One thing is for certain, when the current financial crisis starts to ease, the recriminations will start and one organisation which is firmly in the firing line is The Financial Services Authority (FSA).

Now, the FSA were already on the naughty step because they didn’t spot the banks lemming-like leap to financial Armageddon. And in particular, where were they when the country’s big financial institutions were passing between them an array of nasty toxic assets? Most of these were American mortgages which had no chance of ever being paid off, but were classified as enjoying triple A credit status by the leading credit agencies who must have dined out on many a lunch from the grateful bankers.

Now, the FSA is being accused by British MPs as being impotent when it came to the collapse of the Icelandic banks and the loss of their people’s savings. Mind you, the Parliamentarians didn’t spare the blushes of the U.K. local authorities, who said they didn’t deserve compensation for the loss of their 900 millions in a system that many financial observers knew to be creaking and over-exposed.

A committee of MPs claimed that the FSA were told of the problems of the Icelandic bank Kaupthing way back in 2005, but failed to act upon the knowledge.

But the MPs didn’t single out the FSA in isolation. They also threw scorn on the U.K. Government, as well as the local authorities who all appeared to look the other way when it came to warnings about the Icelandic banking system, which saw Kaupthing, as well as Landsbanki and Glitnir, in terminal trouble.

The MPs on the committee said that the U.K. charities, who were exposed to the tune of £120 million, should be bailed out, but that the councils deserved no compensation for the millions they had lost.

The main accusation is that the FSA was told of Kaupthing’s problems in 2005 by the then Chief Executive of investment bank Singer & Friedlander, which had itself been acquired by the Icelandic financial giant that year. Mr Shearer highlighted his new parent’s “strange” accounts management. But the FSA concluded at the time that is was not its place to interfere with a bank that came under the auspices of the Icelandic financial regulator.

Fair enough some might argue, but the MPs are not so forgiving, saying that the FSA effectively chose to look the other way when it came to being told of the problems and as such, committed a serious dereliction of duty. The Committee Chairman, Labour MP John McFall, was especially critical of his own party’s handling of Anglo-Icelandic relations, saying that the Treasury’s decision to use the Anti-Terrorism, Crime and Securities Act to freeze the assets of Landsbanki, was particularly ham-fisted.
The effect was a quick souring of diplomatic relations between the two countries.

In fact, the Icelandic authorities were quick to blame the U.K. for actually causing Kaupthing to fail because it had caused widespread panic. The Committee of MPs disagreed, saying that in no way could the U.K. Government take the blame for such an outcome.

The MPs also exonerated the FSA over the situation of British citizens holding accounts in overseas territories which were not protected by either the British, or Icelandic authorities. Those people with deposits with Landsbanki in Guernsey and Kaupthing in the Isle of Man lost everything, but had no claim for compensation, even though many lost all their life savings. But the FSA was right in it’s stance that it could do nothing about this group claimed the MPs.

The Committee prepared a report which concluded that the FSA should pay closer attention to cross-border regulation; how it should deal with regulators in other countries; and, the matter of U.K. bank accounts and their suitability for expatriates.

Guest Article by Neil Camp