Former savers with the Derbyshire Building Society may have unwittingly ended up leaving their money in a division of a failed Icelandic bank.

The situation occurred when the building society invited savers to invest in Derbyshire Offshore, a subsidiary based in the Isle of Man that offered higher returns than normal savings accounts.

Derbyshire Offshore, and its £320 million worth of deposits, was then sold to Kaupthing Isle of Man in 2007 a subsidiary of Icelandic bank Kaupthing.

South Derbyshire MP Mark Todd said at a Treasury Select Committee meeting last night that he believed savers were not given the chance to move their money before the sale went through.

"I'd welcome an explanation about how people who invested in a Derbyshire Offshore product ended up unwittingly, as far as I can tell, as account holders with an Icelandic bank," he said.

"They weren't given an opportunity to say 'thank you I'm not going to do that'."

At the Treasury Select Committee Lord Turner, chair of the Financial Services Authority (FSA), responded by calling the mix-up a "sorry situation".

But he explained that the building society had done everything required to notify customers of where their cash was being held.

Confusion may have occurred, Lord Turner suggested, if people thought Offshore had been sold to Kaupthing, Singer and Friedlander – the British wing of Kaupthing covered by FSA protection.

But he argued that the sale would not have altered the savers' legal status or access to any British compensation scheme, because both Offshore and Kaupthing Isle of Man were regulated by the island's authorities.

He said: "The transfer was done on the November 20, 2007, so that those who had deposits which were maturing over the last year could have certainly chosen at the end of that period to have moved their money elsewhere.

"I accept entirely that they may not have understood entirely the implications of what was going on, but they should have.

"I have in front of me here the letter – and the letter in no way implies that Kaupthing Isle of Mann is a UK bank, it in no way implies that it has a relationship with Kaupthing, Singer and Friedlander.

"It doesn't in any way imply that it is regulated by the FSA, which it is not. But I think we can accept that it is a sorry situation."

Chancellor Alistair Darling said he would look into regulations concerning the offering of offshore products in Britain, which were not regulated by British authorities.

He said: "Certainly in relation to the Derbyshire experience that's clearly something the FSA will want to look at.

"Most people putting money into a building society tend not to study all of the form and everything else."

Savers in Kaupthing Isle of Man may see their deposits rescued if liquidators can find a buyer for the failed bank in the next month.

If that does not happen, savings up to £50,000 should still be covered by the Isle of Man compensation scheme – though it is unclear how long it would take for money to be returned to its owners.

Deposits greater than that amount are not protected.

A spokesman for the Derbyshire said: "Although no longer the Derbyshire's responsibility, we naturally regret that customers of our former subsidiary have been caught up in these difficulties.

"We are therefore raising this matter with the relevant authorities in the hope that a solution may be found."