What next for Icelandic-bank savers?
2008 has been the year of the Icelandic bank. Following Kaupthing Bank launching a savings business – Kaupthing Edge – in the spring, the best-buy saving tables have been dominated by Icelandic-owned players. Icesave and Heritable Bank, both owned by Landsbanki, consistently offered some of the top online and ISA deals, while Kaputhing Edge has consistently kept its competitive edge.
All that changed in October. The banking crisis rocking the entire global economy hit Icelandic banks especially hard.
Over the first weekend of the month, Iceland's government was forced to come up with a financial package to support the banking sector. Geir Haarde, Iceland's prime minister, said Icelandic banks had grown too big and needed to cut back on their overseas operations.
The announcement sent Icelandic banks’ share price into freefall, prompting the government to suspend all share trading on financial firms.
Icesave, Heritable and Kaupthing customers in the UK were naturally worried. But that turned to panic when, on 7 October, the Icelandic government nationalised Landsbanki and Icesave froze all transfers in and out of its accounts.
Press attention and concern eventually prompted the British government into action. It reassured all UK savers that although only balances of £50,000 and under would be covered by the Financial Services Compensation Scheme (FSCS), anyone with balances over this amount would receive full redress from the Treasury.
Events then moved on further; following the Icelandic government putting Landsbanki into administration, Icesave, Heritable Bank and Kaupthing Edge have been closed.
So, what does this mean for their saving customers?
Landsbanki launched Icesave into the UK in 2006. Before it was shut in October 2008, it had over 300,000 depositors with a collective balance of £5 billion.
The closure of Icesave will be the first time the FSCS has been tested. The good news is that savers will receive 100% of their money back, even if their balances exceeded the £50,000 compensation limit.
The process of compensating these customers has been difficult. Talks between the FSCS and the Icelandic authorities broke down, amid debate over which country was responsible to refund depositors. However, the two sides both agreed that an accelerated redress process should be adopted to ensure money was paid as quickly as possible.
On 24 October, the FSCS announced that it was ready to launch an accelerated process, and promised Icesavers they would receive their money back by the end of November. The process is set to kick-off in the first week of November, at which point customers will receive letters explaining the process and the steps they need to take.
Instead of having to fill in compensation forms, Icesave depositors will receive 100% of their money back directly into their linked accounts. Payments will, however, be phased for security reasons.
Loretta Minghella, chief executive of the FSCS, says: "We recognise that Icesave's customers have been anxious about their savings. We would like to thank them for their patience.
"We have been working hard to establish a way of compensating retail depositors of Icesave without the need for a paper-based application process.”
Like Icesave, Heritable Bank has now closed – in fact it has been placed in administration by the High Court because its financial stability was judged to be insufficient to protect savers’ money.
In addition, the majority of its savings business has now been transferred to ING Direct, a wholly-owned subsidiary of Dutch bank ING Group. ING intends to operate these accounts from its UK branch. Just to reassure savers that their money is safe, the British Treasury has guaranteed 100% of their money.
Although most savers will be transferred to ING, around 100 account will not – meaning customers will have to claim compensation. The first £50,000 of any money will be paid out through the FSCS, with the remainder covered by the Treasury.
The FSCS will send these people an application form to claim compensation. Further details can be found on the FSCS website or by phoning 0207 892 7300.
As well as saving accounts, Heritable also offered residential, buy-to-let and commercial mortgages.
The impact on existing borrowers is minimal. Your mortgage agreement will remain in place despite the administration order, and at the moment Heritable has no plans to change repayment profiles. This means that you will not be forced to refinance elsewhere.
As a mortgage borrower the worst thing you could do is stop making payments on your loan – remember, your house is at risk if you don’t meet your repayments in full and on time each month.
For wholesale customers - including local authorities - the news is less bright. Heritable has frozen all wholesale deposits and no withdrawals will be accepted.
Now that the company has been placed in administration, all holders of wholesale deposits will have to lodge non-preferential claims. This will be held on file and dealt with in accordance with the Insolvency Act 1986.
Heritable’s administrator, Ernst & Young, says it will review all claims made against Heritable “in due course”.
Kaupthing Edge (also known as Kaupthing Singer & Friedlander) has be declared in default by the FSA and as such will close.
Like Heritable savers, most customers of the savings bank will be transferred to ING.
However, around 3,000 depositors with non-internet accounts have not been transferred. These people should have already be contacted by the FSCS with information about how they can claim their money back.
Again 100% of all deposits is protected, with the FSCS paying out the first £50,000 and the Treasury covering any outstanding balances.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.