The Icesave Dispute: Iceland‘s Obligation under European Law

Introduction

“Icesave” was a high interest savings account belonging to a branch of Landsbanki, Iceland’s oldest and second largest commercial bank. It began its operation in the United Kingdom in October 2006 and in the Netherlands in May 2008. As a bank branch within the European Economic Area (hereinafter EEA), Landsbanki was regulated by Fjármálaeftirlitið, the financial services regulator in Iceland (hereinafter “FME”). Had however, the bank been a subsidiary it would have been governed by the UK’s Financial Services Authority and the Netherland’s Authority for the Financial Markets.¹ The Icesave accounts were popular both in the UK and the Netherlands. In the UK, retail depositors had an aggregate exposure of 4.5bn pounds² and the figure was 1.7bn Euros in the Netherlands.³ This success, although welcomed initially, was regretted by Icelanders when nearly the entire banking sector, including Landsbanki, crashed in 2008. Shortly thereafter, Iceland’s three major banks were nationalised.⁴

The financial collapse resulted in the so-called Icesave dispute between Iceland on the one hand and the Netherlands and the UK on the other hand. There are many legal uncertainties surrounding the dispute but this article shall focus on Iceland’s legal obligation under European law, particularly the European Community Directive No. 94/19 on Deposit-Guarantee Schemes (hereinafter “94/19 Directive”) for the funds lost in Landsbanki’s foreign branches. The extent of the obligation has been strongly debated and disputed in Iceland, the Netherlands and the UK by scholars and the public alike.⁵ It shall be argued that the 94/19 Directive was not expected to manage a major financial collapse and its intention was for States to set up a scheme that could cover a scenario envisaged by the Directive. Iceland’s legal liability is thus questionable and the underlying uncertainties would best be solved by an independent adjudicator. This is however easier said than done since no court has compulsory jurisdiction over the dispute and the UK and the Netherlands have refused to grant any court jurisdiction. The Icesave negotiations have been ongoing since 2008 but are now drawing gradually to a close in the form of an agreement. It would therefore at the current stage not be feasible for the Icelandic State to have the dispute resolved before a court, bearing in mind the time and cost as well as the risk of an outcome less favourable than the negotiated agreement.⁶ 

The 2000/12 Directive

The most important regulation with respect to banking within the EU (and thereby EEA) is Directive 2000/12 relating to the business of credit institutions. When the credit institution notifies the home Member State, in this case Iceland, of its intention to establish a branch in another State it must provide the Member State with certain information required by the Directive.⁷ The requirements cannot be said to be excessive: the name of those establishing the branch and the institution’s address in the host Member State. Additionally the credit institution sets out the structural organisation of the branch and a programme of operations listing “the types of business envisaged”.⁸ Article 20, paragraph 3 is of particular importance with respect to the responsibility of the Icelandic State:

Unless the competent authorities of the home Member State have reason to doubt the adequacy of the administrative structure or the financial situation of the credit institution, taking into account the activities envisaged, they shall within three months of receipt of the information... communicate that information to the competent authorities of the host Member State and shall inform the institution concerned accordingly.⁹

In 2006 the Central Bank of Iceland had expressed its concerns on the reduced worldwide access to liquid funds and emphasised the importance of the banks possessing sufficient liquid assets.¹⁰ The banks had furthermore been criticised by foreign analysts for the lack of access to liquid funds.¹¹ The Icesave accounts were the response of Landsbanki to this criticism since they guaranteed liquidity access.¹² Landsbanki began its operation in the UK in October 2006¹³ and in the Netherlands in May 2008.¹⁴ It is clear that under the 2000/12 Directive the Icelandic State could, and should have, questioned the financial situation of Landsbanki when the State was made aware of its intention to establish branches. This is especially evident with respect to the Netherlands branch which was established only a few months before Iceland’s financial collapse. Instead the FME and the Central Bank labelled the financial system stable owing to the strong position of the banks due to their access to liquid funds and strong liquid assets.¹⁵ This approval helped assure investors and critics of the stability of the financial system. The warning signals were ignored and Landsbanki was enabled to embark on its foreign “exploration”.

Both the British and the Dutch authorities were able “if necessary” to affect the operation of the Landsbanki branches by indicating conditions under which Landsbanki activities had to be carried out. This had to be undertaken within two months of receiving the information on Landsbanki from the Icelandic authorities.¹⁶ Neither State made use of the provision within the two-month time frame so Landsbanki was able to commence its activities.¹⁷ This was so even though according to the 2000/12 Directive the British and Dutch authorities had information regarding the amount of funds and solvency ratio of Landsbanki before it began operating.¹⁸ Ultimately, Landsbanki was questioned neither by the host nor the home State.

It must be borne in mind that the host Member States have less power than the home State in affecting the credit institution after its activities have commenced. The host State can require information from the institution but it seems that it is only if the institution is not complying with the legal provisions adopted in the host Member State that the provision has any teeth.¹⁹ The host State does however have the authorisation to: 

...take appropriate measures to prevent or punish irregularities committed within their territories which are contrary to the legal rules they have adopted in the interest of the general good.²⁰ 

The authorities are thereby entitled to stop the credit institution from initiating any further transactions within the territory of the host State. Failing to affect the operation of Landsbanki was a fault on the part of the two host States in terms of the Icesave dispute.

The 94/19 Directive

As we have seen the 2000/12 Directive enabled both the host and the home Member State to intervene in the establishment and operation of Landsbanki. Neither State made use of this provision. The more specifically relevant and controversial legal instrument in the Icesave dispute is EC Directive No. 94/19 on Deposit-Guarantee Schemes. The Directive is of immense importance to the dispute since the question of Iceland’s legal obligation rests on its interpretation. The role of the Directive is to require Member States to set up deposit guarantee funds to serve as protection for depositors. The Directive is intended to blur the barriers between different Member States and make sure that depositors are protected to a certain minimum within the EU and the EEA respectively.²¹

Directives and Regulations are two of the European Union’s legal instruments.²² It is very important, in order to fully appreciate the nature of the 94/19 Directive, to distinguish between the two. Regulations are generally directly effective or “directly applicable”.²³ This has been firmly established by the ECJ.²⁴ Regulations are usually not dependent on any further action by the Member States and the ECJ has considered it improper for States to incorporate Regulations into national law except when necessary.²⁵ Directives on the other hand are only binding “as to the result to be achieved” but the “choice of form and methods” is left to the national authorities to decide.²⁶ In other words, the final result has to be the same but the Member States have discretion as to how the object is to be reached.

With respect to the 94/19 Directive the European Commission has defined its key objective as twofold: “to protect a part of depositors’ wealth and to ensure financial stability by preventing bank runs.”²⁷ The Directive was implemented into Icelandic law as Act No. 98/1999. The discretion States have in how they implement Directives can lead to uncertainties as to whether the object of the Directive has been adequately met. The core of the Icesave dispute revolves around whether it was sufficient that the Icelandic Government set up and implemented a deposit guarantee scheme or whether the scheme had to effectively guarantee the minimum compensation amount under the Directive.

Directive 94/19 must be read in conjunction with Directive 97/9 on Investor-Compensation Schemes. Article 4(1) of the 97/9 Directive states that “Member States shall ensure that schemes provide for cover of not less than ECU 20 000 for each investor in respect of the claims”.²⁸ According to the Schjödt law firm in Brussels there clearly is a resulting obligation since Member States need to set up a system that provides cover.²⁹ Directive 94/19 is not as straightforward with respect to the obligation of Member States. Article 7(1) states that “[D]eposit-guarantee schemes shall stipulate that the aggregate deposits of each depositor must be covered up to ECU 20.000 in the event of deposits’ being unavailable.”³⁰ It could therefore be argued that the obligation is not put on the Member States but the Depositguarantee schemes. This is supported by the fact that Article 7(1) was amended by Directive 2009/14. Since the amendment the Article now states that “Member States shall ensure that the coverage for the aggregate deposits of each depositor shall be at least EUR 50 000 in the event of deposits being unavailable.”³¹ By amending the 94/19 Directive the EU has firmly established that the obligation is on the Member States which suggests that the obligation was not clear enough before the amendment. It is nevertheless important to note that Directive 2009/14 has no impact on the Icesave dispute since it did not come into force until 2009.

The preamble to the 94/19 Directive maintains that its purpose is to increase the stability of the banking system and savers’ protection.³² However, the preamble specifically mentions that the Directive must not jeopardise the stability of the banking sector.³³ It may furthermore not result in Member States being made liable in respect of depositors if they have ensured that a scheme that guarantees deposits and ensures compensation has been introduced and officially recognised.³⁴ Such a scheme was operating in Iceland, the Depositors’ and Investors’ Guarantee Fund (hereinafter DIGF) but it could not ensure compensation. The impossibility of ensuring compensation after a collapse such as occurred in Iceland strongly indicates that the 94/19 Directive did not envisage a financial collapse of this kind.

There are two possible ways to fund deposit and guarantee schemes. The schemes are either pre-funded, where a certain percentage is permanently safeguarded in the fund, or they are post-funded where the fund does not safeguard any funds but in the event of a banking failure it relies on being able to borrow money for the losses suffered. The deposit ratio is the financial percentage of all deposits that have to be safeguarded in the Depositors and Investors’ Guarantee Funds. Iceland’s deposit scheme was pre-funded and the deposit ratio was 1% of all deposits.³⁵ However, Iceland’s DIGF did not fulfil the 1% deposit ratio in 2008 when the banking system collapsed.³⁶ The post-funded schemes, such as the UK scheme, have been criticised for the advantage they give to the financial institutions operating under the scheme. Since no portion of the funds needs to be safeguarded the banks are able to manage 100% of all the deposits. In comparison Icelandic banks could manage 99% of the deposits due to the safeguarded 1%. The difference may seem small but the profit from the investing interests is immense considering the size of an entire national banking system.

The potential refund-risk is also greater for post-funded systems in the event of a financial collapse. The Schjödt firm has claimed that in the case of the entire UK banking system collapsing, the UK fund would not be able to provide the minimum coverage since no bank would be in a position to loan money to the fund.³⁷ This risk is evident in all post-funded systems, which in turn strengthens the argument that the Directive was not meant to deal with a major financial collapse.

The burden of ensuring the minimum compensation at all times is also unduly on the pre-funded systems. In Iceland the deposit ratio would have had to be close to 50% of all deposits to guarantee the minimum amount. The legal requirement was however merely 1% of all deposits.³⁸ The excessive ratio would have made it impossible for the banks to function on an international level.³⁹ In retrospect, that would have been the best solution. It would inevitably mean that only the larger and wealthier countries would be able to set up branches in other Member States. Banks of smaller States, such as Iceland, that do not have the financial backup necessary, would be prevented from establishing branches in other Member States. Depositors’ wealth would thus be secured and the 94/19 Directive’s objective properly met.

It is evident that Member States have certain latitude in how they organise the schemes. The travaux preparatoires of the 94/19 Directive mention that the rules on the operation of the DIGF were not harmonised after assurance by the Member States that the financing arrangements were able to pay all the covered deposits.⁴⁰ This supports the view that the Directive did not intend to ensure unconditional compensation, including in cases of economic collapse. It may further be deduced that the scenario envisaged by the Directive was to provide cover for problems in the banking sector that fall short of a complete banking collapse. The Schjödt firm has emphasised that the Directive’s objective is not to protect investors against a meltdown of the entire financial system. The Icelandic Government has also claimed that the 94/19 Directive neither foresaw nor was meant to tackle an entire banking system collapse.⁴¹ The Directive’s preamble seems to support this view but it states that the scheme provides for solidarity “in a given financial market in the event of the failure of any of them”.⁴² This suggests that the scheme was not intended to manage a failure of an entire financial market. According to this reading it was sufficient that the authorities took reasonable measures ensuring a scheme that functioned in a scenario envisaged by the Directive. The crash of an entire financial system cannot be seen as such.

The firm also sets forth an argument force majeure although it is referred to as an insurance argument. Similar to insurance policies, in the event of force majeure, possessions are generally not covered.⁴³ However, for an event to constitute force majeure it must have been unforeseen, beyond the State’s control and it must have been nearly impossible in the circumstances for the State to perform the obligation, according to the ILC Articles.⁴⁴ Force majeure does not apply if the conduct of the State invoking it caused the situation, even if only partially.⁴⁵ The Icelandic Government has advocated the insurance argument and claimed that due to the force majeure situation in Iceland, the State is not liable for payment to depositors if the amount is higher than the DIGF can cover.⁴⁶ Arguing force majeure in these circumstances is controversial to say the least. It is one thing to directly respond to a force majeure situation in the form of the “Emergency Act”,⁴⁷ but claiming that force majeure situation continues indefinitely is very unlikely to be successful.

In 2000, the French Central Bank published a study on deposit guarantee schemes where reference was made to the 94/19 Directive. According to the study “deposit guarantee schemes are neither meant nor able to deal with systemic banking crises”.⁴⁸ Iceland’s obligation depends on what scenario was envisaged by the Directive and whether the scheme was meant to deal with a major banking crisis. As we have seen, much suggests that the Directive was intended to manage problems in the banking sector that fell short of a complete collapse.

Whether the DIGF could have covered even a minor collapse is a fundamental question in addressing what, if any, Iceland’s obligation is under European law for the funds lost in the Landsbanki branches. When the banking sector collapsed in 2008 the DIGF had not met the legal requirement of 1% deposit ratio.⁴⁹ According to the 2008 balance sheet, the assets of DIGF were approximately 16.5bn Icelandic krónur at the end of 2008.⁵⁰ Even though only 20.887 Euros per deposit had to be covered the asset figure is small when compared with the aggregate exposure of 4.5bn pounds in the UK⁵¹ and 1.7bn Euros in the Netherlands.⁵² The extent of the financial obligation of DIGF due to the banking collapse remains uncertain and will likely not be clarified until the assets of the three banks have been sold.⁵³ It is thus not clear what scenario the DIGF could have covered. In order to ascertain Iceland’s obligation it must be clarified what scenario was envisaged by the Directive. The uncertainty would best be solved by an independ- ent adjudicator.

State liability can only be triggered if State obligations are not fulfilled. According to the Schjödt law firm, the obligation under the Directive is to establish a compensation scheme recognised by the national Financial Service Authority, in Iceland’s case the FME. The firm maintains that State liability does not extend to ensuring that the scheme adheres to the Directive’s objectives. The obligation of guaranteeing the minimum amount 20.887 Euros is put on the scheme not on the Member State.⁵⁴ The firm further argues that even if the arrangements are inadequate and the schemes fail to honour their obligations, the Member States cannot be held responsible for that failure. The States have the sole obligation of setting up the scheme.⁵⁵ This interpretation renders the Directive rather meaningless. Why set up a scheme that need not be effective? If financial stability and protection of depositors’ funds truly are the key objectives of the Directive, a dysfunctional scheme unable to provide cover in a normal scenario is in direct contrast to its aim.

In October 2008, Lovells law firm in London was requested by the Icelandic Government to submit a legal opinion on the uncertainties of the 94/19 Directive. It claimed that the State was obliged to ensure that a functioning deposit guarantee scheme was in place but the State however was not expected to provide any sort of guarantee. They emphasised that nothing in the Directive obliges States to back up the fund if it ends up being inadequate.⁵⁶ Article 3, paragraph 1 of the Directive allows Member States to exempt credit institutions from the obligation to belong to a deposit guarantee scheme if the institution already belonged to a system that existed at the date when the Directive was adopted. It is nevertheless prohibited for the system to “consist of a guarantee to a credit institution by a Member State itself or by any of its local or regional authorities”.⁵⁷ Interestingly, the travaux preparatoires of the 94/19 Directive mention “emergency situations of exceptional gravity”. In those instances the home State is not prohibited from rendering necessary assistance which must however not contravene Treaty rules on state aid.⁵⁸ The State clearly has a degree of discretion in determining whether to render assistance.

Stefán Már Stefánsson, law professor at the Faculty of Law at the University of Iceland, and Lárus Blöndal, barrister, have written several articles regarding the Directive. They have maintained that the Icelandic State is not responsible for the deposits in the UK and Netherlands but the responsibility lies with the deposit fund itself, the DIGF.⁵⁹ They have highlighted that if the Directive had intended to make Member States responsibility for ensuring that a certain minimum deposit would always be guaranteed such a clause would have needed to be included in the Directive.⁶⁰ On the contrary, the 24th recital of the Directive’s preamble states:

[T]his Directive may not result in the Member States’ or their competent authorities’ being made liable in respect of depositors if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized.⁶¹

Stefánsson and Blöndal further maintain that the Directive, and thereby the EU, is the one at fault, not the Icelandic authorities. The Icelandic authorities fulfilled their obligation by setting up the scheme. The Directive, however, created legitimate expectations for deposit owners by ensuring a uniform minimum guarantee irrespective of the bank’s location within the Community.⁶² Stefánsson and Blöndal are referring to the well established doctrine of legitimate expectations which entails that Community law cannot violate the legitimate expectations of those involved.⁶³

The deposit owners could legitimately have expected their funds to be guaranteed and those expectations cannot be disregarded. This is true irrespective of the high interests of the Icesave accounts and the notion that the depositors might therefore be responsible for taking the risk.⁶⁴ The EU single market goals make all such speculations irrelevant. Depositors had legitimate expectations of uniform minimum guarantee with respect to all banks within the Community. As we have seen, the Directive was not intended to cover a collapse of an entire financial system. In terms of Icesave, an instance of major financial collapse, the legitimate expectations cannot be transferred to the Icelandic State. Iceland can only be made liable for legitimate expectations of deposit guarantee in scenarios envisaged by the Directive.

The Issue of Jurisdiction

Although not a member of the European Union, Iceland has nevertheless been an active player in European integration. Iceland signed the European Free Trade Association (hereinafter “EFTA”) agreement on 22 July 1972, thereby ensuring a free trade agreement with the European Community.⁶⁵ The agreement is still in place although it currently includes only four countries: Iceland, Norway, Switzerland and Liechtenstein.⁶⁶ In 1991, negotiations were concluded with the EFTA countries on the establishment of a European Economic Area (EEA) but the European Court of Justice (ECJ) declared the agreement incompatible with the EC treaty. The main reason was the creation of an independent EEA court with jurisdiction to interpret EEA law.⁶⁷ This was resolved by an amendment to the agreement creating an EFTA Court of Justice.⁶⁸ The EFTA Court has jurisdiction with regard to EFTA States which are parties to the EEA Agreement and it corresponds to the jurisdiction of the ECJ over EU States.⁶⁹ When disputes arise between an EU State and an EEA State neither the ECJ nor the EFTA court have direct competence.

The Icesave dispute has highlighted a flaw in the European structure since no court has compulsory jurisdiction over the dispute. The ECJ has exclusive competence to interpret EU law. It furthermore has compulsory jurisdiction to resolve disputes between Member States within the scope of the Treaties and over clarification of points of law.⁷⁰ However, since Iceland is not a member of the EU all three States must agree on its jurisdiction for the matter to be taken before the ECJ.⁷¹

The parties must also agree for the dispute to be dealt with by the International Court of Justice (hereinafter ICJ). If Iceland had made a declaration granting the ICJ compulsory jurisdiction, as both the Netherlands and the UK have done, consent of all three parties would not be necessary.⁷² If all three parties had made the declaration the States would be obliged to settle the issue before the court, dependent on such request by any of the parties. In the current situation, however, explicit agreement by all parties on ICJ jurisdiction is necessary but both the UK and the Netherlands have refused to grant the court jurisdiction.⁷³

From what we have seen no court has compulsory jurisdiction over the dispute. Even arbitration needs to be agreed upon by all parties.⁷⁴ Iceland has therefore been left with the sole option of requesting the other parties to consent to the jurisdiction of any of the aforementioned courts. This has inevitably strengthened the position of the Netherlands and the UK. This position makes one question whether the EU foresaw debates occurring between an EEA and an EU State. The fact that no court has compulsory jurisdiction over the dispute suggests again that the EU did not foresee disputes arising between an EU State and an EEA State.

Conclusion

It is clear that the Icelandic State set up the DIGF which was recognised by the FME. Maintaining, such as the Schjödt law firm has done, that this is the sole obligation under the Directive cannot, however, be accepted. If that were the case, the Directive would not be of much use since States would not need to set up an effective scheme. It must therefore be concluded that the obligation of the State under the Directive, as it was envisaged, was to set up a scheme that functions effectively in managing problems in the banking sector that fall short of an entire banking system collapsing. Once such a scheme has been set up Member States can avoid liability. This is supported by the travaux preparatoires which do not prohibit Member States from assisting the DIGF in cases of severe economic situations.⁷⁵ The Member States are in other words not required to assist the DIGF in any way.

Many arguments support the view that the Directive did not envisage and was in fact not meant to deal with a major financial collapse. First of all, if all the major banks in a State collapse, there are no funds, apart from the DIGF of those States, left to reimburse depositors. The post-funded schemes would in those situations not have any secured funds and the deposit ratio of the pre-funded schemes is generally too low to provide cover in major financial collapse. Secondly, the travaux preparatoires of the 94/19 Directive support the view that they did not envisage a major financial collapse. They refrain from harmonising scheme-management rules due to the assurance that the Member States were able to reimburse all the depositors, including those at branches in other Member States.⁷⁶ Thirdly, the Directive’s preamble maintains that the scheme shall provide for solidarity in the event of “any of” them failing. It does not mention “any or all” of them failing, as is common in legal documents.⁷⁷ Finally, the 2000 study of the French Central Bank reached a similar conclusion: deposit and guarantee schemes are neither capable nor intended to handle major banking crises.⁷⁸ It can thus be concluded that the Directive neither foresaw nor was it meant to manage a major financial collapse.

At the same time it is clear that the Directive gave deposit owners legitimate expectations to expect their funds to be covered up to 20.887 Euros. In normal circumstances the DIGF is responsible for meeting these expectations by guaranteeing the deposits. The legitimate expectations also apply in situations of major financial collapse, which the Directive neither envisaged nor was meant to manage. This inconsistency is a major flaw in the Directive and represents the main culpability of the EU in terms of the Icesave dispute. The DIGF cannot be made liable for guaranteeing the minimum compensation amount in major financial crises.

The Icesave dispute has also highlighted a flaw in European legal frameworks generally. The fact that no court has compulsory jurisdiction over the dispute suggests, as has been said, that the EU did not foresee disputes arising between an EU State and an EEA State. Despite the legal uncertainties regarding Iceland’s obligation, the State has been forced to negotiate since the UK and the Netherlands did not agree to bring the matter before an appropriate court. When bearing in mind that EEA States incorporate a significant amount of EU legislation, it seems reasonable that EEA States get the same mandatory access to the ECJ as EU States. This would in turn benefit EU States, since EEA States could not refuse to grant the ECJ jurisdiction.

Iceland’s obligation under the Directive was to set up a scheme that could provide for cover in a scenario envisaged by the Directive. It is uncertain what scenario the DIGF could have covered although its assets suggest that it was not a great deal. In order to ascertain Iceland’s obligation it must be clarified what scenario was envisaged by the Directive. This would best be done by an independent adjudicator. The Icelandic State should have used its power under the 2000/12 Directive and properly questioned the financial state of affairs of Landsbanki and prevented it from establishing foreign branches. The Icelandic State should at least have demanded that they be transformed into subsidiaries, thereby relieving Iceland of its supervisory duties. The fault of the UK and the Netherlands cannot be said to be as great. Either State could have questioned the financial situation of Landsbanki under the 2000/12 Directive before it began its operation and both States failed to do so. After the branch had been set up the two States had less power than Iceland to affect its operation but they nevertheless did not use the measures available.

Much suggests that the 94/19 Directive did not expect the scheme to deal with a major financial collapse and furthermore that the fundamental obligation of Member States was merely to set up a Fund that would provide for cover in a scenario envisaged by the Directive. Iceland’s obligation for the funds lost in Landsbanki under European law cannot be precisely ascertained in the abstract. The Icesave negotiations are ongoing and although the underlying uncertainties would best have been solved by an independent adjudicator, preferably the ECJ, it would not be reasonable at the current stage to have the matter resolved before a court, especially considering the time and cost of the court process coupled with the potentially higher refund risk of the Icelandic State.⁷⁹ In that regard, it is important that the three States not overlook the cost of ongoing debates coupled with the advantage of congenial communication in European society. The Icesave dispute has however made it clear that if the EEA and the EU are to continue their cooperation the compulsory jurisdiction of the ECJ must be reconsidered to include EEA States. 

Endnotes

1. The difference between a branch and a subsidiary is very important since under the former the bank falls under the jurisdiction and thereby the legal responsibility of the home country whilst the latter shifts the jurisdiction and the responsibility to the country where the subsidiary is located. Jännari, at 11. This is why Kaupþing, a much larger bank than Landsbanki which operated a deposit account similar to Icesave in the United Kingdom, has hardly been discussed in Iceland. As a subsidiary, Kaupþing fell under the responsibility of the United Kingdom. The UK Financial Services Authority has however been severely criticised domestically for their lack of regulatory supervision of the bank. Mason, ‘FSA Let Failing Bank Move on Highstreet’. 

2. HM Treasury, ‘Review of the Landsbanki Freezing Order 2008’ 3.

3. Daníelsson, ’The Saga of Icesave’ 1.

4. With respect to Landsbanki and Kaupthing this was possible due to Act No. 125/2008 Art. 5 which added a new Article, Art. 100 a, to Act on Financial Undertakings No. 161/2000. For further clarification on the course of events see: Report of the Special Investigation Commission, Chapter 20.

5. Some of those views will be highlighted in this article.

6. The matter will continue to be debated and some will feel that the court route should be taken. The Central Bank of Iceland has however recommended that the negotiations be concluded. Seðlabanki Íslands,’Umsögn um frumvarp til laga um Icesave’. 

7. Directive 2000/12 Art. 20, paragraph 1.

8. Ibid Art. 20, paragraph 2.

9. Ibid Art. 20, paragraph 3. 

10. Seðlabanki Íslands, Fjármálastöðugleiki 2 (2006) 38.

11. Fjármálaeftirlitið, Annual Report 2000 21.

12. Landsbanki, 2007 Annual Report 8.

13. Ibid at 25.
14. Landsbanki, Confronting Challenge 25. 

15. Seðlabanki Íslands, Fjármálastöðugleiki 3 7. See also Fjármálaeftirlitið, Annual Report 2007 21. The FME and the Central Bank have since been criticised for their lack of supervision. For further clarification the reader is encouraged to read Appendix 8 to the Report of the Special Investigation Commission.

16. Directive 2000/12 Art. 20, paragraph 4.

17. Ibid Art. 20, paragraph 5.

18. Ibid Art. 20, paragraph 3.

19. Ibid Art. 22, paragraph 1. 

20. Ibid Art. 22, paragraph 5.

21. Directive 94/19 Preamble, Sec. 1.

22.  Treaties are the primary legal instrument and the other three , in addition Regulations and Directives are: Decisions, Recommendations and Opinions. Treaty on the Functioning of the European Union (hereinafter Lisbon Treaty) Art. 288 (ex Art. 249 TEC).

23. Ibid 249.

24. Franz Grad v. Finanzamt Traunstein. 

25. See for example Orsolina Leonesio v. Ministerio dell’agricoltura. See also Commission v. Italy [1973].

26. Lisbon Treaty, Art. 288 (ex Art. 249 TEC).

27. European Commission, Review of Directive 94/14/EC on Deposit-Guarantee Schemes 3.

28. Directive 97/9 Art. 4, paragraph 1. The ECU was an artificial internal accounting currency used in the EU until the introduction of the Euro in 1999. Gandolfo, International Finance and Open-Economy Macroeconomics 365-366. 20.000 ECU have been calculated as 20.887 Euros in the Icesave Agreements..

29. Schjödt law firm, ‘Note on Directive 94/19 and 97/9’ 1. The legal opinion was requested by Iceland’s Ministry for Foreign Affairs and its object was mainly to clarify various aspects of Iceland’s obligation under the 94/19 Directive. The firm specialises in providing business law services to national and international clients.. 

30. Directive 94/19 Art. 7, paragraph 1.

31. Directive 2009/14 Art. 1, paragraph 3.

32. Directive 94/19 Preamble, recital 1.

33. Ibid Preamble, recital 23.

34. Ibid Preamble, recital 24. 

35. Act No. 98/1999 Article 6, paragraph 1. See also: Schjödt law firm, ‘Note on the Discrimination Issue’ 2 and Draft of Iceland’s Report Following the ECOFIN Ministerial Meeting in November 2008 8.

36. Tryggingasjóður innistæðueigenda og fjárfesta, Ársreikningur 2008 3.

37. Schjödt law firm, ‘Note on the Directive 94/19 on Depositor Compensation Schemes and Directive 97/9 on Investor Compensation Schemes’ 2.

38. Act No. 98/1999 Art. 6, paragraph 1.

39. Blöndal, and Stefánsson, ‘Í hvaða liði eru stjórnvöld?’. 

40. Commission of the European Communities, Proposal for a Council Directive on Deposit-Guarantee Schemes 8.

41. Prime Minister’s Office, ‘Athugasemd vegna fjölmiðlaumfjöllunar’.

42. Directive 94/19 Preamble, recital 25.The wording of recital 25 seems to have been carefully thought through since in the travaux preparatoires of the 94/19 Directive the recital originally provided for solidarity “in the event of one of them failing”. The Directive does however not mention the failure of any or all of them as is common in legal documents. See for example: The North Atlantic Treaty, Art. 2.

43. Schjödt law firm, ‘Note on Directive 94/19 and Directive 97/9’ 3. 

44. International Law Commission, Art. 23, paragraph 1. The European Court of Justice shares similar understanding, see Commission v Italy [1970].

45. Ibid Art. 23, paragraph 2.

46. Bill Amending Act No. 96/2009 4.

47. Act No. 125/2008 on the Authority for Treasury Disbursements due to Unusual Financial Market Circumstances etc. which was enacted on the 6th of October 2008, almost immediately came to be known as the “Emergency Act”. The Act has been hotly debated amongst lawyers due to its radical nature whereby several ingrained legal principles were altered and the Icelandic banking and business environment was changed drastically overnight. Prime Minister’s Office, ‘Act on Depositors’ and Investors’ Guarantee Fund: The New Legislation in Short’ See also Guðmundsson et al, ‘The Financial Crisis in Iceland and the Fault Lines in Cross-Border banking 11.

48. Banque de France, The Functions and Organisation of Deposit Guarantee Schemes 179-180. 

49. Tryggingasjóður innistæðueigenda og fjárfesta, Ársreikningur 2008 3.

50. Ibid at 6.

51. HM Treasury, ‘Review of the Landsbanki Freezing Order 2008’ 3.

52. Daníelsson, ’The Saga of Icesave’ 1.

53. Tryggingasjóður innistæðueigenda og fjárfesta, at 8.

54. Schjödt law firm, ‘Note on the Directive 94/19 on Depositor Compensation Schemes and Directive 97/9 on Investor Compensation Schemes’ 5.

55. Schjödt law firm, ‘Note on Directive 94/19 and Directive 97/9’ 3. 

56. Ainsworth, at 1.
57. Directive 94/19 Art. 3, paragraph 1. See also ibid.

58. Commission of the European Communities, Proposal for a Council Directive on Deposit-Guarantee Schemes 8.

59. Blöndal, and Stefánsson, ‘Ábyrgð ríkisins á innlánum’. 

60. Blöndal, and Stefánsson, ‘Í hvaða liði eru stjórnvöld?’.
61. Directive 94/19 Preamble recital 24.
62. Blöndal,and Stefánsson, ‘Er Evrópusambandið skaðabótaábyrgt?’.

63. Hartley, at 149. See furthermore Stefánsson, ‘Legitimate Expectations in EC/EEA Law’.

64. The one year fixed rate savings paid 7.01 per cent. Hill, ‘Halifax Launches Market-Leading Savings Account’ The Icelandic banks were getting a reputation for aggressiveness in the market. Bachelor, ‘Icesave Warms up Battle for Savers with 7 Per Cent-Plus Interest Offer’ 22. 

65. The agreement was particularly important for Iceland with respect to the fisheries export industry. Thorhallsson and Vignisson ‘A Controversial Step: Membership of the EEA’ 34.

66. This is due to the other former EFTA countries joining the European Union. Hartley, The Foundations of European Community Law 5-6.

67. European Court of Justice, Opinion 1/91, Draft Treaty on the Establishment of a European Economic Area.

68. For further information on the EFTA and EEA court see: Brandtner, ‘The ‘Drama’ of the EEA: Comments on Opinions 1/91 and 1/92’ 3 See also Benediktsson, Iceland and European Development 22-23. Surprisingly, Switzerland did not become a signatory to the EEA agreement since it was rejected there in a national referendum. Hartley, at 6.

69. EFTA Court, ‘Introduction to the EFTA Court’. 

70. Lisbon Treaty, Art. 263, paragraph 1 (ex Art. 230 TEC). See further Kaczorowska, European Union Law 211.

71. See further Méndez-Pinedo, at 8.

72. Statute of the International Court of Justice, Art. 36, paragraph 2. See also International Court of Justice, ‘Declarations Recognizing the Jurisdiction of the Court as Compulsory’.

73. Prime Minister’s Office, ‘Athugasemd vegna fjölmiðlaumfjöllunar’.

74. Wallace, and Martin-Ortega, International Law 332. 

75. Commission of the European Communities, Proposal for a Council Directive on Deposit-Guarantee Schemes 8. 

76. Ibid

77. See for example: The North Atlantic Treaty, Art. 2.
78. Banque de France, The Functions and Organisation of Deposit Guarantee Schemes 179-180. 

79. The Report of the Special Investigation Commission has shed light on many aspects of the Icesave dispute. The Commission was established by Act No. 142/2008 with the task of investigating and analysing the process leading to the collapse of the three main banks in Iceland. The Commission delivered its report on the 12th of April 2010. The report’s discussion of issues relating to the Icesave dispute are beyond the scope of the present article but the reader is encouraged to read the report for further clarification and further perspectives on the dispute. 

Bibliography

Legal Instruments and Case Law

Act on the Authority for Treasury Disbursements due to Unusual Financial Market Circumstances etc. No. 125/2008.

Act on Deposit Guarantees and Investor- Compensation Scheme No. 98/1999.

Act on Financial Undertakings No. 161/2002.

Act on an Investigation of the Events Leading To, and the Causes Of, the Downfall of the Icelandic Banks in 2008, and Related Events No. 142/2008. 

Bill amending Act No. 96/2009 Regarding Authorisation for the Minister of Finance, on Behalf of the State Treasury, to Issue a State Guarantee of the Loans Granted by the Government of the UK and the Netherlands to the Depositors’ and Investors’ Guarantee Fund of Iceland to Enable it to Cover Payments to the Depositors of Landsbanki hf. (Submitted to Alþingi at the 138th legislative session 2009-2010).

Commission of the European Communities, Proposal for a Council Directive on Deposit-Guarantee Schemes (30 June 1992) OJ C 136.

Commission v. Italy, Case 39/72 [1973] ECR 101.
Directive 94/19 (EC) of the European Parliament and of the Council on deposit guarantee schemes [1994] OJ L 135.

Directive 97/9 (EC) of the European Parliament and of the Council on Investor-Compensation Schemes [1997] OJ L 084.

Directive 2000/12 (EC) of the European Parliament and of the Council Relating to the Taking up and

Pursuit of the Business Credit Institutions[2000] OJ L 126/1.
Directive 2009/14 (EC) of the European Parliament and of the Council amending Directive 94/19 on

Deposit-Guarantee Schemes as regards the Coverage Level and the Payout Delay [2009] OJ L 68/3.

Franz Grad v Finanzamt Traunstein, Case 9/70 [1970] ECR 825.
The North Atlantic Treaty (4 April 1949) Washington D.C.
Orsolina Leonesio v Ministerio dell’agricoltura e foreste, Case 93/71 [1972] ECR 287.... 26. Statute of the International Court of Justice (26 June 1945) 59 Stat. 1055, 3 Bevans 1179.
Treaty on the Functioning of the European Union (Lisbon Treaty) (1 December 2009) OJ C 83/01.

Books and Book Chapters

Benediktsson, Einar, Iceland and European Development: A Historical Review From a Personal Perspective (Almenna bókafélagið, Reykjavík 2003).

Gandolfo, Giancarlo, International Finance and Open-Economy Macroeconomics (Springer, Berlin 2002).

Hartley, Trevor C., The Foundations of European Community Law: An Introduction to the Constitutional and Administrative Law of the European Community (6th edn Oxford University Press, Oxford 2007).

Kaczorowska, Alina, European Union Law (Routledge-Cavendish, London 2008). Stefánsson, Stefán Már, ‘Legitimate Expectations in EC/EEA Law’ in Mario Monti et al (eds)

Economic Law and Justice in Times of Globalisation Wirtschaftrecht und Justiz in Zeiten der

Globalisierung: Festschrift for Carl Baudenbacher (Nomos, Baden-Baden 2007). Thorhallsson, Baldur, and Hjalti Thor Vignisson, ‘A controversial step: membership of the EEA’ in

Baldur Thorhallsson (ed), Iceland and European integration: On the Edge (Routledge, New York 2004).

Wallace, Rebecca, and Olga Martin-Ortega, International Law (6th edn Sweet and Maxwell, London 2009).

Newspaper Articles

Bachelor, Lisa, ‘Icesave Warms up Battle for Savers with 7 Per Cent-Plus Interest Offer’ The Observer (4 May 2008).

Blöndal, Lárus, and Stefán Már Stefánsson, ‘Ábyrgð ríkisins á innlánum’ Morgunblaðið (15 October 2008).

Blöndal, Lárus, and Stefán Már Stefánsson, ‘Er Evrópusambandið skaðabótaábyrgt?’ Morgunblaðið (8 January 2009).

Blöndal, Lárus and Stefán Már Stefánsson, ‘Í hvaða liði eru stjórnvöld?’ Morgunblaðið (3 March 2009).

Hill, Jennifer, ‘Halifax Launches Market-Leading Savings Account’ Reuters UK (5 June 2008). http://uk.reuters.com/article/idUKHIL54724020080605

Mason, Rowena, ‘FSA let Failing Bank Move on Highstreet’ Daily Telegraph (2 January 2010).

Journal Articles

Brandtner, Barbara, ‘The ‘Drama’ of the EEA: Comments on Opinions 1/91 and 1/92’ (1992) 3 European Journal of International Law 300.

Daníelsson, Jón, ’The Saga of Icesave’ (2010) 44 Centre for Economic Policy Research 1.
European Court of Justice, Opinion 1/91, Draft Treaty on the Establishment of a European Economic Area (1991) ECR I-6079.

Official Documents

Ainsworth, Lesley, (Legal advice by Lovells LLP regarding the 94/19/EC Directive, Recent EC Proposals on Deposit Guarantee Shemes and Non-Discrimination [No date] 2008). http://www.island.is/media/frettir/16.pdf

Banque de France, The Functions and Organisation of Deposit Guarantee schemes: the French Experience (Commission Bancaire 2000 Annual report June 2001).

Draft of Iceland’s Report Following the ECOFIN Ministerial meeting in November 2008 [not submitted]. http://www.island.is/media/frettir/29.pdf

European Commission, Review of Directive 94/14/EC on Deposit-Guarantee Schemes (DGS) (Consultation Document [No date] 2009).

Fjármálaeftirlitið, Annual Report 2000 (Reykjavik 2000).
Fjármálaeftirlitið, The Icelandic Financial Market: Annual Report 2007 (Reykjavik 2007). Guðmundsson, Már, Gylfi Magnússon, Steingrímur J Sigfússon, and Jóhanna Sigurðardóttir, ‘Letter of Intent’ (sent to Dominique Strauss-Kahn, Managing Director of the IMF) (7 April 2010). http://eng.efnahagsraduneyti.is/media/Acrobat/Letter_of_Intent_2nd_review_-_o.pdf

HM Treasury, ‘Review of the Landsbanki Freezing Order 2008’ (Annex 1) (2009). http://www.island.is/media/frettir/47.pdf

International Law Commission, Report of the International Law Commission on the Work of its Fifty- Third session, U.N. GAOR, 56th Sess., Supp. No. 10, U.N. Doc. A/56/10 (2001).

Jännari, Karlo, 2009 Report on Banking Regulation and Supervision in Iceland: Past, Present and Future (Reykjavik 2009). http://www.island.is/media/frettir/25.pdf 

Landsbanki, 2007 Annual Report (Reykjavik 2008).
Landsbanki, Confronting Challenge (H1 2008 Results Presentation Reykjavik 29 July 2008).
Prime Minister’s Office, ‘Act on Depositors’ and Investors’ Guarantee Fund: The New Legislation in Short’ (7 October 2008).

Prime Minister’s Office, ‘Athugasemd vegna fjölmiðlaumfjöllunar’ (11 January 2010).
Report of the Special Investigation Commission (12 April 2010). http://www.rna.althingi.is Schjödt law firm, ‘Note on Directive 94/19 and Directive 97/9’ (Legal advice by Schjödt law firm

October 2008). http://www.island.is/media/frettir/14.pdf
Schjödt law firm, ‘Note on the Directive 94/19 on Depositor Compensation Schemes and Directive

97/9 on Investor Compensation Schemes’ (Legal advice by Schjödt law firm October 2008).

http://www.island.is/media/frettir/14.pdf
Schjödt law firm, ‘Note on the discrimination issue’ (Legal advice by Schjödt law firm October 2008). http://www.island.is/media/frettir/14.pdf

Seðlabanki Íslands, Fjármálastöðugleiki 2 ( Reykjavík 2006). Seðlabanki Íslands, Fjármálastöðugleiki 3 (Reykjavík 2007). Seðlabanki Íslands, ‘Umsögn um frumvarp til laga um Icesave‘ (2010) http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=8382

Tryggingasjóður innistæðueigenda og fjárfesta, Ársreikningur 2008 (Reykjavik 2009).

Websites

EFTA Court, ‘Introduction to the EFTA Court’. http://www.eftacourt.int
International Court of Justice, ‘Declarations Recognizing the Jurisdiction of the Court as Compulsory’. http://www.icj-cij.org/jurisdiction/index.php?p1=5&p2=1&p3=3

Méndez-Pinedo M. Elvira, ‘Icesave-Iceland: The Icesave Agreements and Other National Measures in

Response of the Financial Crisis: Revisiting the Principles of State Liability, State Aid and Non- Discrimination in European Law’ (Unpublished report drafted 1 February 2010). http://elvira.blog.is/blog/elvira/entry/1013839/