On 28 January, the Court of the European Free Trade Area (EFTA) dismissed the application brought by the EFTA Surveillance Authority (ESA), and held that articles 7 and 10 of the Directive 94/19/EC on deposit-guarantee schemes (the Directive) did not envisage that Iceland itself must ensure payments to depositors in the Icesave branches in the Netherlands and the United Kingdom in a systemic crisis of the magnitude experienced in Iceland.   

Following the collapse of the Icelandic banks in 2008, customers with on-line savings accounts in Icesave (a branch of Landsbanki) became unable to access their deposits.  The Icelandic Guarantee Fund for Depositors and Investors failed to make the minimum compensation payments to savers envisaged by the Directive within the prescribed time. 

Domestic deposits in Landsbanki were transferred to a new bank “New Landsbanki” established by the Icelandic Government, following a decision of the Icelandic regulator using emergency powers to achieve a restructuring of the Icelandic banks.   The UK government, controversially, relied on anti-terrorism legislation to order the freezing of assets of Landsbanki and (initially) of Landsbanki-related funds of Iceland’s central bank held in the UK.  The UK and Dutch governments compensated those of their nationals who had deposited money in the Icelandic bank, and sought repayment from Iceland.

The application

The ESA’s application to the EFTA Court alleged a failure on the part of Iceland to ensure that Icesave depositors in the Netherlands and the UK received payment of the minimum amount of compensation (€20,000) provided for in article 7(1) of the Directive on deposit-guarantee schemes (the Directive), as amended, within the time limits laid down in article 10 thereof, in breach of the obligations resulting from the Directive, and in particular under articles 3, 4, 7 and 10, and/or article 4 of the Agreement on the European Economic Area (EEA).

The Court’s interpretation of the obligations under the 1994 version of the Directive

The Court concluded that article 7 of the Directive merely imposed obligations to ensure that the adoption and maintenance of national rules which require a coverage level of at least EUR 20 000, which provided for an effective right to file an action against the guarantee scheme particularly in the case of non-payment.  This fell some way short of imposing an obligation on the State and its authorities to ensure the actual payment of compensation if a deposit guarantee scheme was unable to cope with its obligations in the event of a systemic crisis.

Likewise, the obligation under article 10 of the Directive was limited to provide for a mandatory and effective procedural framework with respect to time limits.  Again, this did not amount to an obligation to ensure compensation if a deposit-guarantee scheme proved unable to cope with its obligations under exceptional circumstances such as in a systemic crisis.

The Court ruled that the Directive deals – at least primarily – with a failure of individual banks and not with a systemic crisis.  The payment obligation lay with the deposit-guarantee fund, which was to be financed entirely by the credit institutions.  Where the fund could not meet depositors’ claims in the event of a default by a member of the scheme, it was for the remaining credit institutions to make up the difference.  In effect, the bankruptcy of a financial institution was covered by the rest of the institutions active in the market.  The Directive left largely unanswered the question of how to proceed in a case where the guarantee scheme was unable to cope with its payment obligations.

The ESA and the European Commission had also argued that, when adopting emergency measures in response to the banking crisis in October 2008, the Icelandic Government had drawn a distinction between domestic deposits - which moved to new banks and were covered in full – and deposits in foreign branches – which were not afforded the minimum guarantee laid down in the Directive, or payment of that minimum amount within the time prescribed.  This amounted to indirect discrimination against foreign depositors on the basis of nationality, contrary to the Directive and/or article 4 of the EEA.

The Court ruled that, considered in the framework of the Directive, the principle of non-discrimination merely required that there should be no difference in the treatment of depositors by the guarantee scheme itself and the way it uses its funds.  The transfer of domestic deposits – whether or not it led to unequal treatment – did not fall within the scope of the non-discrimination principle as set out in the Directive since it was not undertaken by the guarantee scheme or within the framework of the Directive.

Going forward: implications for the amended Directive

Following the crisis, the regulatory framework of the financial system has been subject to significant revision and amendment in order to enhance financial stability.  The Directive was amended in 2009 (through Directive 2009/14/EC) to amend requirements in respect of the coverage level and the pay-out delay.  The Court appeared to suggest that the 2009 amendments (which were not applicable in this case) might now impose a requirement to ensure a certain level of coverage, although it stressed that further assessment would be required to determine whether that obligation would be limited to a banking crisis of a certain size.  The  Court went on, however, to confirm that the EEA States enjoy a wide margin of discretion in making fundamental choices of economic policy in the specific event of a systemic crisis – provided that “certain circumstances are duly proven”.

This suggests that the coverage obligation under the amended Directive may be limited to individual bank failures, or banking crises of limited size, and that if a crisis is deemed systemic, economic policy choices of EEA States which might breach the spirit of the Directive may nevertheless fall within the margins of their discretion.

The Landsbanki’s estate has in fact to date paid around 50% of the total claims relating to Icesave, and further repayments will be made, although interest is apparently to be limited to a 6 month period.