterday afternoon and I said, "No. I am not participating in this". They had got information which was on the record -----

Q499 Chairman: Okay, keep going; that was an aside only.

Mr Shearer: Okay, fine. In respect of the question, "What information?", the information that I provided to the FSA was really no more than just to point out to them what was in the public domain.

Q500 Chairman: When did you provide it?

Mr Shearer: It was in April 2005. There were two separate things. I had a phone conversation -----

Q501 Chairman: In April 2005 you provided this information to the FSA and you said to them, "This company is not fit and proper"?

Mr Shearer: In my opinion that was correct.

Q502 Chairman: But you still had a relationship with them until November 2005.

Mr Shearer: Can I just answer that question? Yes, I did, because my obligation was to the shareholders to do the right transaction and to get the maximum money for the shareholders. That was my legal obligation and I had no other, and therefore, in doing that, part of that, which was made very clear to me by the advisers concerned, was that I could not resign and walk out the door. I had to help in the transition.

Q503 Chairman: Was it wise to make such a positive statement in April 2005?

Mr Shearer: Absolutely.

Q504 Chairman: Even though they were not "fit and proper"?

Mr Shearer: All I was doing was expressing my view. It is up to them to make their judgment. That was the point that was made to me by the advisers. The point the advisers made to me was, "Tony, your obligation is to do the right thing for the shareholders. It is for the FSA to decide whether they are fit and proper, but if you have a view and a feeling then you have an obligation, as we all do. We have an obligation the whole time to the FSA to tell us things that concern us", so we had an obligation to pass on what we thought and our views to the FSA. It is up to the FSA then to take a decision to follow it or not.

Q505 John Thurso: Just as background, one knew Singer & Friedlander and it would be correct to say that they were a private bank of the order of Hoares or Coutts or Drummonds. Those are the sorts of banks that you would regard as competition for clients.

Mr Shearer: Yes, Rothschilds, Close Brothers, parts thereof, yes.

Q506 John Thurso: So generally viewed as slightly conservative wealth preservers with a good list of clients?

Mr Shearer: That is where we tried to position ourselves. We tried to position ourselves around being a traditional bank with traditional values which will help the clients that have got surplus money. We will take it and put it on deposit and then when they need a loan we will lend the money to them.

Q507 John Thurso: The point being that that is the brand image that most of the clients would have had and would have carried on for some years after the transaction took place?

Mr Shearer: Absolutely.

Q508 John Thurso: You have made very clear the point that you had a duty where you would have been advised by your financial and legal advisers as to what you had to do in respect of the shareholders in relation to an offer. Reading your memos, both of them, which I found very interesting, you make it clear. You say, "My short experience of Kaupthing and its management led me to believe they were not fit and proper people to control a UK bank", and you went on to describe how you made these points to the FSA. Were you surprised that the FSA, in your words, "rushed their approval through"?

Mr Shearer: There are a number of parts to that question. Firstly, the FSA had already approved them. I forget what the trigger points are, but in order to get to a 19.5% shareholding they had already had approval to some extent, so they had started off down the approval process. Was I surprised? I do not know. My issue was two-fold. One was, as I said to the Chairman, that I had a duty to pass on to them the information I had. The second thing was that I did not want to go out there with a recommended offer from the board of Singer & Friedlander and find the FSA then publicly turned that down and said they were not fit and proper; we would have all looked incredibly stupid, and so it was fine for the advisers to say, "You have got no obligation". That is why it was important to me to go and say to the FSA, and by the reaction I got from the FSA --- I passed on the information and my colleagues passed on information too because they had meetings there, and I think the questions that we were raising were both about the quality of their earnings, about the way they were managed, about the corporate governance issues. I thought there were very substantial issues there.

Q509 John Thurso: You go on to say that you feel that the FSA should have been further alerted by the fact that the heads of both risk and compliance of the new Kaupthing Singer & Friedlander were subsequently dismissed for voicing their concerns about the way the company was being managed and specifically about its attitude to risk. These seem to me to be absolutely damning criticisms of a complete lack of any kind of control by the FSA. Am I getting this right?

Mr Shearer: I think there are a number of things there. First, I had made my position clear. I had two fellow executive directors - the finance director and the head of the bank. Their intention was to stay. They both left, one of them before I had gone at the end of November. The finance director had announced he was going, and then the head of bank announced shortly after, I think in December or January, so to me that was another red flag that had gone up to the FSA. Then, when subsequently the head of credit and the head of risk --- I do not know because I have only heard the story from the head of credit and the head of risk side and I do not know what action the FSA did or did not do at that time in respect of that, but yes, I would agree with you. I think after the event there were some serious issues.

Q510 John Thurso: We have just had a case where the Government have been obliged to admit regulatory failure with Equitable Life and therefore some form of compensation will be forthcoming. Do you think that we are heading in the direction of similar action with regard to the actions of the FSA in this case?

Mr Shearer: I have not got a clue. I think that is completely outside my field of competence. If you like, my evidence is my knowledge, both specifically about their actions and generally about the circumstances surrounding a bank in that circumstance. I could not answer your question.

Q511 John Thurso: Fair enough. You wrote to Mr Sants in 2008 after he had told this Committee that Northern Rock was the only instance of regulatory failure at the FSA, and you got what you describe as "a rather pompous reply" from a Ms Dunn. You wrote again on 27 May but never received a response. Did you get anything in the pompous reply which gave any explanation for their conduct?

Mr Shearer: No. I should say I am not 100% per cent sure that it was before this Committee that Mr Sants appeared. I saw it on television, and it was in that context, so I may have been wrong as to whether it was in front of this Committee. It looked like this sort of forum and committee.

Q512 John Thurso: He is quite a regular attender.

Mr Shearer: To some extent I had some sympathy with Mr Sants because, whatever I felt, he could not possibly be responsible. The person responsible is a different issue and I am sure you will be seeing him at some stage, but he was not responsible at that stage and I know how difficult it is when you go into a job: you do not know where the bodies are buried, and I thought I was genuinely doing him a favour by saying, "I saw you on television. There is an issue here". I thought what I would get would be a phone call, "Can you nip round for a cup of coffee and a chat and tell me what you think and what you know and we will have a look at the files?", but no, I got nothing other than the letter from the Ms Dunn.

Q513 John Thurso: Just to summarise your evidence before I hand back to the Chairman, is it fair to say that the sale to Kaupthing was a good offer for the shareholders and your responsibility was to accept a good cash offer? You had serious concerns about their abilities and whether or not they were fit and proper which you raised with the appropriate regulatory authorities, who decided that they were fit and proper, or certainly did not decide that they were not fit and proper; that Singer & Friedlander was an old-establish British private wealth bank with a strong brand and that therefore the customers of that bank thereafter could expect a similar degree of confidence to that which they had enjoyed in the past and they have been very seriously let down by the regulatory system?

Mr Shearer: I am not going as far as the second part of your statement.

Q514 John Thurso: You can agree the evidence if you leave the conclusion to me.

Mr Shearer: What happened to them after I left is something that I do not know the detail of, so I could not comment on that.

Q515 Chairman: Just before I pass on, can we go back to your memorandum where you say that your short experience of the Kaupthing management led you to believe they were not fit and proper, and you passed that on in April 2005, you said. You said that that was shared with most of your colleagues and you called the FSA and passed your views on to them. Who did you speak to in the FSA?

Mr Shearer: Paul Shirley was his name. I forget his title. He was the person who headed up the team.

Q516 Chairman: You say there, "Other of my colleagues, including the Chairman of the Audit Committee, the Finance Director and the Head of the Bank, went to see the FSA and made similar comment". With whom did they meet?

Mr Shearer: I was at that meeting too with them. We met with Jonathan Fiskell, Kevin Halpin and James Dresser.

Q517 Chairman: Do you have a minute of that meeting?

Mr Shearer: No, I do not.

Q518 Chairman: Was there a minute taken of the meeting?

Mr Shearer: There was a partner there from Slaughter and May, who attended the meeting, and I believe he took a minute of the meeting.

Q519 Chairman: On your behalf?

Mr Shearer: I did ask him whether he could release that minute to me but he said that I was not his client, that Singer & Friedlander was his client, and since I was no longer at Singer & Friedlander I could not see the minute.

Q520 Chairman: So we could write to Slaughter and May?

Mr Shearer: Yes.

Chairman: Okay, thanks.

Q521 Nick Ainger: Again, briefly on this issue, because it is so important, you believed and your fellow directors of Singer & Friedlander were flagging up to the FSA your genuine concerns that Kaupthing were not fit and proper to run a British bank? That is what you are telling us absolutely on the record, that you took every step you thought was reasonable to inform the FSA of that fact?

Mr Shearer: Yes. It was not up to me to make the determination. What mattered to me was that I got the information to the FSA and I was satisfied that they had the information that I had in order to make their determination.

Q522 Nick Ainger: And your fellow directors, the Chairman, the Head of Bank, the Finance Director, all went with you to the FSA. Was there more than one meeting or was there just one meeting

Mr Shearer: I had a phone call. I also went to one meeting specifically on this point. There were lots of meetings with the FSA. For instance, I went back the day after that with Kaupthing and we talked about process and stuff, but those were two meetings specifically talking about reservations. Others went later or called later and had conversations later.

Q523 Nick Ainger: So it was not a single meeting?

Mr Shearer: Correct.

Q524 Nick Ainger: Other directors of the bank were still flagging up this issue between presumably April and August when the deal was finally completed?

Mr Shearer: Yes. I cannot remember the exact timescale.

Q525 Nick Ainger: Were you shocked that the FSA did not either step in or, as subsequently happened, did not appear, as far as you were aware, to take a very close look at the operation of what became Kaupthing Singer & Friedlander?

Mr Shearer: I think to some extent I have already answered that question. No, because they had already been through some hurdles to get to the 19.5% approved. Did I think that they should have? You are saying was I shocked? I suppose the answer is no. Did I think that they should have taken more action? The answer is clearly yes.

Q526 Nick Ainger: But you went along and had a specific meeting to voice your concerns and fellow directors, in other words you were not the lone wolf on this, you were not the single whistleblower of it. Was it all the board that felt the same or was it just those that had had direct dealings with the people in Kaupthing?

Mr Shearer: We had a seven-person board. I think five of the seven one way or another made their positions known to the FSA.

Q527 Nick Ainger: In answer to some earlier questions from the Chairman, he asked you why you thought that Kaupthing were interested in Singer & Friedlander after your visit to Reykjavik and you saw that these were basically young - you did not use the term "barrowboys" but if there is an equivalent -----

Mr Shearer: No, they were highly educated people who had got lots of -----

Chairman: Let us have a last question.

Q528 Nick Ainger: On reflection now, do you think, and John Thurso described your bank as one with a high reputation, not particularly high profile, that in fact the purpose of Kaupthing taking over Singer & Friedlander was to give them kudos, to give them a solid reputation to their new operations in the United Kingdom? Do you think that was part of the reason why they chose you?

Mr Shearer: There are all sorts of ways in which I could speculate. I do not know the answer to that question.

Q529 Mr Todd: Is the only written communication that was made with the FSA the one summarised in appendix 1 of your note, which refers largely to cross-shareholdings?

Mr Shearer: I will need to check that.

Q530 Mr Todd: Could you check that, because the second question is allied to that: do you possess any notes of the various conversations that you held with FSA officials at any time during these transactions?

Mr Shearer: I will need to check and come back to you. Will I come back to the Chairman?

Chairman: Yes, just send us a note with maybe the names of the directors of your bank who had gone because I think we will be writing to them as well.

Q531 Jim Cousins: Mr Shearer, can I take you back to something you told our Chairman which I found quite interesting? This is about the period between April and November, which must have been a difficult period for you. You told our Chairman that your advisers, the advisers of Singer & Friedlander, had told you that you could not resign, that your duty to the shareholders was to see that acquisition deal through.

Mr Shearer: That was the thrust. I cannot remember whether it was done in exactly those words.

Q532 Jim Cousins: And these advisers were who exactly?

Mr Shearer: We had two sets of advisers. Slaughter and May were the lawyers, Cazenove were the investment bank.

Q533 Jim Cousins: Those advisers who were telling you that you had to stay in post, you had to see the deal through, were Slaughter and May, the legal advisers?

Mr Shearer: No. I think that is taking it into the wrong context. I do not think that it was being said in that way, "You have to do it. There is no way in which you cannot do it". In terms of the facilitating of a bid and making sure that it -----

Q534 Jim Cousins: You will understand this might turn out to be an important point, but you are quite clear that in some reasonably clear setting the advisers, which included the two people you have mentioned, gave you the advice that you could not and should not resign; you had to see the acquisition through?

Mr Shearer: Can I put it a different way? The advice that I was given from my recollection was that I had to put the interests of the shareholders over my own, so this was not an opportunity for me or any of the other executives to negotiate new packages or new anything. Given that this was a cash offer that should clearly be recommended to shareholders at the level it was, we had to do everything we could to facilitate that and make it go through. I cannot say I had a big problem with this. It was very much a transitional period of time. It was supposed to be a couple of months. I think it went on for a bit longer than that and went to the end of November, and during this period I was still very much in charge of the bank. It was not as if I was being asked to do anything differently over that period of time. The changes happened after I left. On my very last afternoon I chaired the Credit Committee meeting in exactly the way that I had done every week.

Q535 Jim Cousins: But it is clear from something else you told the Committee much later on, because you were asked for a minute of your meeting with the FSA, and you told the Committee that Slaughter and May had said you could not have the minute they took on that occasion because their client was Singer & Friedlander and you had no relationship with them. Do I understand from that that the advisers you have just referred to continued in their relationship with Singer & Friedlander after the acquisition?

Mr Shearer: I do not know that, no. I do not know the answer to that at all. Kaupthing's adviser was Deutschebank and I do not know what they did after that.

Q536 Sir Peter Viggers: Did it occur to you to put your concerns in writing?

Mr Shearer: No, I do not think it did. What I was really saying was two things. My concerns related to information which was in the public domain, in the end the report and accounts. What I was saying to them was, "If you go and read the annual report I think you will find that the directors have borrowed 19 million in order to buy shares in their own company. They have got options to put those shares back into the company. They are on four-year contracts. There is not anybody on the board who is outside the Icelandic pool. There is not the experience of international banking. The majority of the offers come from marking investments to market." For instance, one thing that happened, and I am not sure whether the detail of this was passed on to the FSA; I probably did not, but I got a phone call round about 1 or 2 January 2005. I remember it because I was skiing in Switzerland and it was a call on behalf of the Takeover Panel and they wanted to know why our share price had risen so rapidly in a couple of days, and so I laughed and said, "I think the reason you will find is that Mr Einarsson, who is the Executive Chairman of Kaupthing, gave an interview a couple of days ago, like the 29th or 30th, and in it he made it very clear that he was going to bid for Singer & Friedlander, so it is not surprising therefore that the share price has moved up". It is also not totally coincidental that because they were marking the investment to market in their balance sheet they took that profit through the profit and loss account, so something like half the profits of the Kaupthing Group were coming from trade investments substantially which were being marked to market. The actual amount of profits that were coming from what I would think of as banking was less than 10% of the profits within the group. It was those sorts of things. They were all there in the public domain. That is the first thing I would say. The second thing I would say is, "Look: I have met these people. You will be meeting these people yourself. That is my assessment. At the end of the day it is for you to make the assessment, but my assessment is they are not the sort of people that I want to work with".

Chairman: I think we have gone round the houses this morning and it has been very helpful to us. We will maybe be writing to you again because your second memo begs quite a number of questions as well, and as a result of the information you have given us we will certainly be in correspondence with a number of other people. Can I thank you for your attendance this morning, Mr Shearer, it has been very helpful to us.

Witnesses: Hon James Anthony (Tony) Brown MHK, Chief Minister, Isle of Man, Mr Mark Shimmin, Chief Financial Officer, Treasury, Isle of Man, Mr John R Aspden, Chief Executive of the Financial Supervision Commission, Isle of Man, Deputy Lyndon Trott, Chief Minister of Guernsey, and Mr Peter Neville, Director General, Guernsey Financial Services Commission, gave evidence.

Q537 Chairman: Welcome to the Committee session. Before we begin, I would like to place on record that Guernsey and Isle of Man are self-governing Crown Dependencies. They have their own legislative assemblies, legal and fiscal system and UK legislation only extends to them with the consent of the islands' administrations. Although for the sake of convenience we have asked witnesses from the Isle of Man and Guernsey to appear together, we fully understand that they face different problems in respect of the repercussions of the banking crisis and may well be seeking different solutions to these problems. With that statement, can I ask you to introduce yourselves for the shorthand writer, please?

Mr Neville: Peter Neville, Director General of the Guernsey Financial Services Commission.

Mr Trott: Lyndon Trott, the Chief Minister of Guernsey, and thank you for inviting us here today.

Mr Brown: Tony Brown, Chief Minister of the Isle of Man, and again thank you.

Mr Shimmin: Mark Shimmin, Chief Financial officer, Isle of Man Treasury.

Mr Aspden: John Aspden, Chief Executive of the Financial Supervision Commission on the Isle of Man.

Q538 Chairman: Welcome and thank you for coming to this banking crisis inquiry. The UK Government represents both Guernsey and Isle of Man at international level. Have you at any time felt that the UK Government's position and your own are at odds because of the matters under discussion?

Mr Trott: Our day-to-day relationship with Her Majesty's Government is through the Ministry of Justice and in recent months the immediate point of contact has been with Lord Bach. The relationship is very good. On the matter of the issue regarding Landsbanki and the liaison with the Icelandic authorities, that day-to-day engagement has been transferred to the Treasury, but our relationship with the Treasury is a positive one. We have weekly telephone calls with them and I am happy with the relationship.

Mr Brown: Thank you, Chairman, and again thank you for the opportunity to help you in the inquiry. From our side, certainly we have a very strong and healthy relationship with the United Kingdom through the Ministry of Justice. Again, in this situation we have been working with them and the United Kingdom Treasury. I think it is fair to say initially the UK Treasury aspect of it did not get up to speed as quickly as we would have liked, but certainly since we have been working with them on a regular basis that seems to be improving.

Q539 Chairman: How would you characterise the UK Government's response to the Icelandic crisis?

Mr Brown: In relation to the Isle of Man?

Q540 Chairman: Yes.

Mr Brown: The Ministry of Justice, which is, of course, our main route for dealing with the United Kingdom Government, have been supportive and certainly where we have approached them there has not been any problem at all. As I said initially, I think there has been a slow start to the United Kingdom Treasury understanding the situation and clarifying our constitutional position and, of course, also our international identity framework, which is a relatively new agreement signed in 2007, which of course gives some sort of steer as to how we deal with international matters.

Q541 Chairman: Lyndon?

Mr Trott: Her Majesty's Government has been able to get an undertaking that all creditors regarding Landsbanki (Guernsey) and indeed the whole group, will be treated fairly and equally and that we consider is a very positive statement.

Q542 Chairman: You have heard the criticism of the FSA in the last session, but, Tony, your submission suggests that you feel there has been a breakdown of communication with the FSA over KS&F(IOM). Is that a fair description?

Mr Brown: Yes, Chairman. From our point of view we were disappointed in relation to how matters unfolded because we do have a Memorandum of Understanding with the FSA and with our FSC, both, of course, regulators independent of government, who have a Memorandum of Understanding in case of issues that happen. It may be helpful, if you are content, Chairman, for Mr Aspden, who is the Chief Executive of our FSC, to give more detail on that, but certainly we were disappointed in the way things happened, that we were not given advance notice which we would have expected.

Q543 Chairman: Do you want to add anything, Mr Aspden?

Mr Aspden: We were disappointed, Chairman, because at the end of the day we have had a lot of contact with the FSA on a lot of issues and our evidence as well gives a practical example of another one that we had a very successful relationship on, so when this came along and there was a total absence of any communication at their behest, we felt severely let down.

Q544 Chairman: And yourselves in Guernsey, how do you feel in terms of the relationship with the FSA?

Mr Trott: Again, perhaps I can defer that question to the Director General of the GFSC and in doing so make the point, Chairman, that that body is entirely independent of the Government of Guernsey.

Mr Neville: We have a history of a very close working relationship with the FSA, so it was disappointing that things did not work as we believe they should have done. In the past we have had relations with them in relation to a number of cases. In some of those we have had some robust discussions in terms of split-capital investment trusts and Northern Rock, and as a result of that we discussed very clearly with the FSA the need for close co-operation and information exchange in respect of cases that we were dealing with. The difficulty in the Landsbanki Guernsey case is that we understand that the FSA believes that it could not and should not have passed us more information than it did in terms of the changed liquidity situation, the dependence on the parent and on the action it was planning to take. We also accept that there were some fast-changing circumstances, exceptional circumstances. The problem was that we did have an MOU (Memorandum of Understanding) with the FSA, we had assurances of information exchange and co-operation. The FSA knew of our concerns in respect of the fact that we did not want there to be any Icelandic risk in respect of the UK bank, with which 25% of the Landsbanki Guernsey assets were placed, and we did not want there to be any dependence on the parent for liquidity, and we got the assurance from the FSA that there was only limited Icelandic risk. We believed we could rely on the FSA because they had greater information and greater influence and, therefore, we were very surprised when Landsbanki Guernsey failed, partly because it could not recover from the UK bank the money deposited with it. There are two things that I think go to the heart of the enormous concern we have for the Landsbanki Guernsey depositors in respect of the FSA's actions. Firstly, there was limited information given to us on the subjects I mentioned and they did not tell us they were limiting information, we believed that we had an open channel of co-operation. Secondly, we think that the actions they took may have prevented repayment to Landsbanki Guernsey and may have created some kind of preference for other creditors. That is the concern that we would like the FSA to recognise and help us work with the UK authorities to put pressure on the Icelandic authorities and on the Icelandic parent to repay the money under the undertaking that they have given. However, there is a second and, if I may suggest, a much wider concern I have in this respect, and that is the danger of protectionism which comes in as a result of failure of co-operation between two regulators. Cross-border co-operation is absolutely vital if you are going to be able to protect depositors. You can only act on the basis of information you have. International trade and finance, it seems to me, depend entirely on cross-border financial services, and indeed global recovery depends on that, so a major issue for all jurisdictions, and I have seen this in international bodies, is the need for cross-border co-operation. I think that the protectionism that we have seen here does not serve us well and what we would like to do is raise the concern we have about the need for removing the barriers - legal, political and attitudinal - to cross-border co-operation.

Q545 Mr Brady: Can I pursue some of those points, but also from an Isle of Man perspective? You have both got a Memorandum of Understanding with the FSA, so was the previous experience of that co-operation - and I suppose I am asking John Aspden in particular - one that would have led you to expect more proactive behaviour on the part of the FSA, that they would normally have given you more information in these regards?

Mr Aspden: Very much so. In fact, the largest geographical category of any financial institution on the Isle of Man is from the UK, so by definition we have very frequent and very good contact with them all the time; hence the memorandum. The evidence that we have submitted also refers to Bradford and Bingley, and I think this is reasonably in the public domain now so one can talk a little bit about that, but that was a situation where the press, financial commentators and the financial markets clearly saw that the health of Bradford and Bingley was declining, and in the weeks leading up to that not only did we have a very close relationship with the FSA on that but the FSA actually sent a senior director to the Isle of Man at our invitation to meet our Board to explain the issues, to gain our confidence in buying in essentially to the macro solution to the group, which was exactly what we did, because, picking up on Peter's point, the last thing you want at a time like that is everyone going for every little bit they can and bringing the pack of cards down. It worked extremely well on that. Of course, the difference is that Bradford and Bingley is a British bank, it is core to the centre of the retail system, and KSF was not perceived as such, so no doubt that is an argument for a difference in treatment, but actually the whole ethos of co-operation between regulators goes far beyond whose host, whose home, particularly in dealing with an international finance centre like London.

Q546 Mr Brady: So normally there is a two-way street. You gave information to help the UK authorities, you received information in return without necessarily having to ask for it?

Mr Aspden: Correct.

Q547 Mr Brady: Have there been previous instances where that has not happened and that have caused a problem for you?

Mr Aspden: Not of any significance, no.

Q548 Mr Brady: So over a period of years in both cases, Guernsey and Isle of Man, you got into a quality of relationship with our regulatory authorities that led you to believe that you had that reasonable expectation of a ready exchange of information both ways?

Mr Aspden: Correct.

Mr Neville: I would say that we have had some experience of difficulties in the past, particularly over Northern Rock, where we had initially to press very hard to find out which of the tripartite authorities we should be talking to about the guarantee of the deposits, and, secondly, to discover the nature and extent and enforceability of that guarantee, so there were reasons why we had had correspondence with the FSA about the need for cross-border co-operation and that is why we had received some specific assurances.

Q549 Mr Brady: Finally, can I press you again, Mr Aspden? The situation regarding the administration border and the fact that your FSC, I understand, still has not had access to the court papers referred to in your submission to the Committee, does that surprise you?

Mr Aspden: It does. As our evidence says, the order papers for going into administration of the UK bank have been sealed. We wrote to the FSA in October requesting those documents. We heard nothing from them until either December or early January when they said they could not provide the papers but could we be more specific on what we wanted to know, and they finally provided a two-page email to me last Friday with some answers to that. Other than that we have no further information, including on some of the issues also contained in the evidence in terms of what the various position limits were at the end when the bank went into administration.

Q550 Mr Brady: Have they advanced any explanation or reason for excluding you from this information?

Mr Aspden: No.

Q551 John Mann: A lot of decent savers have got their savings at risk. How much are you offering them back?

Mr Brown: The Isle of Man has a Depositors' Compensation Scheme which will come into operation if the bank goes into liquidation and that scheme provides for individual depositors up to 50,000 and for companies, charities and so on up to 20,000.

Q552 John Mann: So individual depositors from you will get 50,000?

Mr Brown: Every individual.

Q553 John Mann: Why have you not increased that?

Mr Brown: Because that is in line with the international norm. It follows the UK, and in fact the UK, as you will be aware, increased theirs in October up to 50,000.

Q554 John Mann: So you do not intend to go beyond that?

Mr Brown: We are reviewing the scheme. We have had a Depositors' Compensation Scheme since 1991 and we have introduced an amendment to recognise the present situation, and we have also made it clear to our Parliament that we will be reviewing that scheme during this next year to see whether or not we need to appraise it even further, and, of course, naturally that will involve consultation with different parties.

Q555 John Mann: And what about yourselves?

Mr Trott: You will be aware, Mr Mann, that there is no international regulatory requirement for a Depositors' Compensation Scheme, but, notwithstanding that, in November of last year the State of Deliberation in Guernsey unanimously approved one quite similar to the one that exists in the Isle of Man in so far as each retail depositor up to 50,000 will be protected through a post-funded and bank funded scheme in the unlikely event that there should be another bank failure.

Q556 John Mann: The savers who have put money in, how much are you giving them back?

Mr Trott: Already the Landsbanki Guernsey is in administration, a royal court appointed position. Landsbanki savers have already received 30% of their monies back, and in some cases that is far in excess of the 50,000 that they may have expected to receive under conventional depositor protection schemes. The administrator assures us he is working extremely hard to secure further substantial payments and I have no reason to disbelieve him. It is important, I think, that the Select Committee understands why Guernsey did not have a depositor protection scheme in place prior to November of last year. Something approaching 93% of the 160 billion worth of sterling equivalent deposits in the island are institutional corporate fiduciary deposits. 7% are retail deposits, the likes of you and I depositing in a high street bank. There are a lot of investment banks in Guernsey which usually only take deposits from high net worth clients, amounts in excess of 250,000, so there was a genuine and understandable reluctance on behalf of some of the industry to support a compensation scheme prior to this.

Q557 John Mann: So what you are saying is you make huge amounts of profit out of people investing because of your offshore island status, but if a consumer does invest and something goes wrong they will not get all their money back?

Mr Brown: The situation in the Isle of Man is exactly as reflected in the United Kingdom until recently in the terms that we have a Depositors' Compensation Scheme, and again I remind you that the United Kingdom only upgraded its scheme from October of 2008. What we do is we have a scheme that will provide, as I say, up to 50,000 per individual depositor. It is a broad scheme, it follows the international norm, and, of course, we have not yet got the bank into liquidation.

Q558 John Thurso: Can we expect similar problems because of lack of clarity, lack of information with institutional investors at some date in the future with your lack of transparency?

Mr Trott: We are certainly not a non-transparent jurisdiction. You will be aware that very recently we signed a tax information exchange agreement with Her Majesty's Government, having had a double taxation arrangement in place since the 1950s, so I am afraid I have to strongly refute any suggestion that we are untransparent, or indeed, for that matter, unco-operative in any way. The point you make about institutional investors is a valid one. They are not covered under any deposit protection scheme, unless, of course, there is a blanket government guarantee given, and that raises all sorts of issues regarding moral hazard which we may touch on later. Certainly with regard to the institutional deposits in the island, we have seen from the end of the third quarter 2008 to the end of 2008 an increase of 15%. We believe that clearly makes a statement that Guernsey remains a well-regulated centre.

Q559 John Mann: So you are making even more money, so savers should be even more in anticipation? Is there any rational reason why I or any other individual saver should put any money into any accounts under your jurisdiction?

Mr Brown: Certainly as far as the Isle of Man is concerned, and it has been well recognised, we are a well-regulated transparent jurisdiction. People who put their deposits there should be aware that there is a compensation scheme and that has served us well, and our commitment to do the best for the depositors is well-known.

Mr Trott: It is important to make this point as well, Chairman, if I may, that the issues that have beset Landsbanki Guernsey and the equivalent in the Isle of Man are not a result of any activities being undertaken in the island, high-risk activities if you like, that have helped destabilise international financial markets; quite the contrary, both islands have been subjected to the importation of contagion that has its origins elsewhere. We have not contributed to it. I hope that helps, Mr Mann.

Q560 Chairman: As someone else said, this is a synchronised global downturn.

Mr Trott: Of that there is no question.

Q561 Mr Fallon: Mr Brown, the Depositor Action Group which raised the issue of the culpability of the UK Government for the crisis around the Icelandic banks, and in particular the statement by the Chancellor that the Icelandic authorities were unable to fulfil their obligations, do you agree that that exacerbated the situation?

Mr Brown: Certainly we were concerned about that being said. It may be helpful if you are happy for Mr Shimmin to cover that point, but from our point of view the Isle of Man's stance in this matter has been pretty straightforward. The situation arose without us being aware of it until we were advised of it and, therefore, we were not very able to, if you like, manage it straightaway because, of course, we were unaware of it happening.

Q562 Mr Fallon: Mr Shimmin, did the Chancellor's statement exacerbate the situation?

Mr Shimmin: From the Isle of Man's point of view, given the lack of information that we had, as Mr Aspden has talked about, in relation to the FSA, it made the situation more difficult to manage in the Isle of Man.

Q563 Mr Fallon: Mr Brown, the Chancellor in his statement to this Committee, described the Isle of Man as "a tax haven sitting in the Irish Sea". How helpful was that statement?

Mr Brown: Clearly, it is not a statement that carries any weight. If you look at the basis of how the Isle of Man is structured, the Isle of Man is a well-regulated country, it has a diverse economy. It applies international standards to the highest level and has a full system of direct and indirect taxation, including a full national insurance system. If you look at all the components of how the Isle of Man operates, it reflects very much how the United Kingdom operates, so that statement was unfortunate and does not reflect the status of the Isle of Man.

Q564 Mr Fallon: He went on to add, "a tax haven sitting in the Irish Sea leading to perhaps people not being clear as to what the different rights and responsibilities are". Were people unclear?

Mr Brown: As far as I understand it, they would be advised if they are putting money into Isle of Man banks by their advisers, and certainly all the information is available if they wish to know more about the Isle of Man as to our autonomy, in terms of we are fiscally autonomous, so it is not a lack of information there, and certainly people should be able to identify that and, as far as we know, many do.

Q565 Mr Fallon: Do you think depositors in the Isle of Man are right now to look to the UK Government for redress?

Mr Brown: The Isle of Man takes the stance that we are responsible for our affairs and we have a Depositors' Compensation Scheme and we have also introduced some early payment schemes to help overcome the present situation.

Q566 Mr Fallon: So what is the answer to my question?

Mr Brown: The answer to the question is that, Sir, we are responsible for our affairs and we accept that.

Q567 Mr Fallon: But I am asking you whether depositors with you in the Isle of Man are right now to seek redress from the UK Government.

Mr Brown: I would not necessarily know why that would be in terms that I can understand the argument about the freezing of the assets, which, of course, we have concern about. As far as the situation for the Isle of Man is concerned, we are accepting our responsibilities and endeavouring to rectify the situation.

Q568 Mr Fallon: But are they right to seek redress from the UK Government?

Mr Brown: I think that is a matter of opinion for them. I do not think the UK Government is responsible for the financial affairs of the Isle of Man.

Q569 Nick Ainger: Can I ask this question to John Aspden? As the regulator of KS&F(IOM), can you explain to the Committee your understanding of why KS&F(IOM) transferred 550 million to KS&F UK?

Mr Aspden: The reason was, as our evidence said, as the regulatory authority on the Isle of Man in the early months of 2008, we were concerned at the country risk presented by the amount of deposits lent from the Isle of Man operation directly to Reykjavik. In fact, in the regulatory body we were discussing this in January and February and, as the evidence says, in March we came to the view that we did not want to incur any Icelandic risk. In fact, to my recollection - I have not got the figure here - the figure was larger at that stage, somewhere in the order of 700 million. Having told the institution that, it was obviously for them in Reykjavik to come up with their response to the fact that we wanted no Icelandic exposure. The Kaupthing Bank, although an Icelandic bank, conducted a significant amount of its treasury operations through London, and in fact many banking groups, as I am sure you know, centralise their treasury operations and London is a very natural habitat for that. They came back with a proposition that the most convenient thing to do, apart from some reduction in exposure from the figure I have just said, would also be to have the money transferred to the London operation, and then we got into the dialogue I have already referred to in the evidence with the FSA about the terms on which that placement would be made. Those are the circumstances.

Q570 Nick Ainger: But this transfer represented almost half the assets of KS&F(IOM). Were you not concerned, particularly bearing in mind your previous concern about the relationship with the Icelandic parent company, that this transfer would in effect destabilise KS&F(IOM)?

Mr Aspden: No, we were not because first of all the concept of upstreaming, if I may use that as a general concept where bank deposits or funds are upstreamed from one company to another within a banking group, is by no means unique to the Isle of Man. It happens in many jurisdictions, including in many onshore jurisdictions as well, so this is nothing new. Of course, it was a significant amount of the balance sheet. However, it was money lent to another what we call Zone A bank, which is a bank from an OECD country which could also enjoy IMF borrowing facilities - that is one of the criteria that we look at - and, based on that, and then in particular based on the discussions we had, the assurances and the information we got from the FSA, I do not think a money market exposure of that is particularly out of the ordinary, not just in the Isle of Man but generally in the banking industry.

Q571 Nick Ainger: Your written evidence to us indicates that you think what you now know about these circumstances is that you had imperfect information provided to you by the FSA at the time. That is my understanding of what you have said in your submissions, that what you now know of the circumstances of KS&F was not what you were being told at the time by the FSA. Is that correct?

Mr Aspden: No. We were told various things by the FSA. We had various understandings and you are quite right, I have put that in the evidence. Whether or not that subsequently turned out to be true in terms of what the London position was with the London bank in relation to the limits and everything referred to in our evidence, I am afraid I do not know, and the reason I do not know is that no information has been forthcoming.

Q572 Nick Ainger: But have you formed a view from what we have now seen has happened to KS&F here that perhaps what you were being told at the time by the FSA was not strictly accurate?

Mr Aspden: The only view I have formed is the fact that if all the understandings that we had, which are referred to in the evidence, had been adhered to I would not have thought that the London bank would be in quite the predicament that it appears to be.

Q573 Nick Ainger: I put it again to you, that if you had known then what you think has happened with KS&F, would you have approved or not raised any objection to the transfer from KS&F(IOM) to KS&F here in London?

Mr Aspden: If you are saying to me if we had thought that the limits and so forth that are in the evidence would be broken or not adhered to, and if you are saying in advance would we have gone along with it, the answer is no.

Q574 Nick Ainger: Can I move on perhaps to Tony Brown? Accusations have been made by people who have got a direct interest in these matters that the reason that KS&F(IOM) has not gone into liquidation or bankruptcy or administration is that you are concerned about the effect it will have on your depositor protection scheme, in other words whether you have got the resources to pay out the 50,000 per depositor if they have 50,000 on deposit.

Mr Brown: First, I would say that is not the case. The Isle of Man Government has been very active in endeavouring to find a way forward that we believe will be in the best interests of all the depositors and a better option to just going straight into liquidation. As far as the DCS is concerned, the Isle of Man Government has earmarked 150 million to put into that and the banks have earmarked 200 million to go into that. We will pay out on the basis of the scheme, if it is brought into operation, and we believe that the net cost to us will be somewhere in the region of 50 million, so from our point of view we are satisfied that we have the resource to do that. Something like 71% of eligible depositors will receive 100% of their deposits within two years, so from our point of view we believe the scheme is effective.

Q575 Nick Ainger: Can I just ask you about the two years? So if the company does go into liquidation some depositors would have to wait up to two years to get their money?

Mr Brown: I think the point is that with liquidation, of course, they would be paid out from the bank side, then the DCS, and, of course, it has to be acknowledged that we have introduced early payment schemes to help those who are finding themselves in difficulties, so therefore we have an early payment scheme at the moment of up to 1,000. We have a new scheme going to Tynwald, our Parliament, this month which will increase that up to 10,000. Taking the whole package, we are satisfied that the scheme will operate effectively.

Q576 Nick Ainger: If you have got this scheme in place which you believe will cover, with support from the Isle of Man Government, all of the depositors for certainly up to the 50,000 mark, and there will obviously be many more that will have more than 50,000 on deposit and they will lose out, you were referring earlier to comparing your scheme with the UK scheme, but in fact the UK scheme pays out much sooner than that. Is there no way that you can match the UK depositor protection scheme in terms of the time of payout?

Mr Brown: I think what we have done is introduce a scheme that we feel is appropriate to the Isle of Man in terms of how we operate the system that we have. Again, we have had a scheme since 1991 but if I may, Chairman, to cover that point of payout, Mr Aspden will have a better understanding of the detail, so perhaps I can ask Mr Aspden to deal with that.

Mr Aspden: So far as the scheme is concerned, the Depositors' Compensation Scheme, the rate at which it will pay out will depend entirely on the rate at which it is funded, so not just the amount but also the speed with which it is funded, and it can be funded not only from Government and not only from banks, but it is also able to borrow on its own account, so if we were able to activate a borrowing facility for it, we could come within the two years.

Q577 Nick Ainger: So it is still two years or below?

Mr Trott: Or below.

Q578 Nick Ainger: But nothing like the speed at which, if you had the depositor protection scheme that is enacted in this country, depositors can get their money back? Nothing like that?

Mr Aspden: No, perhaps not.

Nick Ainger: We are looking at months and possibly years for some depositors?

Q579 John Thurso: One of your concerns from your written evidence is the sealing of the documents relating to the KS&F UK's administration. Can you just explain what difficulty that causes you?

Mr Aspden: First of all, it was what happened to the UK bank that brought our bank into the position it is in at the moment so, first of all, given the fact that all of us in the administration and in the regulatory body have been on the receiving end of questions as to why what has happened has happened, I think that is a natural thing and a worry. Number two, it is extremely important for us to know why it went into administration from the point of view of beginning to make our own assessments as to what recoveries might come, because if it had been, for example, a massive fraud that had wiped out half the balance sheet, that would have vastly affected it. The third point is that our Liquidator Provisionally in the Isle of Man has also been taking steps in relation to the provisional liquidation, and clearly he wants as much information as he can get in order to facilitate his work. This has been one of the major problems in being able to tell depositors what "p" in the pound they might eventually get, because it is not just an Isle of Man calculation; it is a London-based calculation as well. My final point is at the end of the day I think it is only fair and right that if a bank is brought down in London, which then has that consequence in the Isle of Man we should know, and some of your colleagues have referred to transparency, I think it is totally untransparent that that can happen with that sort of consequence on depositors without proper disclosure being made.

Q580 John Thurso: Can I come back to the fact that you have stated that it was the trouble in the UK bank that caused the problems? Obviously, you are an independent jurisdiction but you will probably have felt that you could rely on the institution set up by Her Majesty's Government, the FSA, to be a reliable source of information. To what extent were you depending on the FSA's quality of guarantee or whatever, or their approval of the London operation to give you comfort in the Isle of Man operation?

Mr Aspden: I would not say that we were depending on a guarantee from the FSA, or indeed formal approval, but I think you will have gleaned from our evidence that our understanding of those limits referred to in the evidence would have given us the protection that we understood we would have in relation to that transaction.

Q581 John Thurso: You mentioned that one of the reasons why you would like to see the documents is recoveries. Given the evidence that we heard earlier from Tony Shearer of the pretty lax approach the FSA took to the creation of KS&F, and given your quite proper dependence not on any guarantee but on a degree of comfort, how appropriate would it be for the Isle of Man authorities, whether administrator, liquidator or even the Government, to take legal action against the FSA in the United Kingdom for their failures in this regard?

Mr Aspden: I cannot speak for the Government but that would not be something in the role of myself as a regulator.

Q582 John Thurso: Who would you like to look at that?

Mr Brown: I think the answer is that we would have to consider whether that was an appropriate action.

Q583 John Thurso: Let me offer you some free advice. You appear to have two elements to this. You have one side which is really you get decent legal advice that says, "It is a good case, you should go for it", and I have got a suspicion you would probably get that without too much trouble, and you have also got the small problem of foreign relations. We might not have much of a navy but I suspect we could probably retake the Isle of Man. Is that not the problem, you have got a balance between what you legally might be able to get your hands on and the fact that you have got a big brother government over here who already regards you as a bit of a pain in the neck tax haven in the North Sea that ought to be taken out? Is that not the core of the problem?

Mr Brown: I think it is worth making the point that we are a valuable contributor to the UK economy. Certainly we have to politically weigh up that balance and consider the implications of any actions we take and we would always do that.

Q584 John Thurso: More seriously, is not the point that Her Majesty's Government, given that she is Queen of all of those territories, ought to take a far more sympathetic view and a more responsible view and take that on board themselves?

Mr Brown: We certainly made the point to Her Majesty's Government about the situation and our concern about it.

Q585 Mr Todd: I think this is mostly for Mr Aspden. Can I explore the role of your own organisation in examining the transfer of undertakings between Derbyshire Offshore and KS&F(IOM). When that happened, did you scrutinise the fitness of KS&F(IOM) to take over those undertakings in your island? What was the role of the FSA in advising you of any relevant information about that?

Mr Aspden: In relation to the role of the FSA in advising us of any information, other than the fact to the extent that the UK was regulating or supervising the London end of Derbyshire and had a locus in that, I cannot really recall anything specific beyond that.

Q586 Mr Todd: They have accepted that as regulators of the Derbyshire Building Society, which at that time was already in some difficulty, they were expressing some interest in that transaction and had some liaison over it. I would welcome a separate summary of that arrangement if you could and any discussions that took place there. What did you do yourselves?

Mr Aspden: First of all, at the time of the acquisition, of course, the entity of Kaupthing, Singer & Friedlander (IOM) Limited was already a licensed bank on the Isle of Man, so by definition they were already approved in that status as a licensed body. That took us some way down the track. The other issue that we looked at at the time was to satisfy ourselves that depositors in the Derbyshire (IOM) were made aware, as you have heard in previous evidence this morning, of the transfer of deposits. The other thing that we were clearly interested in was looking to see how the business of Derbyshire (IOM) would be subsumed within the Kaupthing, Singer & Friedlander (IOM) entity and then in particular how those funds would be aggregated and managed in the new enlarged entity.

Q587 Mr Todd: Did you take any view of the difference in parental guarantee that would seem obvious from the commonsense perspective, which is that a British building society has never gone bust, and as the parental guarantor of Derbyshire offshore accounts, whereas the same could not be said of Scandinavian banks? Did you take any perspective on that and feel that was an issue which required some thought?

Mr Aspden: I think the main thing we thought of at the time, and actually it was not a regulatory requirement but was offered by the bank, was the provision of the shortfall guarantee from Kaupthing Bank hf in Reykjavik in respect of the entire entity of the Isle of Man, not just Derbyshire. That was not a formal regulatory direction, therefore it did not need to follow any standard form set by us as regulator or whatever but, nonetheless, at the time I think it offered an important overlay of comfort.

Q588 Mr Todd: You perhaps heard Mr Shearer's thoughts on when Kaupthing, Singer & Friedlander was acquired. Did none of those over the maturity of the Kaupthing management team and their ways of building up shareholdings occur to you to scrutinise at some stage when you were examining KSF(IOM) which was a direct subsidiary of Kaupthing in Iceland? Did you not give any thought to any of those issues?

Mr Aspden: Indeed. In fact, members of the Reykjavik bank actually came to the Isle of Man and visited us on a number of occasions. There was certainly an Icelandic director of the London bank who was also on the board of the Isle of Man entity. Indeed, because of our lack of familiarity with the Regulator, the FME in Reykjavik, we took additional steps, and I do not think it is referred to in our evidence, to establish a Memorandum of Understanding with the regulatory body there and we requested them to come and visit the Isle of Man, and they did.

Q589 Mr Todd: In all this contact which took place you did not get any of the disquiet that we have heard from Mr Shearer?

Mr Aspden: I did not get ---

Q590 Mr Todd: You must have met some of the same people.

Mr Aspden: We have not ---

Q591 Mr Todd: Finally, the FSA has thus far said that they are unable to disclose advice they gave in the matter that John was pursuing earlier, the transfer of cash to London, that they have not been prepared to disclose that certainly to Members of Parliament who have enquired about it. Are you in a position to give us more information as to the information you received from the FSA, perhaps copies of any material that you think is relevant to our inquiry in this?

Mr Aspden: The only thing I could do, and I have not got copies with me, but we certainly have file notes of each of the discussions that we had with the FSA at the time, and I am talking about March to May 2008, and then we also wrote a letter to the FSA setting out our understanding of what we had been told.

Mr Todd: That would be very helpful to have.

Q592 Sir Peter Viggers: Following that point, the Isle of Man authorities would have no objection to any dialogue with the FSA being disclosed to us if we asked the FSA for that information?

Mr Shimmin: No.

Q593 Sir Peter Viggers: Thank you. Then from Guernsey's point of view, Guernsey has also expressed concern about the manner in which the relationship with the FSA works and has expressed that concern in writing to the FSA. Does Guernsey have any objection to us asking the FSA for copies of that dialogue and correspondence?

Mr Neville: None at all. The thing I would say is I have had correspondence with Hector Sants. Obviously our concerns are in the context of us still wanting to understand the FSA's point of view but Hector Sants has confirmed to me he understands we are here today and there is no problem with the releasing of that information as far as I am concerned.

Q594 Sir Peter Viggers: Thank you. What prompted you to undertake your own review of your work relating to Landsbanki?

Mr Neville: In these circumstances where a bank has gone down it is quite normal for a regulator to take a good hard look at itself and see if there are any lessons to learn. From our point of view it was a natural response. I wanted to know if there were any concerns that we needed to address. I wanted to make sure that a lot of the concerns that were being expressed by the depositors were addressed by an independent party who could actually take a hard look at us and say whether we had done a good job or not. In the event we were obviously satisfied with the result.

Q595 Sir Peter Viggers: The conclusion of the Foot Review was that there was no regulatory failure. Are you using that conclusion as cover to not apply public funds to compensate the Landsbanki depositors?

Mr Neville: That is a question more for the Chief Minister than myself.

Mr Trott: We take the view, Sir Peter, in Guernsey that the taxpayers should not bear the risks of banks failing. I am confident to know that is the view of the TSC because I quoted those words directly from your report, The Run on the Rock. The answer to your question, therefore, is no. The reality is there was no regulatory or governmental failure regarding the placing into administration of Landsbanki Guernsey Limited. It is also important for me to make a couple of other points while I am speaking. I have not ever heard any informed source refer to Guernsey as a tax haven. I have heard many sources refer to us as a low tax jurisdiction, and there is much justification for that. When we are talking about the retail deposits that are placed in Guernsey and in the knowledge of the risks that existed beforehand, and those risks certainly in terms of retail deposits up to 50,000 are much less today, one needs to understand that when Guernsey signed up to the 27 bilateral agreements with EU Member States with regards to the Savings Directive there was an expectation that there would be significantly more tax, if you like, received by EU Member States from that activity. The reality is it was much less. Why? Because the depositors in Guernsey preferred to disclose their undertakings to their relevant tax authorities. It is further evidence, I believe quite strong evidence, that Guernsey is not a tax haven, far from it, but, as I stated earlier, a low tax jurisdiction.

Q596 Sir Peter Viggers: You have recently announced the introduction of a deposit protection scheme. Why was there not one before?

Mr Trott: I partly answered that ahead of time earlier when I responded to Mr Mann. There was little appetite in the island amongst the banking fraternity for a scheme. The reason for that was that a very small part of the deposit aggregate in the island is, in fact, retail deposits. The majority of the business that is undertaken is invest banking and an awful lot of fiduciary deposits are included in that figure.

Q597 Sir Peter Viggers: How did you fix the limit?

Mr Trott: 50,000 for retail deposits is an industry standard. In terms of having a cap on the ultimate liability the industry would take, there were some sophisticated calculations done that took into account the effects should there be one or two bank failures. That is a scenario, I have to say, that is extremely unlikely for a variety of reasons.

Q598 Sir Peter Viggers: Okay. Will the scheme cover those affected by the Landsbanki collapse?

Mr Trott: It is not retrospective, so the answer to your question is no. Again, I would repeat that the Landsbanki Guernsey depositors have already received 30% of their deposits back and in some cases, as I mentioned earlier, that is far in excess of the 50,000 limit that is now in place. Importantly, the Administrator has made very clear that he anticipates further distributions to those depositors later on this year.

Q599 Sir Peter Viggers: What was your response? Were you surprised that the UK Government used the Anti-terrorism, Crime and Security Act 2001 to protect the UK's position with regard to Landsbanki?

Mr Trott: It is an area that I would not feel comfortable commenting on, but I am sure that if the UK Government felt it was justified it probably was.

Q600 Mr Brady: Following on from Mr Todd's questions to Mr Aspden, you said you had written a letter to the FSA to confirm the contents of your discussions with them. When did you write that letter?

Mr Aspden: May 2008, something like that.

Q601 Mr Brady: I think you are going to send us a copy of the letter and that would be helpful.

Mr Aspden: I will.

Q602 Mr Brady: When we have asked the FSA about discussions with FSC with regard to the transfer of the 530 billion they have always denied there was any guidance given. Would it be a reasonable interpretation to say that the reason for the discrepancy between their version and the Isle of Man version is you are basing your comments on a series of discussions over a period of months which gave rise to expectations and they are simply denying that they gave specific advice in the days leading up to the transfer?

Mr Aspden: I think you are quite right. There is one additional point, and that was it was erroneously reported in the press that the FSA had required, or whatever, the transfer of that money. That never happened and we have never alleged that.

Q603 Jim Cousins: Mr Trott and Mr Brown, in the future would you like to see financial services regulation and depositor protection put on a common UK-wide basis?

Mr Brown: Certainly from our point of view we would be happy to contribute to any discussions about that. To prejudge whether or not that is in everyone's best interests is something we need to thoroughly discuss with the UK and other parties to see whether it is to everyone's benefit.

Mr Trott: With regards to depositor protection, there are issues regarding moral hazard that one needs to take into careful consideration. As far as retail depositors are concerned, 50,000 does seem to be a pretty standard norm, so I think we are probably already there. With regards to greater regulatory co-operation, I think my colleague, the Director General of our independent Financial Services Commission, made clear earlier there is room for additional scope between home and host nations and that is one of the reasons for this inquiry, I am sure.

Mr Neville: May I add that we do actually apply exactly the same standards, the international standards, which are applied in the UK. Any regulator can only regulate to the extent of the information it is provided and that is why I think not only between us and the UK but also between all jurisdictions we need better co-operation to make sure that the regulators are able to assess the risks of the businesses that they are regulating, the risks that those businesses are taking in their jurisdictions. Therefore, I do not think there is any difference in standards but what does need to be improved is co-operation.

Q604 Jim Cousins: Mr Neville, just one further question to you. You have supplied some very interesting information about deposit placing in your jurisdiction. The figure you have given us is 141 billion, roughly 88% of which is placed with a group of international and private banks. The loan guarantee scheme which the British Government is in the process of working on, how much of the 124 billion roughly that is with those international and private banks in Guernsey might be covered by the loan guarantee scheme that the British Government has in mind?

Mr Neville: Unless I misunderstand the question I do not see that the UK guarantee scheme would be relevant to the deposits placed in Guernsey. Perhaps I misunderstand the question.

Q605 Jim Cousins: If the financial instruments which were being guaranteed were located in Guernsey the guarantee would extend to Guernsey.

Mr Neville: I am not sure I understand the context of that to the Guernsey banks because we would be looking at deposits within the Guernsey banks which would be covered, as far as the retail depositors are concerned, by the depositor protection scheme.

Q606 Jim Cousins: No, I realise that. I am talking about the banks' own financial instruments.

Mr Neville: Are you talking about the use of special purpose vehicles based in offshore centres?

Q607 Jim Cousins: Yes, exactly.

Mr Neville: There are very few special purpose vehicles based in Guernsey. I am aware of one or two, but as far as the position so far is concerned I am not aware of any special purpose vehicles in Guernsey that have been involved in any way in any banking problems so far.

Chairman: Thank you very much for your evidence. We are very grateful that you took the time to come across particularly in this inclement weather. Thank you very much.