Dialogue with Secretary to the Treasury

Here follow two exchanges that I've had with Sarah McCarty-Fry, Secretary to the Treasury over the past few months.

HM Treasury, I Horse Guards Road, London, SWIA 2HQ
xxxxxx(?)batelco [dot] com [dot] bh
January 2010

SMC Thank you for your email of 4 November about Kaupthing Singer & Friedlander Isle of Man (KSF IoM). I am sorry for the delay in replying. Oversight of KSF IoM is the responsibility of the Isle of Man's Financial Supervision Commission (IoM FSC) and therefore arrangements for depositors in KSF IoM are a matter for the Government of the Isle of Man.

Ice: However, as you set out below, the Treasury Select Committee chaired by John McFall MP, reached the conclusion that both British Governances should work together to resolve the issue of former KSFIoM depositors being left not only penniless, but without care or concern by either Government in a pitiful and callous exchange of 'not my responsibility' in dealing with this devastating end to many a lifetimes careful husbandry. The cumulative years of work put in by thousands of ordinary citizens to save money for homes, education, and retirement, runs into many hundreds of thousands and should not be diminished or trivialised as both sides are inclined to do. Even a 100% return of our lost savings could not recompense the anguish and depression that depositors have suffered over the past 15 months – let alone having to wait seven years or more in the hope of a possible 88% return (not accounting for loss of interest and inflationary effects).

Ice: According to the IoM Treasury Minister, Mr Allan Bell MHK, in his verbal evidence to the IoM Tynwald Select committee just a few days ago, there has been no evidence of assistance from the UK Government over the past year despite its duty bound constitutional obligation towards its Crown Dependencies in acting on their behalf in international affairs (and certainly not in opposition to this aim). This whole sorry affair is a disgrace perpetrated by a Government against a minority of British citizens. It was not the IoM Government that invoked a power within the Anti Terrorism, Crime and Security Act against another small Northern island; it was not the FSC that placed KSFIoM under administration with the assets of thousands of UK retail depositors locked inside for six months; and it was not the brainchild of Mr Allan Bell to keep UK assets for general distribution in the Isle of Man – making UK depositors wait for years whilst island depositors got reimbursed directly – no, all of these acts were performed under the direction of Brown and Darling (with Turner and Bach in close co-operation to be sure) and they should all be thoroughly ashamed of their heedless behaviour, but such types are typically beyond common remorse.

SMC: The Treasury Select Committee in its report on the failure of the Icelandic banks recommended that the Government should not provide cover for the deposits held by British citizens in jurisdictions outside the direct control of the United Kingdom. This is consistent with the principled position adopted by the Government. Arrangements for depositors in banks in overseas territories are a matter for the Governments of those territories. As such, it would not be appropriate to use taxpayers' money to guarantee their deposits. This principle is consistent with that expressed by the Chief Minister of the Isle of Man.

Ice: As a UK taxpayer for the past unbroken 43 years, I would very much agree with you that the UK Government should not provide cover for deposits outside of the direct control of the UK. However, the Isle of Man is not an Overseas Territory; it is a Crown Dependency, part of the British Islands together with the UK. The citizens of the IoM are both British citizens and European Union citizens, and the UK has a constitutional duty to uphold the good governance of the island – it has ultimate power over the Crown Dependency and can enact law upon the island if a serious situation were to develop due to the absence of proper governance by its incumbent leaders.

Ice: The former depositors of KSFIoM have never asked for compensation from the UK Government/taxpayers, they have consistently argued for the return of their own assets to the jurisdiction of the Isle of Man so that the appointed liquidators and KSFIoM directors could perform their respective duties to return the money to its rightful owners. The UK Treasury imposed a Transfer Order against KSF UK to prevent any such movement – despite the IoM sending three senior delegations to the UK to try and remedy the situation.

Ice: KSFIoM depositors were comforted to discover that their monies were in the UK bank and not elsewhere; we thought that the situation between regulators and the banks would quickly be resolved, the money returned, and the business of sorting out KSFIoM would soon follow. How wrong we were; when depositors heard that the UK Government had no intention of returning IoM money to its own jurisdiction for the benefit of retail depositors we could hardly bring ourselves to believe that a UK Government could be so cold, so callous – and so spitefully determined to follow their own needs without care or concern of the effect upon others no matter that the greater majority of those others were British citizens in, or near retirement.

Ice: Had HMT protected/recompensed IoM retail depositors in the same manner as it did mainland depositors it would have been only right and proper that IoM monies remained in the UK subsidiary branch and thereby contribute to the common purse for distribution amongst all creditors – including HMT standing in the shoes of KSF Edge depositors. But no; IoM retail depositors received not one penny, but were actually insinuated to be tax dodgers by the UK Chancellor himself. The UK kept all KSFIoM assets and now 15 months later continues to share it between all remaining creditors. This is so grossly unjust as to be beyond contempt. So no, we didn't ask for compensation from the taxpayer per se, but given all the extenuating circumstances that brought this financial disaster upon the unsuspecting heads of 11,400 depositors who were quite properly saving their money in a triple-A rated bank with the full support of a British regulatory authority – a bank that was, up until the day the FSA put KSF UK under administration well funded and viable – we should have had all monies identified as belonging to the IoM subsidiary returned to that jurisdiction for distribution to the retail depositors there.

Ice: Governments come and go, and the debts they incur transfer to the newcomers who defer and delay until in some far-off future the debt is cancelled or paid. Not so with people; we have only finite lives, and having one’s life savings taken, impounded and distributed to those in another jurisdiction to receive an indefinite sum at some unknown time hence may well be too late for the many now suffering unplanned hardship in retirement. An undeserved finale´ for those whose forte of taking-care was ‘taken care of’.

Ice: The purpose of compensation schemes is to provide a measure of protection for retail depositors before any other affected parties – and the UK Government ensured that happened for one group of its citizens, but not for another. It is quite unforgivable; opportunity existed to co-operate in the spirit of doing the right thing for people suffering deprivation and loss, but the UK Government chose not to do this for reasons that can only be guessed at, but given the Chancellor’s comments and review action, unmerited spitefulness towards off-island depositors comes top of the list. The UK Government could be forgiven for acting the way it saw fit in the heat of the moment to invoke a power within the Anti Terrorism Act and simultaneously place KSFUK under administration, but after the dust settled and the IoM delegation had explained their plight, common sense and British decency should have prevailed with diplomatic action taken to see right be done, but regrettably, this was the last thing on the minds of the Darling pair.

SMC: The Select Committee report said that the UK Government should "work with those in the Isle of Man and Guernsey to resolve these issues".

Ice: Yes, exactly so, and where is the lead from the UK Government in this debacle? Where is the UK in its negotiations with the Icelandic authorities on behalf of Crown Dependencies? HMG is too busy dealing with Iceland trying to retrieve the £2.6B it spent in recompensing 'IceSavers'. Three hundred thousand British depositors who had placed their monies in a known Icelandic on-line bank – outside of the auspices of UK regulation – and relying only on the far-off and biased eyes of the Icelandic FME (if you ever did) were recompensed for their trouble. Mr Darling just had to rush to their aid despite the bank being regulated by Iceland, he even utilised an extraordinary power within an Act not intended for such purpose in order to achieve his aim. But of course, we all know that this was done to save the UK banking industry, not the IceSave depositors. Had this incident happened outside of the imminent global financial meltdown I don't think Mr Darling would have been anywhere near as quick to enact such an inappropriate means of freezing the assets of another sovereign country without proper consultation and open, honest dialogue. Why allow the situation to get beyond prudent financial limits before engaging such an extreme means to bring down the Icelandic economy in such a spectacular fashion? Other than to project a knight in shining armour image that is...

SMC: Regarding action taken by the Treasury, you may be interested to read the decision of the Administrative Court in the judicial review brought by Kaupthing, the Icelandic parent bank, which is available from: http://www.bailii.org/ew/cases/EWHC/Admin/2009/2542.html.The The court considered that the Treasury was fully entitled to act as it did.

Ice: I have read the report; the Court found that the Treasury was entitled to act as it did in protecting UK interests. We are all entitled to do things – whether that makes them the right thing to do is quite another matter. Two wrongs do not make a right, they make a bigger wrong, and being within the boundaries of entitlement does not confer great statesmanship upon the perpetrator, it just means that he cannot be pursued for doing less than a better person might have done under similar circumstances.

Ice: You are also concerned about restricted access to banking services in the UK for non-residents. There is no legal or regulatory barrier to banks providing services to on-residents, but many banks and building societies have decided not to do so. I understand this is largely on commercial, not regulatory grounds, and is driven chiefly by concerns about fraud prevention and additional administrative requirements in dealing with people abroad.

Ice: It really matters little the reason for this great disincentive to deposit monies in the UK, the effect on the non-resident British citizen is the same and is very real. Offshore banks accommodate persons without a UK residential address with no great difficulty – the majority of these banks being no more than subsidiaries of branches on the mainland. Still suffering from this shattering life-experience I have looked more closely at the offshore banking model (pity this was so disinteresting to me for the previous sixteen years). It now seems so clear: retail banks operating off-island suck in ready-cash from customers spread around the globe as well as from their own inhabitants and those resident in the UK. This bountiful supply of liquidity is then upstreamed to the UK (around £52 billion per year from the IoM at the last count) where it is put to work. The money is taxed for UK and EU residents so the UK Treasury gets its cut, and UK financial institutions clearly benefit from the steady flow of offshore cash. The original incentive to deposit offshore is defunct, but still a widely-held fallacy of yore: greater tax-free interest. This tired notion is aided and abetted by a UK Government that enforces conditions upon mainland banks that then find it easier to disallow non-resident depositors (happily sending them off to open new accounts in their offshore subsidiaries) rather than go to the trouble of taking/keeping them on. And really, why would they bother otherwise?

SMC: I can confirm that the number of banks and building societies who are prepared to offer services to non-residents is small. It may partly depend on a firm's target market and whether an applicant can present themselves at a suitable branch to make an application in person rather than remotely.
4/34164/2009

SMC: The Government cannot offer a referral service to help non-residents. Instead the British Bankers' Association offers an account finder service through its website at: www.bba.org.uk . It is intended to help those who have difficulty in finding a suitable onshore account.
I would like to make clear that a number of the points raised are either a matter for the Financial Services Authority (FSA) or the IoM FSC, and I suggest that you write to the FSA or IoM FSC as is appropriate setting out your concerns.

Ice: I am sure that it will come as no surprise to you to know that I have written to these institutions and have received no better answers. I am also absolutely sure that you and the officials working in other Government departments replying to depositors know exactly what the latter are trying to explain and will hopefully feel, at a human level, empathy toward us for being dumped in such a dreadful position as fodder to the cannon – but we also know that you are all obliged to follow the party line; dole out the spiel; emphasise the 'position'; and generally dissuade us from holding up our plight for the illumination of wrong doing. That makes my effort of writing this plea nothing more than passing time from which will come no great revelation, nor change of Government stance, but at least I've had my common say whilst forlornly lamenting the loss of hundreds of thousands put by for my retirement house back home in the UK.

SMC: Thank you for taking the trouble to make me aware of these concerns and I hope you find this response helpful.

Ice: I will say that I am surprised to receive a reply as these are becoming very thin on the ground of late, even those deferred. You may gather from my comments above that as welcome as it is to hear from you, your letter unfortunately provides little real help (as we both know only too well…). Thank you, xxxxxxxxxxxxxxxxxx.

SARAH MCCARTHY-FRY MP

HM Treasury, I Horse Guards Road, London, SW I A 2HQ
xxxxxxxxxxx(?)batelco [dot] com [dot] bh
7 April 2010

SMC: Thank you for your further email of 3 February responding to my letter of 25 January about Kaupthing Singer & Friedlander Isle of Man (KSF IoM). I am sorry for the delay in replying.
I would like to take this opportunity to reiterate that the UK Government takes seriously its constitutional responsibilities for the Crown Dependencies. However, the UK Treasury is firm in the view that arrangements for deposits held by British citizens in jurisdictions outside the direct control of the United Kingdom are a matter for the Governments of those territories.

Ice: Kindly refer to the extracts copied below from the following named report which clearly finds the UK Government somewhat lacking in its responsibilities:

House of Commons Justice Committee: Report on the Crown Dependencies Eighth Report of Session 2009-10

Report on Crown Dependencies:24. Representatives of all five democratically-elected authorities have expressed to us frustration that those they are dealing with in the UK Government sometimes fail to distinguish between them; confuse their interests—which may be different—and even confuse them with the Overseas Territories. The latter is a particularly sore point in relation to the financial services sector, where the insular authorities are at pains to point to the conclusions of the Foot Report that the Crown Dependencies are, in fact, extremely well regulated, whereas the same could not universally be said of the Overseas Territories27

Report on Crown Dependencies:14. We recommend that the Ministry of Justice considers alternative models for the representation of the interests of the Crown Dependencies internationally. It is imperative that a means is found by which the Islands are represented effectively and we strongly recommend that certain officials, either from the UK or from the Islands, be specifically designated as representing the Islands in international negotiations. Clear and unambiguous representation of the Crown Dependencies' interests on the international stage will assist them in building their relationships with third countries and international organisations and, consequently, help them to develop their international identities

SMC: With regard to the Isle of Man, the Isle of Man is a British Crown Protectorate. This means that it shares the same monarch as the United Kingdom but is self governing and is not represented in the UK Parliament. In line with established constitutional arrangements, the UK Government is responsible for representing the Isle of Man in international fora, but the Isle of Man is not part of the UK and has its own directly elected legislative assembly, its own administrative, fiscal and legal systems and its own courts of law.

Ice: Protectorate, in international law, a relationship in which one state surrenders part of its sovereignty to another. The subordinate state is called a protectorate. The term covers a great variety of relations, but typically the protected state gives up all or part of its control over foreign affairs while retaining a large measure of independence in internal matters. The relation may originate when the dominant power threatens or uses force or when the subordinate sees advantages (usually military protection) in the arrangement. A protectorate is distinguishable from the relation of home country and colony, for the protected state retains its sovereignty (though often only nominally), its territory remains distinct from that of the protector, and its citizens do not become nationals of the protecting state. Initially, in most cases, the extent to which the dominant state may interfere in local affairs is governed by treaty; but since a protected state usually has no access to diplomatic channels, it is in a poor position to resist attempts at increased control.

SMC: The UK Government can make legislation that extends to the Isle of Man. However, as a matter of convention, this legislation is generally limited to matters involving international treaties and international agreements, such as the incorporation of the European Convention on Human Rights, which the UK signed on the Isle of Man's behalf at the outset.

Report on Crown Dependencies: 13. The representation of the interests of the Crown Dependencies on the international stage by the UK Government is not optional according to whether or not the interests of the Islands are congruent with those of the UK: it is the UK Government's duty. In cases of conflict, the Ministry of Justice must endeavour to find a mechanism for representation which will faithfully present and serve the interests of both parties.

SMC: The Isle of Man is not a member state of the European Union. However, it has a special relationship with the EU, set out in Protocol No.3 annexed to the UK's Accession Treaty. As a result of this the Isle of Man enjoys restricted free trade rights with EC member states but generally European Community law, including the Deposit Guarantee Schemes Directive, which requires member states to establish deposit protection schemes, does not apply (the exceptions are measures regarding custom rules, and various import measures in respect of agricultural products). The Isle of Man Government continues to consider that Protocol 3 provides the best option for the Island.

Ice: British citizens are European citizens, that was my point, and as such they have recourse to certain EU rights.

SMC: You contend that: "It was not the IoM Government that invoked a power within the Anti Terrorism, Crime and Security Act against another small Northern island". I would like to clarify the position. On 8 October 2008, HM Treasury made the Landsbanki Freezing Order 2008 to freeze the Landsbanki funds in the UK or held by UK persons. Landsbanki is the only Icelandic bank that was made the subject of a freezing order. It is not the asset freeze to which you refer that caused KSF IoM to be placed in to administration.

Ice: You have misquoted me, I wrote: It was not the IoM Government that invoked a power within the Anti Terrorism, Crime and Security Act against another small Northern island; it was not the FSC that placed KSFIoM under administration with the assets of thousands of UK retail depositors locked inside for six months; and it was not the brainchild of Mr Allan Bell to keep UK assets for general distribution in the Isle of Man. The inference here is that of 'shoe on the other foot' which you seem to have disregarded or misunderstood. I am well aware that the asset freeze was not used against KSF UK – there was no requirement because it was already within the powers of the FSA to shut down the bank without using such an extreme means of doing so. However, it is fact that all Icelandic banks operating in the UK were forced to cease trading within an hour or so of each other and this together with Brown and Darlings public proclamation of ‘freezing all Icelandic assets’ was more than enough to engender that fallacious idea in the minds of the general public. This was almost certainly intended, and even now politicians are overly keen to jump the gun and trot out that tired statement before understanding the full question. This has the effect of misdirecting the essence of the matter: all UK-based Icelandic banks stopped trading which had the effect of retaining all assets of those banks in the UK and under control of the Government through the Treasury and the FSA. This was an orchestrated ‘sting’ and it is now clear that the FSA knew full well that KSFUK was in trouble by virtue of obliging the bank to set up a reserved account with the Bank of England to hold deposits from October 3rd 2008 onwards. This ‘solution’ was not enough, and the combined action was too late – and might have been avoided altogether had a diligent and cooperative effort been expended a few months earlier. Gordon Brown has now admitted that regulation was not enough and that when he was Chancellor he had followed the industry’s call for less regulation when it actually needed more.

Quote: Business Secretary Lord Mandelson added: "Regulation should have been more intrusive and the regulatory practice of the FSA [Financial Services Authority] should have kept pace with the fast-changing developments in the financial services sector.”

SMC: You argue that "the UK Treasury imposed a Transfer Order against KSF UK" to prevent KSF IoM assets being returned. This transfer order (SI 2674) had no effect on KSF IoM's assets and was published as soon as it was made. The transfer was put in place very quickly after the FSA's determination that KSF UK no longer met its threshold conditions. The situation was extremely urgent and urgent action was necessary.

Ice: You are dreadfully mistaken, the Transfer Order prioritised UK Kaupthing Edge depositors to the exclusion of all other creditors of the bank – and not just to provide them with their due compensation under law, but to return to them the whole of their monies safely ensconced in the Dutch bank ING with complete access to their funds. This operation took Ernst and Young more than six months to complete during which time no other creditor received consideration. The share value of assets securing the loans made by KSFIoM to KSF UK fell during this extended period and E&Y are now paying only a dividend on the difference between loan and market values instead of full compensation as stipulated in the Repo Agreement.

Ice: Those citizens saving with the offshore deposit-taking bank were ordinary retail depositors and their plight was completely and spitefully overlooked by this rotten Government even though its very actions put many of the affected 11,400 British subjects into immediate penury. The abject lack of concern was made worse at this time by ministers (including the Chancellor) appearing on television and making inflammatory and unjustified claims against those saving on the ‘island in the Irish Sea’ and since then by other Labour ministers trying to defend their undefendable, self-centric and oblivious actions.

Ice: There is nothing that can be said to convince me otherwise; had HMT’s intentions been honourable, then proper discourse would have ensued between fellow British regulators in a transparent and responsible manner (as with Bradford and Bingley). But no, HMT’s intentions were to snidely secure the assets of KSFIoM – evidenced by the fact that these assets were not returned to the jurisdiction (had there been a gross oversight) when requested by senior delegations from the Island. Had the assets been French, German, or American, there would have been two ‘Transfer Orders’ in place and a back door opened to allow the diplomatic return of such assets – but not when HMG posits itself as the big boss bully of small islands which have no defence against such blatantly bad behaviour.

Ice: It is convenient to argue that KSFIoM could have placed its assets elsewhere, and equally expedient to lay blame at the island’s regulator for allowing the bank to continue placing deposits in the UK bank (and I have held both of these thoughts) but in its position of subordinate regulator (and acknowledging peer behaviour) I believe the FSC were convinced that the FSA would naturally advise them if anything untoward was going on in the sister bank that the FSA were supposedly regulating and as such were taken totally completely unawares when KSF UK suddenly went under administration. It does beggar belief that such discussions did not take place and emphasizes the intention of HMG to covertly undertake this action and secure IoM monies within the UK jurisdiction. HMG is keen to point out the ‘foolishness’ of KSFIoM in placing its considerable monies in the UK bank, but continues to permit thousands of depositors (including many British pensioners) to suffer the ‘mistake’ of a few officials who controlled that money. HMG’s only concern is that the island is seen to be responsible for bringing dire circumstances upon its customers, and that those savers who failed to bank in the UK should suffer the consequences of their ways. That juvenile response has cost ordinary retail depositors their life-savings; their health; their home and their welfare, but this is of no concern to this UK Government. The biggest mistake that the directors of KSFIoM and members of the FSC made was in believing that a UK regulator would look after common interests and advise its fellow British regulator accordingly. Brown and Darling nailed their colours to the mast making it quite clear that they were on an ‘offshore’ warpath and this situation could not have evolved any better for them had they sat down and planned it.

SMC: The reasons the funds KSF IoM placed with KSF UK cannot be repaid is because KSF UK has been placed into administration; as part of the administration process, as is usual, a moratorium is in place on the enforcement by creditors of claims against KSF UK. Creditors of KSF UK will be treated in accordance with the administration procedures and may receive a payment from the administration in the normal way.

Ice: This case is not ‘normal’ in any way; this case leaves British retail depositors destitute whilst HMT makes conceited claims about the laws of administration. Customers of UK Kaupthing Edge and Heritabl IceSave (Icelandic bank regulated from Iceland) have been repaid in full – carried out at the cost of a six month wait for remaining creditors. The UK Government was well aware that IoMG could not replicate the action it took for the benefit of UK Edge and IceSave customers, but made no attempt to alleviate the massive problems it caused to ordinary people obliged to bank offshore when it brought down KSF UK. The first thing HMG should have done was return the monies belonging to the bank of the Isle of Man for that jurisdiction to handle its own liquidation, a bank that had liquidity and viability before this dire action was perpetrated. KSFIoM monies were held by an administration carried out in the UK jurisdiction, this event could have been avoided had the coming situation been properly discussed with its fellow regulator, but HMG chose not to do this and so inflicted acute irreparable harm, extreme worry, and ill-health on thousands of retirees. It cannot be condoned or forgiven; this UK Government performed a reprehensible act against British citizens and subjects of the Crown and it really needs to acknowledge that despicable act because it clearly fails to see the magnitude of loss and despair it has singularly brought against its own people.

SMC: In respect of the other points raised in your letter, I attach a note that sets out in further detail the situation regarding KSF UK and KSF IoM, which I hope will help to explain the situation.

Ice: I know the real situation, it is the Government that needs to accept that it alone is truly responsible for the dreadful injury it has inflicted on British retirees and ex-servicemen amongst others. Best regards, xxxxxxxxxxxxxx

Thank you for taking the trouble to make me aware of these concerns and I hope you find this response helpful.

SARAH MCCARTHY-FRY MP