A RESPONSE TO THE GFSA ASSERTION THAT THERE WAS NO PROOF
READ THE CONFIDENTIAL LETTERS THAT PASSED BETWEEN THE GFSC AND THE FSA IN JANUARY 2009, THAT HAD TO BE PRODUCED IN EVIDENCE AT THE TSC HEARING
25th August 2009
In response to the Guernsey Financial Services Commission [GFSC] Director General’s assertion that there was no proof of Landsbanki Guernsey Depositors’ Action Group’s [LGDAG] assertions of negligence on the part of the GFSC and that the Group’s claims were ‘unfounded’, LGDAG would like to clarify this matter. The facts appear to show that the GFSC was negligent and as such the Chief Minister Lyndon Trott should stand by his statement that, should there be indications of regulatory deficiency, he would re-open the Landsbanki Guernsey case.
It is a matter of record that early in 2008 the GFSC became concerned as to the continued financial stability of the Icelandic banking system and hence Landsbanki Guernsey. The GFSC therefore communicated its concerns to the FSA (the UK Regulator) requesting confirmation that Landsbanki Guernsey’s sister bank, Heritable, in the UK, had sufficient 'ring-fenced' funds to cover any liabilities it may have, i.e. that Heritable was, in fact, a stand-alone operation and not dependent on Landsbanki Islands hf (Iceland) to survive.
The Financial Services Authority (FSA) replied to the GFSC indicating that there was a two-way movement of funds, and based on this reply, the GFSC allowed Landsbanki Guernsey [LG] directors to enter into agreements and transfer LG depositors’ money to Heritable Bank, UK.
§ That by failing to carry out the normal and required levels of due diligence, the GFSC was negligent.
§ That by accepting unsubstantiated assurances from third parties, rather than relying on available documentation, the GFSC did not fulfil its duties as Regulator.
§ That the action of the GFSC, considering that it had concerns about the Icelandic banking sector - by allowing LG to transfer money to, and enter agreements with, Heritable when both Banks shared a common parent, Landsbanki Islands hf - contributed in part to the failure of LG.
There is ample evidence to validate LGDAG’s contentions:
1. The Regulatory correspondence includes:
§ Letters from GFSC to FSA initially dated 21/4/2008 and subsequently dated 11/1/2008: Stuart Bailey, GFSC Senior Analyst writes, ' ... Heritable Bank seems ring-fenced from Icelandic risk, but I would be grateful if you could confirm that this is still the case.’
§ FSA Reply dated 18 July 2008: John Brennan of the FSA wrote, ‘I can confirm that our assessment of Heritable’s exposure to Icelandic risk has not changed materially.’
§ The GFSC has stated that this exchange of correspondence was, 'a key determinant in permitting our [sic] funds to be placed with Heritable.'
§ The FSA have made it clear that they advised the GFSC of funding flows into Heritable from Landsbanki lslands hf
2. Documentation Available to GFSC for Due Diligence:
§ Landsbanki Islands hf Annual Report 2007
Fitch affirmed Landsbanki Heritable ratings. ‘. . . these ratings are based on a guarantee of all its obligations by its parent.’
§ Heritable Bank Annual Report 2007
'Liquidity was strengthened by increasing the committed line of credit from £200M to £400M from Landsbanki.'
'. . . . as of 31 December 2007 the company had a bilateral committed line of credit of £400M provided by Landsbanki . . . . and the facility is due for repayment in December 2010. £178M is outstanding against this facility as at 31 December 2007.’
§ Fitch Ratings (int’l. financial analysts) Report: Heritable Bank Ltd. 26-Sept-2007
'Heritable Bank Limited's long and short-term lDR's and Support Rating are based on a guarantee of materially all its obligations from its parent Landsbanki Islands hf of Iceland.'
'Liquidity is tight with only a small proportion of liquid assets on the balance sheet. Mitigating this, Heritable has a committed credit line of £ 200M from its parent.'
' . . . liquidity reliant on a committed line from parent'
‘To support liquidity Heritable holds a committed credit line of GBP£200M from Landsbanki, which has been extended to December 2008. This is needed as the level of liquid assets on the balance sheet is low. . .'
§ Fitch Ratings - Iceland Special Report 22-May-2008: Re: Problems in Icelandic Parent Banks’ Liquidity and Potential of Sovereign Support
‘Given the size of the Icelandic banks relative to GDP (900%) and the lack of foreign parents with deep pockets, it is hard to imagine that the authorities could distance themselves from a systemic crisis, particularly because of banks’ huge net external liabilities (200% of GDP).’
LGDAG therefore concludes that:
§ The GFSC did not complete a suitable level of due diligence prior to allowing LG to enter into substantial agreements with its Sister company, Heritable Bank.
§ There was ample evidence available to the GFSC which showed the dependence of Heritable on its Icelandic parent.
§ This evidence directly related to the queries that the GFSC raised with the FSA.
§ The GFSC preferred to ignore this evidence and rely on an unsubstantiated reply from the FSA which, in fact, did not fully address the GFSC’s concerns.
§ That after raising the issue of the financial independence of Heritable Bank, the GFSC did not follow up its concerns to a defendable end point.
LGDAG has raised these issues on several occasions with Mr Nik Van Leuven, Director General of the GFSC, but rather than clarify the GFSC involvement in the failure of Landsbanki Guernsey, the GFSC has preferred to remain hidden behind banking legislation.
LGDAG therefore calls for complete disclosure from the GFSC as to its role in the failure of Landsbanki Guernsey and for the Chief Minister to re-open the Landsbanki Guernsey case due to clear regulatory errors.