Moves to protect UK customers as bank shuts

The Government today took steps to protect the nearly 500,000 UK consumers who have money saved with Icelandic banks.

Chancellor Alistair Darling announced that no UK saver would lose money as a result of the closure of internet bank Icesave if, as expected, its parent company Landsbanki is declared in default.

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The Treasury has also arranged for more than £3 billion of UK savers' money that is held with Icelandic banks to be transferred to ING Direct UK, a subsidiary of Dutch savings bank ING Direct.

ING is to acquire £2.5 billion of deposits and 160,000 customers from Kaupthing Edge, which is thought to represent all of the UK operations of Iceland's biggest bank Kaupthing.

It is also acquiring £538 million of savings held by 22,200 people with Heritable Bank, which is also part of Landsbanki and was placed into administration with Ernst & Young yesterday.

The Heritable Bank transfer is being backed by money from the Treasury and Financial Services Compensation Scheme (FSCS).

The Chancellor has also frozen the assets that Landsbanki holds in the UK until the future of the bank and the position of UK creditors becomes clearer.

The move will be a relief for savers in both groups following the current turmoil in the Icelandic banking sector.

Around 300,000 UK customers of Icesave found themselves unable to access money in their accounts yesterday and the Icelandic government later said it would default on its obligations to UK savers.

The move to put Heritable Bank into administration also meant savers were likely to have to get their money back through the FSCS, which would have taken four months and covered only up to £50,000.

Kaupthing is a separate bank to Landsbanki, and it insists it is financially sound.

But given the events of this week, which have also seen the Icelandic government pass emergency legislation enabling it to take control of the country's banks, savers are likely to feel happier that their money is now in different hands.

Mr Darling said on GMTV: "I am very aware of the fact that Iceland has, sadly, chosen to default on its obligations here. We are pursuing Iceland and we will pursue it vigorously to make sure that we get the money due to us back.

"But in the meantime I am going to be able to help those savers who would otherwise have to look to Iceland to get their money back. I am prepared to stand behind them and to stand behind the depositors.

"It demonstrates my commitment to help people who have put money into banks in these exceptional circumstances."

Savers with Icesave and those with Heritable Bank whose money has not been transferred to ING Direct will be paid back by the FSCS.

Under normal circumstances the scheme would only cover the first £50,000 that people had lost, rising to £100,000 for joint account holders.

But the Treasury said today that it would ensure that savers would be repaid in full, even above this limit.

People who had ISAs invested with Icesave will also not lose the tax-free status of the money saved in the accounts.

The Treasury added that the FSCS was working with the Deposit Insurance Scheme in Iceland to ensure that depositors were paid back as quickly as possible, while Mr Darling has also spoken to the Icelandic Finance Minister urging him to give UK depositors the same protection as Icelandic ones.

Fears over the health of Icelandic banks had been growing in recent weeks as the country wrestled to maintain stability in its financial sector and recently nationalised its third largest bank Glitnir.

The Icelandic prime minister warned earlier this week that the island faced the "real possibility" of "national bankruptcy" as its economy could be sucked into the "global banking swell".