Finance

Greensill scandal spotlights risks of non-bank finance sector

The Greensill Capital scandal has shone a spotlight on the risks involved with non-bank firms spreading into areas of finance traditionally dominated by regulated lenders, MPs on the Treasury committee have said.

The warning came from the MPs’ 19 July report on the lessons learned from the failure of the supply-chain finance firm Greensill, after several hearings into the matter were held during the first half of 2021.

Greensill collapsed in March after Credit Suisse suspended four funds valued at $10bn which were key to liquidity, after concerns Greensill loans had become over-exposed to the Gupta Family Group Alliance.

“The total extent of the losses from the failure of Greensill is not yet clear. While there do not appear to have been direct losses to British consumers, any losses suffered by institutional investors may be passed on to consumers,” the MPs said in their report.

The Serious Fraud Office is now also investigating GFG over fraudulent trading and money laundering allegations, and is looking into its financing arrangements with Greensill.

READ SFO launches fraud probe into Gupta Family Group and its relationship with Greensill Capital

The MPs have urged the Treasury to work with the Bank of England and the Financial Conduct Authority to look at how to fill any holes in authorities’ data around non-bank finance firms.

“Filling these gaps may require legislative or regulatory fixes. Where there is additional information which could be collected to assist the Bank of England in achieving its objective for financial stability, the Prudential Regulation Authority and FCA should collect this information, and, if needed, the government should put forward legislation to enable this,” the report said.

In light of the need to wind down PRA-regulated Wyelands Bank, which was part of the GFG Alliance, the MPs said that there should be reform of regulations around acquiring an existing bank as “a matter of urgency”.

The report noted evidence from Sam Woods — deputy governor for prudential regulation at the Bank of England and chief executive of the PRA — who “made it clear” that “the issues identified at Wyelands Bank were directly connected to its lending to other entities in the GFG Alliance”.

Bank of England governor Andrew Bailey also gave evidence on the acquisition of a banking licence by GFG’s chief executive, Sanjeev Gupta. Bailey told the committee that Gupta acquired Wyelands through a change of control in 2016.

READ ‘Are you a fraudster, Mr Greensill?’

“He met the terms for authorisation. In the lessons learned from all of this, we will go back and look at it. There have been some changes in the rules around acquisitions over recent years that have some relevance to this, but it is something we will go back to, certainly,” Bailey said.

Noting this, the committee said in its report that reforming the process of how a bank is acquired, “should ensure that the PRA has the powers necessary to ensure that existing banks do not fall into the hands of owners who would not be granted a banking licence in their own right.”

The committee said it awaits with interest the outcome of the SFO’s probe into the failure of Greensill.

Supply chain financing

Greensill rolled out two major public sector supply chain schemes involving pharmacies and their employees. In its Pharmacy Early Payment Scheme, pharmacies were paid sooner than the usual 90-day payment period. In its Earnd scheme, employees of NHS trusts were allowed to draw an accrued salary, advanced by the scheme.

The committee said the government should consider the underlying issues in businesses who face the need to pay suppliers sooner, rather than turn to supply chain financing.

Noting the Earnd scheme was provided “free of charge” without expenditure from public coffers, the committee acknowledged that could be why the Treasury hadn’t been consulted on “what might otherwise have been deemed a ‘novel’ proposal for the purposes of the Treasury’s guidance on managing public money.”

It added that the Treasury should be more involved in determining whether such “novel” schemes, when provided for free, are appropriate in the provision of public services.

“It may also bring commercial benefits to the firm which provides the service, for example cross-selling opportunities as Greensill’s administrators cite, as well as the reputational benefit of being a supplier to the government and potentially access to data,” the committee said.

“If they deem that there is a case for supporting such solutions, the government should consider whether any additional controls may be needed around procurement where the government or public bodies are given significant and novel financial services without charge.”

To contact the author of this story with feedback or news, email Penny Sukhraj

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