Charities at front of queue for Icelandic banking meltdown compensation

04/03/2009 (15 h 59 m ago)

• Local authorities left to wait with other creditors • Darling's use of Terrorism Act called into question Charities with cash deposited in the failed Icelandic banks should be fully compensated by the government, a Treasury select committee report will recommend today, although local authorities, which had more than £953m invested, should be left to stand in line with other creditors. The report also backs the government in refusing to compensate British citizens who had money invested in offshore accounts in the Isle of Man and Guernsey with the Icelandic banks. The recommendations, which will now go before government, were warmly welcomed by charities caught up in the financial crisis that battered Iceland last year, causing all three of its big banks to crash. John Low, chief executive of the Charities Aid Foundation, said the committee, led by Labour MP John McFall, had listened "sympathetically" to evidence provided by the organisation. "We are thrilled with the recommendations. They have recognised the injustice of the situation." Research by the Charities Aid Foundation found 48 charities had lost a combined £86.6m in deposits with the Icelandic banks, attracted by some of the best interest rates for savers then on the market. But not all charities have admitted losses in public. The Audit Commission puts the figure at about £120m. Cats Protection had over £11m deposited with Kaupthing Singer and Friedlander, one of the largest amounts at risk. Peter Hepburn, the charity's chief executive, said the report's recommendations were "brilliant" news. "These savings were to be used to fund new cat adoption centres to help cats in areas of greatest need in the UK, such as Lisburn in Northern Ireland and Felling, near Gateshead." He said the projects are at risk because the charity is unable to access the savings. McFall said the committee, which has conducted a series of hearings into the financial crisis, had been unanimous in its decision to recommend compensation for charities. "The work undertaken by the charitable sector often provides the most vulnerable elements of society with invaluable support," he said. "At a time when more people than ever are faced with difficult economic circumstances, we believe that it is imperative that charities have access to the funds that were provided to them by the public." The committee also recommends that the government clarifies the protection available to charities under the Financial Services Compensation Scheme, which protects individual investors. The government is expected to respond to the report within two months. The report acknowledges that some local authorities would feel "hard done by" as a consequence of the report, but said it would "seem perverse to reward those authorities who failed to protect their investment with yet more money from the taxpayer". In all, 127 English local authorities, including 12 police authorities and 10 fire departments, had invested a total of £953m in the Icelandic banks. It is still unclear how much they will claw back from administrators, although they are preferred creditors. Kent headed the list with £50m on deposit, followed by Nottingham city council with almost £42m. "The LGA, working with councils, currently expects to get the lion's share of this money back and is working flat out to make sure that the council taxpayer is top of the list for repayment," said Margaret Eaton, chairman of the Local Government Association. But she said the report had drawn unfair distinctions. "There must be a consistent and fair approach to compensation. If charities are to be compensated why should there no relief whatsoever for the council taxpayer? Councils provide vital services to society's most vulnerable people." A separate report from the Audit Commission last month found seven English authorities had behaved "negligently" by continuing to make deposits with the banks even after they had been downgraded by credit-rating agencies. The government said it would protect all individual savers with the Icelandic banks shortly after they collapsed in a turbulent few days in October. The banks had expanded rapidly and sought to increase their deposit base by attracting UK savers through accounts like Landsbanki's Icesave. Kaupthing, another of the big banks, bought the British firm Singer and Friedlander and launched a savings account, Kaupthing Edge. But in the weeks after the catastrophic failure of the Icelandic economy, it emerged that many local authorities and charities had also been investing with the banks. The report questions the role that Alistair Darling, the chancellor, played in undermining confidence in Iceland by using anti-terrorism laws to safeguard the deposits of British savers in Landsbanki. It suggests that Darling's use of the Terrorism Act had "inevitably" stigmatised the entire Icelandic financial system and had a serious impact on confidence in Kaupthing, the largest of the three big Icelandic banks, and at that point still in business. It recommends the government find a "less blunt instrument" for similar circumstances in future. Banking Voluntary sector Local government Iceland Banks and building societies Economic policy guardian.co.uk © Guardian News & Media Limited 2009 | Use of this content is subject to our Terms & Conditions | More Feeds

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