FSA failed to do due diligence when allowing Edge retail accounts into Britain and allowing Kaupthing IOM investors to continue investing in a shaky bank.

FSA let failing bank move on High Street
The Financial Services Authority did nothing to prevent Icelandic bank Kaupthing from setting up British retail operations eight months before it failed because it thought taking personal deposits would be a positive move to boost the bank's faltering liquidity.

By Rowena Mason
Published: 9:10PM GMT 02 Jan 2010
The Icelandic bank set up British retail operations eight months before it failed
The Icelandic bank set up British retail operations eight months before it failed

The revelation comes as Icelandic president Ólafur Ragnar Grímsson balked at signing legislation, already passed by the Icelandic government, approving reimbursement of £2.3bn to the UK government for compensating 300,000 customers of the Icesave arm of Reykjavik-based Landsbanki.

The Serious Fraud Office is now formally investigating Kaupthing under the Fraud Act to see whether the launch of its high-interest Edge retail accounts misled British savers. UK customers deposited £2.5bn in the internet accounts between April 2008 and the bank's collapse 15 months ago.

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According to very senior sources at the regulator, the FSA had worries about the liquidity of Kaupthing's British subsidiary before Christmas 2007.

It did nothing to stop the establishment of the Edge accounts in the April, eight months before its eventual collapse, because the regulator thought it would help the bank's cash position.

It is understood that the British arm of Kaupthing came very close to surviving the crash that sank the Icelandic economy.

But the UK was eventually forced to freeze Kaupthing's assets in the days before its collapse amid fears that money could be transferred back to Iceland.

The FSA, which was in charge of supervising the bank's UK subsidiary Kaupthing, Singer & Friedlander, has refused to reveal whether it is investigating the collapsed institution.

It says it was "impotent" to prevent Kaupthing's takeover of the blue-blooded City investment bank Singer & Friedlander in 2005, despite warnings about the suitability of the new owners.

Earlier this month, The Sunday Telegraph revealed that the Serious Fraud Office had launched a formal investigation into Kaupthing's activities in London.

Tony Shearer, a former chief executive of Singer & Friedlander before it was taken over by Kaupthing, has written to FSA chairman Lord Turner to ask for a public inquiry.

"For the sake of everybody who lost money, we need to know exactly what happened between the takeover and its collapse," he told The Daily Telegraph. "The FSA is partly culpable because this all happened on its watch."

It is thought to be the only financial collapse in which British citizens have lost money.

More than 4,000 UK savers with Kaupthing in the Isle of Man are still waiting alongside commercial creditors to receive full compensation over £50,000 in a process that could take eight years.

Kaupthing collapsed last October, along with two other Icelandic banks, Glitnir and Landsbanki, leaving 300,000 British savers unable to access their money and institutions nursing billions in losses.

The crash was linked to the demise of a number of High Street retail brands, the merger of building societies, such as Yorkshire and Chelsea, and rises in council tax as a result of £1bn of losses at local authorities. Following the crisis, the Treasury had to pay out £7.5bn to compensate UK savers, although £2.3bn of this will be repaid by Iceland over the next 15 years.

The Serious Fraud Office is also looking at transfers made by the bank prior to its collapse.

One source said the aim of was to conduct a full inquiry on behalf of the hundreds of British charities, councils and offshore savers still waiting to be fully compensated a year after the crisis.