FSA Refuses Parliamentarians Request to Investigate Icelandic Banking Advice

by Karl Hindle – London UK

An All-Party Committee investigating the advice local authorities received from treasury fund advisers has had its request to the Financial Services Authority (FSA) rebuffed.

The Committee which is composed of Members of Parliament (MP's) from a cross section of parties, wanted an investigation into the advice provided to Local Authorities which resulted in £1 billion (USD $1.6 billion) of taxpayers money being deposited with Icelandic banks which subsequently collapsed.

The Icelandic banking affair resulted in depositor losses which the British government has managed to claim back in a one-sided deal with Iceland. This has done a great deal to sour relations between the two countries, not to mention cause significant economic hardship to Iceland which is a country whose size is out of all proportion to the UK's.

At home, the announcement of recovering the money by Prime Minister Brown was viewed with mixed feelings – no-one likes a bully.

The FSA declined to investigate because it claims not to have a remit to regulate bank deposits and as such, an investigation by the FSA would not be justified. This is not something which has prevented the FSA in the past, whilst the regulator has not been averse to assuming responsibility elsewhere, that is of course, where an opportunity to further expand its own sphere of influence exists.

Though the Parliamentary Committee is formed of a cross-section of MP's it is led by Phyllis Starkey, a Labour veteran, who has worked hard to get the City regulator on board in launching an investigation. While the FSA may be technically correct in that it may not have the remit, it could launch an investigation based upon the request by the Parliamentary Committee, though what power it had to actually do anything other than investigate and report is unclear.

Upsetting a Labour controlled committee is out of character for the FSA, which may demonstrate a changing attitude as to who will be occupying the offices of its political masters in a few short months. The FSA did not simply refuse to investigate the advice, but also the issue of conflicts of interest by treasury advisers who formed part of larger firms which benefited financially from the implementation of advice recommendations.  

On the other hand, by refusing to investigate because it has no remit, the FSA has made a clear point to the Parliamentarians that if they want this form of banking activity regulated, they'll have to give them the power to do so. Coming so close to the commencement of FSA regulation of banking relationships with personal customers, including the provision of advice and explanations at the point of sale for deposit accounts, the refusal to investigate smacks of playing a poker hand with an influential group of politicians, some of whom will certainly be in power next year no matter what their political persuasion. If Labour remain in power next year, the FSA is in a situation where it can present a “win-win” scenario for the Committee – you want this investigated, we need you to give us the power to regulate – and if Parliamentarians want it done chances are the FSA will get the formal powers, which is mud in the eye for the Bank of England.

On the other hand, a Labour victory is far from certain, and probably unlikely, which underlines the FSA's caution.