Treasury Minister Allan Bell MHK - whose rearranged appearance before the Tynwald Select Committee investigating the collapse of Kaupthing Singer & Friedlander (IOM) had been awaited with eager anticipation - told the Committee he did not believe the UK authorities had deliberately set out to harm the IOM when it took action to freeze the assets of Icelandic banks in the UK.

In his opinion the UK, reacting to considerable concerns about the deteriorating situation in the UK, “failed to take account of the repercussions” for the IOM. “Things were moving fast”, he said “and they didn’t think” about what would happen – “but it wasn’t a deliberate act.”

He earlier described the situation in the UK, and elsewhere, as “frenetic”, especially with the collapse of Lehmans, and pointed out the authorities in the UK were under tremendous pressure from the huge workload; adding he had no evidence the IOM authorities were deliberately mislead over the KSF situation.

So having effectively dismissed the idea of a ‘conspiracy’ he then conspiratorially added a caveat to his evidence.

He said he was hesitant in saying that it had not been a ‘deliberate act’ as the UK Treasury must have drafted the Order in advance of it being sent to the UK parliament for passing. Therefore, he “couldn’t help but think they could have had time to think of the repercussions”.

In some ways this was the pattern of Mr Bell’s evidence, initially giving a fairly robust response to questions and then pulling back slightly from his initial position following further questioning.

His evidence regarding when he first knew of the failure of the bank was less than convincing, as was his evidence that the timing of the revised Depositor Compensation Scheme (DCS) was purely coincidental to the failure of KSF (IOM).

He also frequently started answers to questions with “we” as opposed to ‘I’, and it is assumed he was referring to himself and Treasury officials and not the royal ‘we’.

The session commenced with Mr Bell recounting his recollections of the emerging Icelandic situation in 2008 and said there had been no specific concerns in relation to KSF.

In fact he had no knowledge, until the morning of the 9^th October 2008, how bad the situation had become.

He went on to explain he had sought feedback a week to 10 days before the collapse, and again four to five days before; speaking directly to the bank’s Chairman, Donald Gelling, on the latter occasion. He said Mr Gelling had assured him everything was fine.

Apparently he tried to contact Mr Gelling again on the 8^th October, but said he had been unavailable to talk as he was in a meeting all day.

Therefore, it was Wednesday morning, he repeated, he first knew of the collapse, and he immediately passed the information on to the Chief Minister.

In response to a follow up question from Committee Chairman, Rushen MHK Juan Watterson, Mr Bell said his first call had been prompted by press speculation about the Icelandic banking situation and for no other reason.

Asked whether Treasury had had any concerns about the takeover of S&F by Kaupthing, Mr Bell, and not for the only time, emphasized that Treasury had to keep a clear demarcation between the roles of the Treasury and the Financial Supervision Commission, particularly following the IMF report. The takeover was “strictly the domain of the FSC” he said; but helpfully added no issues had been raised with him.

Mr Watterson wondered what Treasury’s response was to the growing concerns regarding the banking situation; to which Mr Bell replied they were looking at updating the DCS. However, the advice was to wait and see what would emerge from the EU and the UK and then align to the international standard.

Mr Watterson inquired what concerns were being expressed in the spring/summer of 2008 regarding risks of the Icelandic situation to the IOM.

Mr Bell said “no alarm bells were ringing” in respect of Iceland; the concern related to the banking system in general, of which Iceland formed one part.

Mr Watterson questioned Mr Bell about the exposure of the IOM government; but Mr Bell assured him the exposure was limited and to date 40% of the £2.8m on deposit had been recovered on par with other creditors.

At this point proceedings stopped for a few moments as the Hansard clerk complained his recording was being interfered with by 3 mobile phones in the room.

Having resolved that little problem Mr Watterson asked Mr Bell if he thought the collapse had been avoidable, leaving aside the Treasury’s failed attempt at a Scheme of Arrangement.

Mr Bell replied that all the information he had pointed to the bank being profitable and solvent, and if it had had access to the funds in London he thought it would still be in business today. He added the predicted 94% recovery of assets gave further weight to this assertion.

So who was responsible for the collapse was the next question.

Mr Bell suggested it was a combination of the “over exuberance of the Icelandic banking system”; the concern of Alistair Darling the Icelandic authorities would only protect Icelandic interests, which triggered his response that precipitated the collapse; and the total inaction of the UK Financial Supervision Authority (FSA) to communicate, to the FSC, the intended action and this precipitated the collapse in the IOM.

He pointed out the Bradford & Bingly situation had been handled completely differently, with the FSA talking to the FSC a few days prior to the expected collapse, and as a result matters were taken in to hand, the situation managed, and nobody lost any money.

In his view had the same action been taken with KSF the bank could have been protected, but instead there was a “complete breakdown of the relationship.”

Mr Watterson asked Mr Bell to explain the delineation between the Treasury and the FSC; to which Mr replied a Memorandum of Understanding (MOU) is available on the FSC’s website. He went on to say Treasury sets the policy and the FSC implements it “and the delineation is very clear and crucial in light of the international financial arena.” They have to be quite separate, he emphasized.

Mr Bell couldn’t recall Treasury having issued a ‘direction’ to the FSC and said they consult over any new policies and listen closely to them. For example, if the FSC suggest new business opportunities that offer an economic advantage to the IOM without damaging its reputation, Treasury would support it.

Essentially Treasury will only intervene or oppose things if they appear to be against the national interest or come with reputational risks.

So the takeover of S&F had not been considered sufficiently important for Treasury to become involved, suggested Mr Watterson; to which Mr Bell said, not at the time.

Mr Bell also confirmed he had been unaware of Tony Shearer’s concerns until he heard then being expressed at the UK Treasury Select Committee hearing.

In respect of new regulations passing through Tynwald, Mr Bell said they scrutinize them very closely but if the IOM attempted to be “whiter than white it would have no industry to regulate”. So a balance has to be struck.

Mr Watterson ask if he was content with the remit of the FSC; to which Mr Bell replied it is working well but it is an evolving situation with a world wide review. He suggested there maybe a tightening of regulation so a local review was likely in light of new standards.

In hindsight did he have any concerns over the FSC’s handling of the KSF (IOM) situation, was the next question from Mr Watterson.

Mr Bell said that with the information he has now he is very content and his biggest concern relates to the FSA.

Mr Watterson raised the issue of conflicts of interest, with active members of the industry being board members of the FSC; and was it a mistake.

Mr Bell acknowledged it presented a dilemma but for a small jurisdiction, like the IoM, it is difficult to get the best possible people to serve on these types of body.

He suggested if people who are “whiter than white” are appointed they wouldn’t be able to do the job as they wouldn’t have the experience and current knowledge of the industry.

The Manx Herald, perhaps unsurprisingly, disagrees with this patronizing and unsubstantiated attitude.

Mr Watterson put it to Mr Bell the perception is the current situation damages the reputation of the IOM; but Mr Bell thought this only relates to some “off-island people”, and it is unfortunate. He added deposits had for quite a period increased which provided evidence there is confidence in the IOM.

Mr Watterson inquired of Mr Bell if he planned any changes; to which Mr Bell said it is his intention to have a “root and branch review” of the Insurance and Pensions Authority (IPA) and the FSC to see if they are “fit for purpose”; whether two regulators are needed and a review of membership. He also said he would look at any new emerging standards and, almost as an after thought, told the Committee he would “listen to any comments you have to make”.

Committee advisor, Phil O’Shea, quizzed Mr Bell about the issue of removing the risk to Iceland; but Mr Bell said it was an FSC issue, not the Treasury’s, so he couldn’t comment.

Mr Bell was then questioned about the IOM’s ‘up-streaming banking model’; and again he said it was an issue for the regulator. Under further questioning he said it was a model that was adopted by all the offshores, had worked well, had contributed substantial amounts of tax and only recently had it become an issue.

Mr Watterson suggested the model may need greater controls, but again Mr Bell reiterated these were matters for the regulator and any interference from Treasury would move them into grey areas.

Mr Watterson said he was looking at this from a systemic perspective, was it not also a political issue regarding risks and rewards.

Mr Bell said he saw no reason for the government to get involved but expected governments, world wide, to now take a look at the issue and he would review the outcome in due course.

Mr Watterson wondered if a predicted recovery rate of high 80’s/low 90’s highlights a weakness in the upstream model; but Mr Bell didn’t think so.

So was a 10% loss an acceptable amount, inquired Mr Watterson; but Mr Bell said he wasn’t sure, although he thought a recovery of over 90% was a good indication of how good the business had been.

Referring to some of the other bank collapses in the IOM, Mr Bell said this one was different and the others had been business models that he would not encourage in the IOM or elsewhere.

This report covers about half of Mr Bell’s evidence and a further report will be published in due course. Ed.)