Rishi Sunak set to tighten UK financial regulations after Greensill scandal

Chancellor Rishi Sunak has ordered two immediate reviews of UK financial regulation linked to the collapse of Greensill Capital as he accepted some recommendations from a report by a committee of MPs into the scandal.

Greensill, which collapsed in March 2021, employed former Prime Minister David Cameron as an adviser. The company had a “symbiotic relationship” – in Cameron’s words – with GFG Alliance, a metals group that is currently under investigation by the Serious Fraud Office.

MPs and others have also questioned why company founder Lex Greensill was given an unpaid advisory role in Whitehall by the Cameron government in 2012 – where he pushed ‘chain funding’ procurement”, a form of factoring.

The Conservative-dominated House of Commons Treasury Select Committee made several recommendations when it published a report in July accusing Cameron of a “significant lack of judgment”.

In a letter to the committee, Sunak said he had accepted its call for reform of the “designated representative regime”.

While Greensill Capital was based in the UK and arranged tens of billions of pounds in funding a year, it largely escaped the direct scrutiny of UK regulators. The Financial Conduct Authority, which opened an investigation into Greensill in March, has overseen only one Greensill unit which outsourced its compliance function to a third-party firm under the scheme.

Sam Woods, the Bank of England’s deputy governor for prudential regulation, told the committee that this form of regulation was designed 40 years ago for independent sellers rather than the regulatory accommodation of firms such as Greensill.

Sunak said he had already instructed the Treasury to review the regime, which would include legislative reforms to strengthen oversight of appointed representatives to prevent “opportunities for abuse of the system”.

The chancellor also said he was pursuing the committee’s recommendation for reform of the ‘change of control’ process which regulates who can acquire ownership of a bank. It is overseen by the Prudential Regulation Authority, of which Woods is the chief executive.

MPs had called for a reshuffle to prevent existing banks from falling into the hands of owners who would not be granted a full banking licence. Sanjeev Gupta, whose family owns GFG Alliance, acquired a bank called Wyelands in 2016 through a change of control, despite being ordered by the BoE to return its money to savers in March this year.

In testimony before the select committee, Woods said a 2009 EU directive had “reversed the burden of proof” around approving new owners of existing banks, making it harder for regulators to block takeovers. control.

Woods added that reverting to the previous approach – whereby the PRA could object if it was not fully satisfied that key criteria had been met – would “strengthen the regulator’s hand where the position is unclear. “.

In other areas, Sunak gave a more cautious response to the committee, for example in his request to expand the definition of “securitisation” – in the securitization regulations – to include supply chain finance. .

Woods had told the committee it was “a bit odd” that Greensill securities were not covered by the system because, unlike securitizations, there was no “risk allocation”.

But Sunak argued that it would be “inappropriate” to extend the relevant regulations to the subsequent sale of supply chain finance loans, as they posed different risks than a securitisation.

Sunak added that changing the definition of securitization regulations – so that it doesn’t just include installment loans – would bring whole swaths of commercial loans into the scope of the regulations. This would impose “detailed and prescriptive requirements on lenders”, with a negative impact on companies’ ability to access finance, he argued.

The government did not believe supply chain finance posed a systemic risk to the wider economy, the Chancellor said.

However, he said it was possible some new regulatory requirements could be helpful for un-tranched loans and added that the government would consult with regulators to find out if this could be helpful.

This article has been amended to clarify the extent to which the FCA regulated Greensill

Video: Greensill: A Story of Pride, Hype and Greed
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