How will the Greensill saga change UK financial services regulation?

The Treasury Committee has recently published responses by the Financial Conduct Authority (FCA) and Her Majesty’s Treasury (HMT) to its report on the lessons learned from the Greensill collapse.

In two areas where the Committee made recommendations – the appointed representatives (‘AR’) regime and the rules for change of control of financial services firms – the regulators will undertake detailed review work. This may have significant implications for financial regulation. In this article, financial services and banking specialist Tony Watts analyses the implications this may have on the wider financial services industry.

Greensill’s business model

Greensill’s business model was to provide ‘supply chain finance’. Greensill paid a supplier under a contract early (minus a commission) and then received the full amount from the buyer when it paid the invoice. Greensill funded this by (typically) packaging the debts under the contracts into securities which were bought by institutional investors.

In one form or other, ‘supply chain finance’ has been around for centuries. It is commonly used as a substitute for lending, though in practice it is mostly banks which provide this form of finance. Like most forms of corporate lending, it is unregulated in the UK, other than supervision by the FCA for money laundering purposes. Neither the Committee nor the respondents considered that this should change, since this activity did not pose a risk to financial stability or consumer detriment.

Securitisations of receivables (such as debts under invoices) must be reported to the regulator under the Securitisation Regulation. This only applies, however, where there are different tranches of securities with different priority. It did not, therefore, apply to Greensill’s activities where there was only one level of debt. The Committee recommended that this be reviewed but this was resisted by all respondents.

There was consensus, however, on the need for review of the regimes for ARs and change of control of financial services firms.

AR regime

The AR regime under Section 39, Financial Services and Markets Act 2000 allows fully authorised firms (‘Principals’) to provide a regulatory umbrella under a contract with another firm (its appointed representative or ‘AR’). The AR does not need direct authorisation by the FCA and is instead supervised by its Principal. This regime applies only to a limited range of intermediary activities.

A company in the Greensill group operated as an AR, though it is not clear which activities it carried out under this arrangement as this information is not shown on the FCA Register. It probably covered arranging activities in relation to the repackaging of debts and/or the insurance cover for the debts.

The FCA and HMT agreed there were areas of the AR regime that needed to be reviewed, with the Bank of England commenting that it had gone beyond its original purpose of providing cover for self-employed salespersons.

The review process will start imminently.

Change of control regime

The background to this issue was the ‘symbiotic relationship’ that Mr Sanjeev Gupta’s GFG Alliance (which included Liberty Steel) had with Greensill.

Mr Gupta was allowed to acquire control of a PRA-regulated bank (Wyelands) in 2016. The bank then ran into trouble because of its exposure to the GFG Alliance. Acquiring control of a PRA and/or FCA-authorised firm requires the prior consent of the relevant regulator(s). In the case of banks, insurers and many investment firms, ‘control’ starts at a threshold of 10%.

Evidence from the BOE was that the rules for changes of control had subtly changed in 2009 because of the EU Acquisitions Directive. Before 2009, the regulator was required to be satisfied of the fitness and propriety of the person acquiring control. After that the burden of proof changed; to block a change of control, a regulator had to be satisfied that the statutory criteria had not been met.

The Committee recommended that there should be an urgent review of the change of control framework and it is clear that the regulators accept this.

Future implications

It is likely that there will be in-depth reviews of both the AR and the change of control regimes. It is hoped that any changes will be proportionate.

Whatever the original intention of the AR regime, it has been used for a long time in the same way as it was used by Greensill, i.e. not just for self-employed salespersons but for freestanding businesses. A large part of the financial services industry works on this basis. There are FCA-regulated networks whose sole business is to provide cover for ARs. Many firms start their businesses as ARs while obtaining direct FCA authorisation. This is an easier way to market where the FCA authorisation process has become very lengthy. Major changes in the use of the AR regime may have far-reaching implications.

Similarly, the change of control regime covers the acquisition of relatively small shareholdings in financial services businesses, so any change should be approached with care.