But public bodies including police forces, charities and local councils were not protected. The government agreed to pay the money back after months of tortuous negotiations but the bill has not yet been signed into law by the President.
Icelanders are furious that they will be repaying the loan for at least 15 years but failure to do so could dash the country's hopes of joining the European Union.
Meanwhile the Financial Services Authority (FSA) has been accused of failing to stop the weak Icelandic bank Kaupthing from setting up UK retail operations because they thought accepting personal deposits would help the bank's liquidity.
It is now believed the FSA had concerns about the collapsed bank as early as December 2007. Kaupthing's assets were among those frozen to prevent them being transferred back to Iceland. The Serious Fraud Office is now investigating the bank.
An FSA spokesman said: "The Icelandic parliamentary stuff is not something we would comment on."
BRITISH savers could lose millions of pounds if the Icelandic government scraps plans to repay funds lost when the island's banks collapsed.
Nearly a quarter of Iceland's 320,000 population have signed a petition calling on President Olaf Ragnar Grimsson to call a referendum over the repayment of £3.1bn. Polls suggest 70 per cent of Icelanders are against repayment to UK and Dutch investors.
Icelandic banks offered some of the most attractive deposit interest rates in the world, at the expense of healthy margins.
They convinced 300,000 UK savers to invest billions.
At the point of collapse in October 2008 the Icelandic banking system owed investors more than £160bn seven times the country's GDP.
The UK government used anti-terror legislation to seize Icelandic assets and £2.3bn in loans were sanctioned to repay individuals who had lost money.