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I don't know the exact details but I didn't think Iceland was in Europe, the UK wanted to rush them in so that those rules could apply:

https://en.wikipedia.org/wiki/Accession_of_Iceland_to_the_Eu...

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Iceland is and was in the EFTA and hence in the EEA where the single-passport rules apply -- and applied back then as well, otherwise the Iceland banks operating in the UK and the Netherlands would have been under UK/NL supervision instead of IS supervision. UK/NL were not ALLOWED under those rules to meaningfully supervise IS banks operating in their countries. As long as they operated under IS law and IS supervision, they operated under IS insurance rules with the usual EU (EEA) 100k€ limit. Iceland blatantly broke the rules.

Later, after the shit hit the fan, Iceland did apply for EU membership and negotiations begun. Iceland later withdrew their application.

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