A debate in the House of Commons yesterday identifies some interesting phenomena as a result of the banking crisis and the moves against the Icelandic banks last month. The debate was initiated by Mary Creagh, Labour MP for Wakefield, speaking about constituents of hers who had lost out in Guernsey or the Isle of Man through bank defaults there. The Isle of Man subsidiary of an Icelandic bank had taken deposits from British investors, who will find themselves partially, if not totally, out of pocket once the dust settles.
First, there is the complexity of the regulatory arrangements to take into account the different jurisdictions involved. That previous paragraph mentions four of them, one of which is in the EU, another one is in the EEA, and two are not in anything at all. Do you know which is which? Mary Creagh explained that many of her constituents did not, and were caught out by the differences in compensation regimes as a result.
This is a fine example of a political issue that need not be a problem in theory but turns out to be one in practice: the assertion that companies can bid for business in the UK from different and competitive regulatory regimes may sound fine but it has its consequences when things go wrong (which is, after all, what regulatory regimes are designed for).
Next, there is the role of the British government in closing down Icelandic banking operations in the UK that led, in turn, to the losses in offshore accounts as well. The Chancellor of the Exchequer declared that “The British Government’s obligation must be to depositors who have put their deposits into UK banks.” Not, you note, to UK depositors who have put their deposits into banks. British citizens with money abroad might lose out in favour of foreign citizens with money here. It is the nationality of the deposit that counts, not the nationality of the depositor.
It is not the place of this blog to say that this is wrong, but we must comment on the apparent importance of nationality in the Chancellor’s statement. Is it really right that a system based on free capital movements across borders and that refuses to discriminate between countries when it comes to competition can suddenly introduce differential treatment for investors when things go wrong? How is the average investor to cope with all this? The value of EU law in protecting consumer interests within the single market has never been clearer.