FSA closes probe into bank failure with public rebuke
Regulator publishes final notice to ensure that other regulated firms “understand the importance” of liquidity guidelines.
The Financial Service Authority has published a final notice against Kaupthing Singer and Friedlander Limited, the UK based subsidiary of failed Icelandic banking group Kaupthing Bank Hf, for a breach of one of the FSA’s regulatory Principles.
The UK subsidiary being placed into administration on 8 October 2008. Following this, the FSA started an investigation into the conduct of KSFL and its senior management during the period immediately prior to the bank’s failure.
The regulator found that between 29 September and 2 October 2008, KSFL breached principle two 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 with the Icelandic parent group would have a detrimental effect on its own liquidity position.
The FSA said it 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 final notice, published on the FSA’s website, 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.
The regulator said FSA this notice should be a warning to other firms who must ensure understand the importance of complying with the FSA’s liquidity guidelines and that where compliance is dependent on arrangements with a parent company, these arrangements are “rigorously tested”.
Following the conclusion of the investigation, Sigurdur Einarsson, former non-executive chairman of KSFL, Hreidar Mar Sigurdsson, former non-executive director of KSFL and Armann Thorvaldsson, former CEO of KSFL, have told the FSA that they will not perform any significant influence functions for a period of five years from October 2008.
The FSA has not made any findings of regulatory breach against them and they have not made any admissions.