© Provided by The GuardianPhotograph: Focke Strangmann/EPA
MPs have accused the UK's Financial Conduct Authority of failing to protect businesses and investors swept up in the collapse of specialist lender Greensill Capital, saying the crisis "draws yet more uncertainty" over the efficacy of the City regulator, and that it is time for a review of its powers.
Greensill filed for insolvency on Monday, prompting concerns that the failureputs jobs at risk at one of its biggest borrowers, the metals manufacturer GFG Alliance Group. Founded by the entrepreneur Sanjeev Gupta, GFG Alliance employs 35,000 people around the world, including around 5,000 UK workers. Greensill allows businesses such as GFG to borrow money to pay their suppliers.
© Photograph: Focke Strangmann/EPAThe German financial regulator BaFin banned Greensill Bank from regular operations on 3 March due to the risk of over-indebtedness.
"The FCA exists to protect consumers and businesses from abuses of financial institutions, but after less than 10 years, already has a string of scandals under its belt," said Kevin Hollinrake, the Conservative MP and co-chair of the All Party Parliamentary Group on Fair Business Banking.
"The fact that Greensill Capital was allowed to operate in the UK in the shadows demonstrates a failure to fulfil its requirements."
The scandal follows the furore around the collapse of a fund run by the former star investment adviser Neil Woodford, and the £236m implosion of London Capital & Finance, which prompted the FCA to be reprimanded by a court of appeal judge for failing to take action in time to protect savers.
Parliamentarians, including the former Treasury minister Paul Myners, have been raising concerns about Greensill for months. Lord Myners, who has been asking questions in parliament about the bank since 2019, said ministers and regulators had been too slow to act.
"I have been asking parliamentary questions about Greensill Capital since 2019 in an attempt to draw attention to potential systemic risk," he said on Tuesday. "In so doing I was seeking to encourage government to look at the apparently extraordinary growth of Greensill in a highly competitive market for trade finance, the regulatory status of the company and its links with Gupta which was thereby establishing a critical role in UK steel manufacturing, frequently with government aid.
"I received nothing but bland responses from government and financial regulators who appeared to have no appetite to ask some pretty obvious questions."-
Greensill is headquartered in Australia but its largest offices are in the UK. However, it has avoided oversight by the FCA due to gaps in UK rules: lending to businesses, rather than consumers, is not regulated in the UK.
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The watchdog does regulate the information and marketing of investment products, such as the packaged loans that Greensill sold to investors for cash. For that, it relied on an arrangement known as appointed representation.
This allowed Greensill Capital Securities to piggyback on the regulatory licence of a completely unrelated firm, the American-owned ACA Mirabella, which has an entire business model based on supplying appointed representatives to third parties. The arrangement means ACA Mirabella, rather than the FCA, is ultimately responsible for overseeing Greensill Capital's narrow scope of regulated activities, including business reports, its annual audit, and supervisory check-ins.
It has emerged that ACA Mirabella terminated its relationship with Greensill on Friday.
ACA Mirabella said in a statement that it "maintained appropriate compliance oversight over that function, per our regulatory responsibilities".
Hollinrake criticised the arrangement, saying it allowed Greensill to operate "in the shadows". The cross-party group is now calling for a review of the FCA's powers.
"The 'appointed representative' structure is not appropriate for a firm with the majority of its operations in the UK, and the FCA should at the very least end this practice. However, the fact that this is allowed draws yet more uncertainty of the efficacy of the FCA," he said.
added that the all-party parliamentary group is calling for an urgent review of the FCA's powers and its willingness to use them to ensure there is robust parliamentary scrutiny.
The appointed representative structure has existed in the UK since 1986 and is meant to give firms the right to operate locally while they apply for their own licence. But some rely on firms such as ACA Mirabella for expertise on local regulations. Any changes to that model would require government legislation.
The FCA and Greensill declined to comment. The Treasury was not immediately available for comment.
Greensill was thrown into crisis last week after its own financial backers including the insurer Tokio Marine, the banking group Credit Suisse, and the Swiss finance house GAM Holding withdrew support amid concerns about the firm's management and the growing pile of loans issued to Gupta's GFG Alliance.
While the FCA has not taken any action, the crisis triggered alerts at other regulatory bodies, including the Bank of England, the European Central Bank and Germany's financial watchdog, BaFin.
Greensill's parent company is registered in Bundaberg, the Australian home town of its founder, Lex Greensill. However, the majority of its business is based in the UK, where it employs about 600 of its 1,000 global staff.
German regulators banned Greensill's banking subsidiary from doing business last week and filed a criminal complaint after uncoverring irregularities in its bookkeeping.
Meanwhile the BoE's Prudential Regulation Authority (PRA), which is in charge of monitoring financial stability in the UK, has asked banks to reveal how much of their business is linked to Greensill or GFG Alliance, but found no material exposure. The ECB has reportedly asked EU lenders for similar information.