18
NEWS ANALYSIS THE BANKING CRISIS
“ The insurance
companies should
have been warning
people. They were
quite happy to take
money but it was
not made clear in
their documentation
that should a bank
collapse investors
were not covered
”
Tony Shah, associate
director, international division,
Christchurch Investment
Management
BY DANIEL JUDGE
Offshore centres have not
been able to escape the
financial crisis engulfing
much of the world, striking
indiscriminately at the
heart of the mightiest institutions
and most indebted
homeowners.
The high-profile collapses
of Icelandic banks Kaupthing
Singer & Friedlander
(KSF) and Landsbanki in
particular have focused
attention on the Isle of
Man and Guernsey and
directly led to a review
of the financial regulation
of all three UK Crown
Dependencies being
announced in November’s
Pre-Budget Report.
Not surprisingly, much
of the recent spotlight has
been on depositor protection;
or more precisely,
the lack of it. Unusually
for a jurisdiction that has
promoted itself as a cutting-edge
offshore financial
centre, Guernsey has no
depositor compensation
scheme.
Ministers on the Isle
of Man, meanwhile, have
hastily enacted an amendment
to its Finance Act in
the wake of the KSF failure
that raised the maximum
limit available to depositors
from £15,000 to £50,000, a
move jointly funded by
the Government and local
banks.
l Partial recompense
Guernsey is consulting on
establishing a compensation
scheme with a proposed
maximum payout to
individuals of £50,000, as is
its neighbour, Jersey, which
likewise provides no such
protection at present.
This means Landsbanki
depositors could, theoretically,
get nothing back. But
its administrator, Deloiotte
& Touche, has made an
A question of confid
The global banking crisis has had serious consequences for
particularly the Isle of Man and Guernsey. With investors fa
or all of their investments, they face an uphill battle to rega
offer of £0.30 for every
pound held in accounts
and further payments
could be made depending
on the remaining assets of
the bank after this process
is completed.
In the case of the Isle of
Man, the chain of events
that led to the collapse of
KSF is now well known.
The UK government placed
the London operations of
the bank into administration
and froze its assets,
including around £550m
that belonged to the bank’s
Manx business – a move
that precipitated the failure
of the offshore division.
It may seem a simple
solution for this money
to be returned to the Isle
of Man, an action that
would mean savers’ cash
would be safe, but the UK
government has so far
refused to do so. It argues
that such a decision would
give preferential treatment
to one set of creditors
over another.
John Spellman, chief
executive of Isle of Man
Finance, says: “We understand
their position but we
have got to resolve this.”
He adds that KSF Isle of
Man was a profitable business
and were it not for the
UK government’s action, its
depositors money would
be secure.
“It was well-run and,
through no fault of its own,
collapsed after its assets
were frozen in another
country. In an ideal world
the assets will be returned
INTERNATIONAL ADVISER [www.international-adviser.com] DECEMBER 2008
and we are working with
the UK government to
resolve the situation.”
l Unexpected losses
Another sector of financial
services vital to the
offshore industry has also
been hit by the banks’
collapse. Offshore bond
policyholders stand to lose
millions of pounds if they
have invested their money
in cash deposits in the
failed banks.
Such savers were left
reeling by the revelation
that because their money
was invested by an insurance
firm and is legally an
asset of that company, policyholders
are not eligible
for access to the £50,000
compensation available
to individual savers in the
Isle of Man.
Many investors and their
advisers wrongly assumed
the insurance compensation
scheme would be
triggered by such events.
They have learnt to their
cost that this applies only
Isle of Man bank deposits
Date Sterling Non-sterling Total bank
(£bn) (£bn) deposits (£bn)
30 Sep ’06 28.56 11.85 40.41
31 Dec ’06 30.23 13.16 43.39
31 Mar ’07 32.08 13.87 45.95
30 Jun ’07 33.11 15.81 48.92
30 Sep ’07 34.24 15.84 50.08
31 Dec ’07 33.95 16.59 50.54
31 Mar ’08 34.89 17.47 52.36
30 Jun ’08 36.05 17.72 53.77
Source: Isle of Man Finance
if the insurer goes bust.
Hundreds of millions of
pounds of offshore bond
money was deposited with
KSF, and a smaller amount
in Landsbanki Guernsey,
and those who invested
now face the stark reality
of losing it all.
l Bleak outlook
Talks between the UK and
Icelandic governments over
the collapse of KSF are
continuing. It was expected
that a court hearing in late
November in the Isle of
Man regarding the winding
up of the bank would be
adjourned to allow negotiations
to continue.
But given that Iceland
itself is effectively bankrupt,
the likelihood of savers
ineligible for the Isle of
Man compensation scheme
getting even some of their
money back is far from
high (although Iceland has
now agreed to pay out
the first £18,000 of UK
savers’ money).
Against an increasingly
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