Landsbanki Guernsey Collapse

Hard Lessons Worth Learning from Landsbanki Guernsey

Why compensation schemes should feature foremost in savers' minds.

Back in October 2008, 1,600 depositors with a collective sum of £117.3bn placed with Landsbanki Guernsey woke up to the news that the bank had collapsed taking with it their life-savings. As this hapless group watched other savers, namely those with the onshore element of the Icelandic bank, IceSave, receive reassurances from the UK's financial regulator that 100% of their savings would be returned to them, (which indeed it was) no such words of comfort were extended to Landsbanki Guernsey customers. Today, having endured 21 months of anxiety and uncertainty over whether any of their monies would be recovered, these savers have had 67.5p in the pound returned. As for their expectation more will follow, Peter Niven, Chief Executive of Guernsey Finance, the promotional arm of the Island's finance sector, says, "According to the liquidator, there will be further payment at the end of this year, probably after September. The long-term prognosis for an ultimate pay-out is in the range of 85p to 91p."

Unlike the Isle of Man, Guernsey did not have a depositor compensation scheme in place. It had a depositor protection scheme but this did not include the all important element of actual compensation in the event of a bank going bust. Following the collapse of Landsbanki Guernsey, the Island's Financial Supervision Commission (FSC) ushered in a compensation scheme to a maximum limit of £50,000 but, unlike the Isle of Man that upped its compensation scheme from £30,000 to £50,000 following the collapse of Kaupthing Singer & Friedlander, when Guernsey introduced its scheme it did not make it retrospective which would have covered the losses already suffered just a few weeks' earlier by savers with Landsbanki Guernsey. 

Expat savers wanting to avoid such a nightmare scenario need to know the following key facts that were learned the hard way by Landsbanki Guernsey when it comes to banks crashing in offshore territories.

First, the UK's depositor compensation scheme does not cover offshore licenced banks. Second, some expat savers are persuaded by parent bank guarantees that any such losses incurred by the offshore subsidiary will be reimbursed by the parent. However, as with both Icelandic bank crashes in 2008, it was the parent that went down first. Both island regulators maintain that the offshore subsidiaries were well-managed and well-regulated on their territories. Always take into consideration a parental guarantee is never enshrined in law. Third, there is no uniformity between the three depositor compensation schemes offered by Jersey, Guernsey and the Isle of Man. The only common factor shared is the ceiling pay-out sum of £50,000. After that, rules for paying out, limits for pay-outs, and who should be paying for such schemes differ. Find out here more details about depositor protection.

Savers with both the collapsed banks tell the same tale of finding themselves customers of these two Icelandic banks by default. With Guernsey, deposits were made with the Cheshire which was taken over by Landsbanki Guernsey as a way of that offshore subsidiary fast tracking itself into the offshore deposit market. (Over on the Isle of Man, it was the Derbyshire's customers who suddenly found their balances being managed by Kaupthing, Singer & Friedlander). Those savers who had money tied up in fixed term bonds or long term savings accounts found that they were stuck with the new owners as the same conditions remained in place and to break a bond's term meant losing out on interest payments and/or paying penalties. In short they could nothing more than like it or lump it.

Another key factor to be learned from the misfortunes of savers with these offshore Icelandic banks is the time it has taken not only to be reimbursed but also the hardship and stress caused through having your savings taken away but not knowing for a long time whether you will see a penny of it back. Savers who've suffered already, and those who continue to wait for all of their money to be returned, must be feeling very sore as they wait on the sidelines watching their European-based fellow savers benefit from the latest regulations on compensation for EU banks due to come into effect at the end of this year. These new rules insist compensation must be paid out within seven days instead of the three months allowed under some schemes in operation in the EU. What's more the bank deposit guarantee for these savers is now set at a more generous €100,000 each. All three Offshore Britain finance centres are outside the EU.

Whilst Landsbanki depositors wait on to hear which end of the scale their final pay-out will be, other expats looking for a home for their savings will find that the choice of providers has narrowed with the announcement from Northern Rock Guernsey that it is closing down its offshore branch in September. Yorkshire Guernsey recently let it be known that it is considering pulling out of the offshore market as well. Those deposit-takers with stalls set out to attract expat savers include Clydesdale Bank International, Skipton International.