The FSA stated that the publication of this notice was “to ensure that other regulated firms understand the importance of complying with the FSA’s liquidity guidelines.”
It added that “where compliance is dependent on liquidity arrangements with a parent company, the ability to exercise these arrangements is rigorously tested rather than assumed."
The backdrop to this notice was the failure of the Icelandic parent company, and the UK subsidiary being placed into administration on 8 October 2008. This was followed in 2009 by the Manx High Court putting Kaupthing Singer & Friedlander Isle of Man into liquidation which in turn triggered the Crown dependency’s compensation scheme, and the KSF IoM Depositors’ Action Group sought costs from the Isle of Man Treasury.
After the UK subsidiary was placed into administration, the FSA started an investigation into the conduct of KSFL and its senior management during the period immediately prior to the bank’s failure.
In particular, the FSA considered KSFL’s liquidity management in the context of its relationship with its Icelandic parent company KBHf. The FSA did not investigate the wider issues around the solvency of KSFL’s Icelandic parent company or the group as a whole, as these entities were not regulated by the FSA.
The notice states: "Specifically, between 29 September and 2 October 2008, KSFL breached Principle 2 of the FSA’s Principles for Businesses, which requires a firm to conduct its business with due skill, care and diligence. KSFL was found to be in breach because it failed to consider promptly and properly whether liquidity stresses in KBHf in Iceland would have a detrimental effect on its own liquidity position.
The FSA further outlines how KSFL did not give proper consideration to, or properly monitor, a special financing arrangement with its parent company in Iceland, under which it could draw up to £1bn at short notice: "KSFL assumed it could rely on receiving this £1bn ‘liquidity transformation arrangement’, if needed, without testing that assumption. In addition, when it started to have concerns about this liquidity arrangement, it failed to discuss these concerns with the FSA in a timely manner.”
"While the ultimate insolvency of KSFL cannot be attributed to the failure to monitor promptly and properly the liquidity transformation arrangement, the FSA considers KSFL’s failings to be serious as they occurred at a critical period for the financial markets and at a time when the FSA was particularly concerned to ensure it was fully informed about all banks’ liquidity".
Following the conclusion of the investigation, Sigurdur Einarsson the former non-executive Chairman of KSFL, Hreidar Mar Sigurdsson former non-executive Director of KSFL and Armann Thorvaldsson the former CEO of KSFL have provided undertakings to the FSA that they will not perform any significant influence functions requiring the approval of the FSA at any UK authorised firms for a period of five years from 8 October 2008, the date KSFL was placed into administration. The FSA has not made any findings of regulatory breach against them and they have not made any admissions.
The closure of the FSA investigation into UK based KSFL is independent of any ongoing investigations surrounding the Icelandic parent company, KBHf, currently being carried out by other UK and international overseas agencies.