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Law experts warn Icelandic losers on challenging government

Finance | Vibeka Mair | 23 Jun 2009

Charities will struggle with a legal challenge against the government for refusing compensation for money lost in failed Icelandic banks, according to charity law experts.

Save Our Savings, a coalition of 30 charities fighting to retrieve deposits lost in Iceland, is seeking legal advice from lawyers on the strength of a case against the government and the Financial Services Compensation Scheme (FSCS) for not refunding charities.

Peter Hepburn, chief executive of Cats Protection and chair of SOS, told Charity News Alert that the action could take two different routes.

Firstly, it could take legal action against the government for inconsistencies in its approach to compensation.

“It’s unfair that the FSCS will not compensate charities as we are not covered under the scheme,” said Hepburn (pictured). “Yet the Treasury has compensated an individual with £60m, although the FSCS’ rules state it will only reimburse up to £50,000.

“Also, the government (through NHS North West) has decided to compensate Christie‘s Charity who went directly to No.10.”

Challenge to government for ignoring Committee

Secondly, the SOS could challenge the government for ignoring calls from the Treasury Select Committee to compensate charities.

“It is very unusual for a select committee to make such a strong recommendation,” said Hepburn. “They spent weeks going through evidence and to ignore advice is very strange for the government.”

Selman Ansari, a barrister from Bates Wells and Braithwaite, agreed, saying the SOS had got “real force in argument” on this point.

“The government has taken quite a difficult decision,” said Ansari. “They are rejecting a clear recommendation from the select committee.”

However, he warned that the government probably had good reason for its decision and a judge would be very reluctant to second-guess the government’s action.

Chris Priestley, a partner at law firm Withers, added that he suspected the government had taken legal advice before making the decision and warned charities to think through any action carefully.

Inconsistencies in compensation: best approach

Ansari advised that challenging government inconsistencies was a better option, but said there had to be a thorough investigation to ensure there was a genuine case.

Priestley also advised SOS to work collaboratively to share the work and costs. SOS has so far spent £18,000 on its campaign.

FSCS has followed its rules

A spokesperson from FSCS defended its actions, saying: “The FSCS protects individuals and some small businesses up to a maximum of £50,000 for deposit claims. Whether a charity is covered by the FSCS will depend on how it is constituted.

"In assessing the eligibility of claimants (including charities), the FSCS must follow the rules set for us by the FSA. As a result, some charities that lost money through the Icelandic banking failures that were eligible under the FSCS rules have been compensated, whilst others have not. In these instances we have simply applied our rules in the usual way.

"The government announced in October 2008 that no FSCS-eligible depositor would lose any money as a result of the closure of Icelandic banks. All payments over £50,000 connected to the Icelandic banking failures were compensated by the government, although the FSCS administered all payments.”

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