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The FSA permits them to set up a branch because Iceland is in the EEA, but the FSA is responsible for regulation of their UK branch and could have accepted them accepting deposits, and should have done so when the credit swap pricing for their banks went over 500 basis points
from the top result below
https://iaindale.blogspot.com/2008/10/labour-minister-says-icelandic.html?showComment=1223724000000
As an IFA myself, for years I have advised clients to stay clear of anything that was not UK based, even if a lower return was received