The Greensill scandal highlights the risks of the non-banking financial sector

The Greensill Capital scandal has highlighted the risks associated with the spread of non-banking firms into areas of finance traditionally dominated by regulated lenders, Treasury committee MPs have said.

The warning came from MPs July 19 report on the lessons learned from the bankruptcy of the supply chain finance company Greensill, after several hearings on the matter during the first half of 2021.

Greensill collapsed in March after Credit Suisse suspended four funds valued at $10 billion that were essential for liquidity, after concerns that Greensill’s loans had become overexposed at the Gupta Family Group Alliance.

“The full extent of the losses resulting from the failure of Greensill is not yet clear. Although there do not appear to have been any direct losses to UK consumers, any losses incurred by institutional investors could be passed on to consumers,” MEPs said in their report.

The Serious Fraud Office is now also investigating GFG for allegations of fraudulent trading and money laundering, and reviewing its funding arrangements with Greensill.

READ SFO launches fraud investigation into family group Gupta and its relationship with Greensill Capital

MPs urged the Treasury to work with the Bank of England and the Financial Conduct Authority to see how to fill gaps in authorities’ data on non-banking financial companies.

“Filling these gaps may require legislative or regulatory fixes. Where there is additional information that could be collected to help the Bank of England achieve its objective of financial stability, the Prudential Regulation Authority and the FCA should collect this information and, if necessary, the government should propose legislation to enable this,” the report said.

Given the need to dissolve the PRA-regulated Wyelands Bank, which was part of the GFG Alliance, MPs said there should be regulatory reform relating to the acquisition of an existing bank as “an urgent matter”.

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 clear’ that ‘the problems identified at Wyelands Bank were directly linked to its lending to other entities in the GFG Alliance”.

Bank of England Governor Andrew Bailey also testified about the acquisition of a banking license by GFG chief executive Sanjeev Gupta. Bailey told the committee that Gupta acquired Wyelands through a change of control in 2016.

READ “Are you a cheat, Mr Greensill?”

“He fulfilled the authorization conditions. In lessons learned from all of this, we’re going to go back and look at this. There have been a few rule changes around acquisitions over the past few years that have some relevance in this regard, but it’s something we’ll definitely come back to,” Bailey said.

Noting this, the committee said in its report that reforming the process of acquiring a bank “should ensure that the PRA has the necessary powers to ensure that existing banks do not fall into the hands of owners who do not see themselves not grant a bank authorisation”. full license.

The committee said it looked forward to the outcome of the SFO’s investigation into Greensill’s failure.

Supply Chain Finance

Greensill has rolled out two major public sector supply chain programs involving pharmacies and their employees. In its pharmacy prepayment system, pharmacies were paid earlier than the usual 90-day payment term. In his Earnd scheme, employees of NHS trusts were allowed to receive accrued salary, advanced by the scheme.

The committee said the government should look at the underlying issues of companies having to pay their suppliers earlier, rather than turning to supply chain finance.

Noting that the Earnd scheme was provided “free” without expenditure from the public coffers, the committee acknowledged that this may have been the reason why the Treasury had not been consulted on “what might otherwise have been considered ‘new’ proposal for the purposes of the Treasury proposal advice on the management of public funds.

READ ‘Lobbying is a healthy part of democracy,’ Cameron told MPs as part of Greensill inquiry

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

“It can also bring commercial benefits to the company providing the service, for example cross-selling opportunities as Greensill directors cite, as well as the reputational benefit of being a government supplier and potentially the access to data,” the committee said.

“If they believe there is reason to support such solutions, the government should consider whether additional controls may be necessary regarding public procurement where the government or public bodies receive important and innovative financial services free of charge.”

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

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