The European Free Trade Agreement (“EFTA”) court has dismissed an application alleging that by failing to ensure payment of the minimum amount of compensation to Icesave depositors in the UK and the Netherlands, within the time limits specified, Iceland has failed to comply with the obligations resulting from Directive 94/19 (the Directive). The court held that the Directive does not envisage that the state itself must ensure payments to depositors in a systematic crisis of the magnitude experienced in Iceland.
In 2006 Landsbanki Islands hf (“Landsbanki”) launched a branch in the UK which provided an online savings account – Icesave. In 2008 a similar online deposit branch was launched in the Netherlands. Under the Directive the deposits in the UK and the Netherlands branches were under the responsibility of Iceland’s Depositors’ and Investors’ Guarantee Fund (the “TIF”) which offered a minimum guarantee of ISK 1,700,000 per depositor. From May 2008 Landsbanki opted to take part in the Netherlands deposit-guarantee scheme (in addition to its home scheme) which guaranteed a minimum amount of EUR 40,000 per depositor which later increased to EUR 100,000 per depositor. It also joined the UK deposit guarantee scheme which guaranteed a maximum of GBP 50,000 for each retail depositor.
Following the collapse of Landsbanki in October 2008, compensation was paid under the Netherlands and the British deposit-guarantee schemes. All retail account holders in the UK received compensation from the UK government, to the full value of their deposits. The Netherlands government paid all private and wholesale account holders to a maximum of EUR 100,000 per depositor. The UK government has since attempted to recover the full amount of compensation paid to its citizens from the Icelandic Government.
The court dismissed the applicants’ plea that by failing to ensure payment of compensation to Icesave depositors holding deposits in Landsbanki in the UK and the Netherlands, within the time limits specified, the defendant had breached its obligations under the Directive. The court stated that the Directive aimed to strike a balance between the freedom of establishment and the freedom to provide services in the banking sector and the stability of the banking system and protection for savers. The Directive imposes an obligation on EEA States to ensure that one or more deposit-guarantee schemes are introduced and officially recognised within its territory and to ensure that the credit institutions comply with their obligations as members. The court stated that the Directive did not provide for an exhaustive regulation and simply required EEA States to provide for a harmonised minimum level of deposit protection, giving national authorities considerable discretion in how they organised the schemes.
The court stated that whilst EEA States had certain supervisory duties to ensure the proper functioning of the deposit-guarantee scheme it was not envisaged that they had to ensure the payment of aggregate deposits in all circumstances. The court stated that it was clear from the preamble of the Directive that the cost of financing the guarantee schemes must be borne by the credit institutions and not the EEA States. The court stated that Recital 24 specifically precluded an excessive shifting to the State of the costs arising from a major banking failure.
The court also dismissed the applicants’ plea that by covering deposits in Iceland at least to the level prescribed by the Directive, and within the time limits provided therein, and, at the same time, not providing foreign depositors with at least that same minimum guarantee, the defendant had infringed the Directive or had indirectly discriminated on the basis of nationality.
Whilst some believe that this decision raises important questions over the effectiveness of deposit guarantee schemes it is important to note that a revised version of the deposit guarantee Directive has been issued which could produce a different result. It is important to bear in mind that the EFTA court issues rulings only for Norway, Iceland and Liechtenstein and the ECJ is not bound by its judgments. It also appears that the current momentum within Europe is for greater common regulation within the banking sector which may ultimately lead to further changes to the operation of deposit protection schemes.
It is interesting to note that in this particular case, the British and Dutch Government are also likely to retrieve the majority of the compensation paid out. Iceland has stated that the Landsbanki estate has already paid out 90% of the minimum deposit guarantee that the governments were required to pay.