By Simon Miller
The Financial Services Authority (FSA) has issued a final notice against Kaupthing Singer and Friedlander (KSFL), the UK subsidiary of Icelandic group Kaupthing Bank (KBHf).
Kaupthing went bust following the financial crisis in 2008 and its subsidiary KSFL was placed into administration on 8 October 2008.
After the UK subsidiary was placed into administration, the FSA started an investigation into the conduct of KSFL and its senior management during the period immediately prior to the bank’s failure. In particular, the FSA considered KSFL’s liquidity management in the context of its relationship with its Icelandic parent company KBHf. The FSA 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 FSA found that KSFL breached Principle 2 of the regulator's Principles for Business 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 in KBHf in Iceland would have a detrimental effect on its own liquidity position".
The Final Notice said 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.
In a statement, the FSA commented: "While the ultimate insolvency of KSFL cannot be attributed to the failure to monitor promptly and properly the Liquidity Transformation Arrangement, the FSA considers KSFL’s failings to be serious as they occurred at a critical period for the financial markets and at a time when the FSA was particularly concerned to ensure it was fully informed about all banks’ liquidity."
Sigurdur Einarsson the former non-executive chairman of KSFL, Hreidar Mar Sigurdsson former non-executive director of KSFL and Armann Thorvaldsson the former CEO of KSFL have provided undertakings to the FSA that they will not perform any significant influence functions requiring the approval of the FSA at any UK authorised firms for a period of five years from 8 October 2008, the date KSFL was placed into administration. The FSA has not made any findings of regulatory breach against them and they have not made any admissions.
The closure of the FSA investigation into UK based KSFL is independent of any ongoing investigations surrounding the Icelandic parent company, KBHf, currently being carried out by other UK and international overseas agencies.
The final notice can be found here.