A European regulator has lost its bid to collect Iceland’s government responsible for that country’s collapsed bank deposit insurance scheme.

The EFTA Surveillance Authority, supported by the European Commission, had brought action against Iceland before the EFTA Court in Kirchberg, alleging that Iceland failed to properly compensate Icesave account holders in the Netherlands and UK when its Icelandic parent bank, Landsbanki, failed in 2008.

The bank had more than 400,000 British and Dutch clients with deposits of €3.8 billion at the time of the collapse. Accounts were frozen for almost two months before the British and Dutch bank insurance schemes stepped in and compensated savers, and the EFTA regulator had sought reimbursement from Iceland.

The surveillance authority also claimed Iceland illegally ignored its own bank bailout rules, and that Icelandic regulators treated British and Dutch savers differently than domestic depositors, which it said was contrary to European financial directives.

Rejected claims

On Monday the EFTA Court dismissed the entire case.

Its judges said that, at the time, European rules “did not envisage the alleged obligation of result to ensure payment to depositors in the Landsbanki branches in the Netherlands and the United Kingdom in a systemic crisis of the magnitude experienced in Iceland.”

“Depositors may fall within the remit of other parts of the safety net” for savers, the court said.

The Icelandic government’s transfer of domestic deposits to a “new” refinanced Landsbanki “did not fall within the scope of the non-discrimination principle” of the relevant European directive, the judges ruled.

Finally, Iceland had “no obligation” to ensure its then-independent bank bailout scheme made payments to clients in the Netherlands and UK, under the law in place in 2008.

The court noted that since then European rules have been amended and would now provide “improved protection of depositors” who reside in another European country.

Compensation continues

“It is important to bear in mind that payments from the estate of the failed Landsbanki will continue regardless of the ruling of the EFTA Court”, Iceland’s foreign ministry said in a statement following the ruling. It noted that the “old” Landsbanki has an estimated 1,517 billion Icelandic krona in assets, or about €8.78 billion, to settle “priority claims which amount to 1,318 billion” Icelandic krona.

Noting that the court’s decision is final, the foreign ministry said “Icesave is now no longer a stumbling block to Iceland[’s] economic recovery.”

“The court case was necessary to bring clarity to an important issue under EEA law and to settle the matter according to the proper [European Economic Area] process,” Oda Helen Sletnes, president of the EFTA Surveillance Authority, said in a press statement.

The EFTA Surveillance Authority, based in Brussels, monitors the compliance of EFTA states--Iceland, Liechtenstein and Norway--with European rules. The three countries plus the EU27 form the European Economic Area.

The Luxembourg-based EFTA Court handles cases brought by the EFTA Surveillance Authority against EFTA members, in addition to providing guidance to courts in EFTA countries similar to the European Court of Justice’s role within the EU27.

Along with Landsbanki, Icelandic banks Glitner and Kaupthing also swelled with billions of euro in cross-border deposits and then failed in the financial meltdown. The latter two banks were not part of Monday’s case.