The UK’s financial regulator has censured Kaupthing Singer and Friedlander Limited, the UK-based subsidiary of failed Icelandic group Kaupthing Bank, for not keeping a close watch on whether problems with the parent bank would damage KSFL’s own liquidity.

Meanwhile, Sigurdur Einarsson, the former non-executive chairman of KSFL, Hreidar Mar Sigurdsson, former non-executive director of KSFL, and Armann Thorvaldsson, the former CEO of KSFL, have told the FSA they will not perform any “significant influence functions” that carry FSA approval at any UK authorised firms for five years from 8 October 2008. This date is when KSFL went into administration.

“The FSA has not made any findings of regulatory breach against them and they have not made any admissions,” it said of the executives.

The regulator’s censure is a reminder of how the implosion of Iceland’s once-highly leveraged banking system, which collapsed spectacularly in 2008 as the financial credit crisis hit markets, continues to create after-effects.

Once KSFL was put under control of administrators, the FSA started to investigate the bank’s activities leading up to the bank’s failure, focusing specifically on liquidity management.

Breaches

“Between 29 September and 2 October 2008, KSFL breached Principle 2 of the FSA’s Principles for Businesses, which requires a firm to conduct its business with due skill, care and diligence. KSFL was found to be in breach because it failed to consider promptly and properly whether liquidity stresses in KBH in Iceland would have a detrimental effect on its own liquidity position,” the FSA said in a statement.

“The Final Notice outlines how KSFL did not give proper consideration to, or properly monitor, a special financing arrangement with its parent company in Iceland, under which it could draw up to £1 billion ($1.6 billion) at short notice,” the FSA continued.

“KSFL assumed it could rely on receiving this £1 billion ‘Liquidity Transformation Arrangement’, if needed, without testing that assumption. In addition, when it started to have concerns about this liquidity arrangement, it failed to discuss these concerns with the FSA in a timely manner,” it said.

The regulator said it has published the notice to remind other firms that they must comply with the FSA’s liquidity guidelines, such as in cases where there is a subsidiary that is dependent on a parent.

“While the ultimate insolvency of KSFL cannot be attributed to the failure to monitor promptly and properly the Liquidity Transformation Arrangement, the FSA considers KSFL’s failings to be serious as they occurred at a critical period for the financial markets and at a time when the FSA was particularly concerned to ensure it was fully informed about all banks’ liquidity,” the regulator said.