Confusion over Kaupthing savings

The Kaupthing Edge website still shows the mistaken transfers

The Kaupthing Edge internet bank continued to allow cash transfers by existing savers after it collapsed last month, breaking official restrictions.

The Icelandic bank closed on 8 October and the next day all its savers' accounts were moved to ING Direct, with no loss of money.

But until 6 November the administrators were not able to stop internal transfers on the bank's website.

The administrators from the accountants Ernst & Young blamed an "IT problem".

Collapse and administration

On 8 October the Financial Services Authority (FSA) issued a formal supervisory notice as part of the moves by the authorities to protect saver's money as the Icelandic bank collapsed alongside its rivals Icesave (owned by Landsbanki) and Glitnir.

The notice prohibited Kaupthing from taking in any more money from any customers.

The administrators managed to stop the website letting new customers open new accounts.

However, 2,300 existing customers found that they were still able to move money from their ordinary savings accounts into the bank's higher rate fixed-term deposit accounts, which offered interest at 7.5%.

"Unfortunately, due to IT systems that we were unable to disable, the apparent ability to apply for a Kaupthing Edge fixed term deposit account could not be removed from the Kaupthing Edge website until 6 November 2008," the administrators said this week in an e-mail to the affected customers.

"We did not disable the entire site as this would have stopped all customer transacting capabilities on the site causing considerable inconvenience to the customer base by not allowing them to access their money," said a spokeswoman for the administrators.

The money involved will be refunded to customers' easy access savings accounts, which are now held by ING Direct, and they will not lose any interest which the easy access accounts offer.

Everything normal?

One example of the problem came from a BBC reader, Marlene from Bournemouth.

As of today's date everything is still showing as normal in the savings and both term deposit accounts

Bill, Kaupthing Edge customer

She had moved �30,000 into her fixed-term Kaupthing Edge account in September.

Fearing that the money might be lost when she heard about the problems at Icelandic banks, she decided to move the money out to the Nationwide on 7 October.

But when she spoke to the Kaupthing Edge call centre in Nottingham two days later on 9 October she was reassured that the money was safe because of the previous day's takeover by ING.

She agreed to a suggestion that she should cancel her account closure and reinstate the money, before the transfer to the Nationwide had taken effect.

That reinstatement of the �30,000, to a new Kaupthing Edge fixed-term account, was finally completed on 22 October.

Then on 31 October she saw that the online application process for a fixed-term account was still open and decided to open another account with a further �5,000 deposit, to take advantage of the 7.15% interest rate that was still being advertised.

"This account was duly opened without any repercussions at that point to the contrary, therefore it was quite a shock this morning to find the attached mail from Kaupthing regarding the term deposits," said Marlene's husband Bill.

"As of today's date everything is still showing as normal in the savings and both term deposit accounts," he added.