Sigrún Davíðsdóttir's Icelog

Iceland the winner in the ESA case at the EFTA Court – updated

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Iceland has its Faust, Sæmundur the wise – but in the Icelandic tales of Sæmundur he beats the devil. For some reason this fairy tale comes to my mind now.

The EFTA Court has today dismissed the ESA application re Icesave. Here is the Court’s press release, highlights are mine:

Judgment in Case E-16/11 EFTA Surveillance Authority v Iceland (“Icesave”)


During a worldwide financial crisis in 2008 the Icelandic banking sector collapsed. As part of the financial crisis, the depositors of Landsbanki Íslands hf. (“Landsbanki”) at its branches in the Netherlands and the United Kingdom lost access to their deposits in the autumn of 2008. This included the so-called Icesave-on-line savings accounts. Consequently, Iceland’s Depositors’ and Investors’ Guarantee Fund should have been obliged to pay the minimum guarantee per depositor according to the rules and time limits as set out in the Icelandic law implementing Directive 94/19/EC on deposit-guarantee schemes (“the Directive”). However, no such payments were made to those depositors. The UK and Netherlands authorities arranged for a pay out of retail depositors from their own deposit-guarantee schemes. On the other hand, domestic deposits in Landsbanki had been transferred to a new bank “new Landsbanki” which was established by the Icelandic Government.

Against this background the EFTA Surveillance Authority (“ESA”) lodged an application with the EFTA Court. ESA sought a determination that Iceland had failed to comply with its obligations resulting from the Directive, in particular Articles 3, 4, 7 and 10 thereof, (first plea) and/or Article 4 EEA (second and third pleas) since it did not ensure payment of the minimum amount of compensation (EUR 20 000) to Icesave depositors in the Netherlands and the United Kingdom within the given time limits. The application was supported by the European Commission as intervener.

Written observations were submitted by the Principality of Liechtenstein, the Kingdom of the Netherlands, the Kingdom of Norway and the United Kingdom. These EEA States limited their observations to the first plea only.

In today’s judgment, the Court dismissed the application.

As regards the first plea, the Court noted at the outset that the nature of the result to be achieved is determined by the substantive provisions of the particular directive. Moreover, it noted that as a result of the crises, the regulatory framework of the financial system had been subject to revision and amendment in order to enhance financial stability. However, the present judgment had to be based on the Directive as it stood at the relevant time, without these amendments and without the improved protection of depositors.

The Court held that the Directive 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. How to proceed in a case where the guarantee scheme was unable to cope with its payment obligations remained largely unanswered by the Directive. The only operative provision that deals with non-payment is Article 7(6) according to which depositors have the possibility to bring an action against the responsible scheme. An action against or an obligation on the EEA State in question, though, was not envisaged in the Directive’s provisions. Moreover, neither case law nor a comparison with secondary law supported the first plea.

However, it was stated that this did not mean that depositors necessarily remain unprotected in such a case. Depositors may fall within the remit of other parts of the safety net. They may benefit from other provisions of EEA law regarding financial services, as well as the activities of supervisory bodies, central banks, or governments. The question in the present case, however, was whether the EEA States are legally responsible under the Directive in case of such an enormous event.

Concerning the second plea, it was held that the principle of non-discrimination requires that there is no difference in treatment of depositors by the guarantee scheme itself and the way in which it uses its funds. Insofar, discrimination under the Directive is prohibited. However, the transfer of domestic deposits from the old Landsbanki into the new Landsbanki was made before the Icelandic Financial Supervisory Authority, Fjármálaeftirlitið, rendered its declaration that triggered the application of the Directive. Thus, depositor protection under the Directive never applied to depositors in Icelandic branches of Landsbanki. Accordingly, the transfer of domestic deposits – whether it leads in general to unequal treatment or not – did not fall within the scope of the non-discrimination principle as stipulated by the Directive and could not lead to an infringement of the aforementioned provisions of the Directive read in light of Article 4 EEA. Consequently, the second plea was dismissed.

As regards the third plea, the Court noted that it is settled case law that the principle of non- discrimination, which has its basis in Article 4 EEA, requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. Moreover, it was held that ESA had expressly limited the scope of its application. In ESA’s view the breach had been constituted by the failure of the Icelandic Government to ensure that Icesave depositors in the Netherlands and the United Kingdom received payment of the minimum amount of compensation provided for in the Directive within the time limits laid down in the Directive, as it did for domestic depositors. ESA added that the compensation of domestic and foreign depositors above and beyond that minimum amount is not to be discussed in the context of the present proceedings.

Thus, considering ESA’s self-limitation, the Court was bound to assess whether Iceland was under a specific obligation to ensure that payments were made to Icesave depositors in the Netherlands and the United Kingdom. However, since the Court had already held that the Directive, even read in light of Article 4 EEA, imposes no obligation on the defendant to ensure that payments are made in accordance with the requirements of the Directive to Icesave depositors in the Netherlands and the United Kingdom, it was found that such an obligation of result could only be deemed to exist if it followed directly from Article 4 EEA itself. The Court held that this is not required under the principle of non-discrimination. A specific obligation upon the defendant that would not even establish equal treatment between domestic depositors and those depositors in Landsbanki’s branches in other EEA States could not be derived from that principle. Consequently, the third plea, and the application as a whole was dismissed.

This is how I understand the judgement:

Re the first part, breach of the Directive, it is interesting that the Court sides with Iceland that circumstances were extraordinary and could not pose the obligation on Iceland since the Directive only referred to failure of single banks, not the major part of the financial system.

Re discrimination, the course of events in Iceland was such that the Court decides there was no discrimination involved.

Further, re discrimination in a wider context, there can be no discrimination since there was no breach of the directive.

The judgement in full is here.


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Written by Sigrún Davídsdóttir

January 28th, 2013 at 11:25 am

Posted in Iceland

9 Responses to 'Iceland the winner in the ESA case at the EFTA Court – updated'

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  1. WOW!

    Icelandic banks should IMMEDIATELY set up foreign branches in all European countries, offer market leading interest rates to depositors, leverage those deposits and start buying like madmen again.

    What could go wrong?

    Nothing apparently!

    What Goes Up...

    28 Jan 13 at 12:38 pm

  2. Why is there nothing on the BBC or in the English media about this?
    Nothing mentioned on any TV channel!

    I suppose if it were a football match…?

    George Ward

    28 Jan 13 at 10:32 pm

  3. An article on the BBC web site which disappeared quickly from the front page:
    Well written (it seems that EU current accounts are guarantied to a minimum of 100 000 euro ?)

    Another article not specifically on EFTA ruling:


    29 Jan 13 at 11:00 am

  4. As reported by the BBC ” the European directive on deposit guarantee schemes has been amended, so that it now lays down that the state shall ensure that the guarantee is set at a minimum level of 100,000 euros for each saver.” In line with this directive, bank deposits (not just current accounts) are indeed guaranteed up to €100,000 (per bank group) in the EU (at least in Eurozone countries; in the UK the limit was set at £85,000 – the way the pound is plunging at present the UK may soon be in contravention, but that’s another story!). But what remains unclear to me is what precisely is meant by “the state shall ensure that the guarantee is set …”.

    Clearly the state has an obligation under the directive to have in place a compensation scheme which guarantees the minimum compensation. Deposit compensation schemes are generally funded, not by governments themselves, but by compulsory levies on the participating banks and other financial services (which are obliged to participate in order to be licensed). As I understand it, Iceland had such a scheme in place in 2008 – albeit with the then lower limit of €20,000 – but the collapse of all its main banks meant there were no sources of funding for the scheme to draw on. The central question was, and to my mind still is, what happens in such situations where the scheme, however well designed and funded, is simply unable to respect its guarantee. Is the state obliged to step in as guarantor of last resort? The EFTA Court has ruled that under the previous directive it was not. Has this changed under the current directive? I get the feeling that even the EFTA Court was not sure, though obviously it was not asked for to rule on that question.


    29 Jan 13 at 12:42 pm

  5. Thanks Goupil for the links especially the second one.
    I think this is a great victory for Democracy and the Icelandic people should be feeling very proud and happy that they stood up and refused to pay for the Bankers. However, it is essential that the delinquent Bankers and those who have colluded in allowing the gross abuse should be punished.
    After all, the abuse and wrecklessness of the Banks is behind the crisis.
    Who can deny this?

    We are also asking the same question you are, anrigaut.
    It sounds as if in reality there are no guarantees as a guarantee is only needed in extraordinary circumstances.
    If the guarantee is waived aside by Luxembourg Court EFTA, in extraordinary circumstances and no one is held responsable, even the wreckless and greedy bankers, owners and directors who have fraudulently mis-managed the affairs of the Bank, then what is the point to any guarantee?

    A guarantee is supposed to provide CONFIDENCE.
    Who can be confident in a Bank today?

    Iceland was right to stand up and say NO to paying the guarantees, but they must also stand up and say the wreckless Banksters must be punished and not get away with it. Otherwise there can never be any confidence or trust in a Bank again.

    Why should hard-working, honest people pay for the greed, malpractice and abuse of the Banks which were the cause of the crisis in the first place?

    George Ward

    29 Jan 13 at 1:18 pm

  6. Great blog, ‘keep her lit’, Sigrún.

    I have to admit I didn’t expect this result, it’s like getting a 3 goal win against Barca at the Camp Nou :)
    Even though the EEA directive itself, about the insurance fund and a state’s responsibility wasn’t at all clear and definitive, I had expected the court’s interpretation to go against Iceland. I expect the Iceland president had grown a few more feathers to strut, I’ll look forward to seeing him spank Jeremy Paxman, just one more time :)

    Michael K

    29 Jan 13 at 10:21 pm

  7. This ruling by the EFTA beg the question: How will it be possible to prevent a recurrence of predatory bankers behaviour ? “Buyer beware” is a bit short. How long between the savings and loans debacle and the subprime scandal ?
    The ruling is consistent with a no regulation approach.
    For those who are interested in an overview of the problem:


    30 Jan 13 at 1:39 pm

  8. […] is an earlier blog on the EFTA Court ruling re […]

  9. […] must refer to the Icesave dispute, ruled on by the EFTA Court in January 2013 (link to the Judgement and my digest of the main points.) From the point of view of Iceland this seems a […]

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