Long reads

Greensill’s demise is not enough to dampen UK's fintech spirits

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

As Greensill Capital’s spectacular fall from grace continues to play out in Westminster, questions are circling around what the potential ramifications of its demise signify for UK fintech.

In the same week that Chancellor Rishi Sunak announced several updates to the UK’s CBDC strategy and confirmed that recommendations set out in The Kalifa Review are on track for adoption, creditors voted to wind up Greensill’s Australian parent company after its activities across Germany, the UK and Australia unravelled. The fintech tumbled into administration in March 2021, as funding sources were frozen and its cover was not renewed by insurers.

Established by former Australian banker Lex Greensill in 2011, the fintech first shot to stardom in 2018 when it reached unicorn status with a valuation of $1.64 billion in its first capital raise. Providing supply chain finance, the fintech packaged supplier bills into bond-like instruments for purchase, and in the process brought the practice of reverse factoring into the purview of fintech and perhaps now, into disrepute.

Trade credit insurance was essential for Greensill’s lending, enabling the fintech to create these packages of notes containing investment and sub-investment grade loans, before selling them on to investors as low-risk, high-yield products.

This insurance lapse in March – amounting to $4.6 billion of coverage – is ultimately what triggered the collapse of the Group, but it is believed that the fintech’s true trouble stemmed mostly from its exposure to GFG Alliance, a collection of companies spanning metals to banking linked to the controversial magnate Sanjeev Gupta, and a funding model built around anticipated future invoices.

Since the downfall, senior Credit Suisse executives (also weathering the separate Archegos scandal) have been fired and bonuses cut for involvement with the fintech.

Once a Whitehall darling, Lex Greensill was in 2018 awarded a CBE for services to the British economy and, perhaps unsurprisingly, UK lobbying laws have now been pulled into the furore as details emerged that former UK Prime Minister David Cameron, who after leaving office was brought on board as a senior adviser at Greensill Capital, was contacting government ministers for support of the fintech.

In a quote that did not age well, Cameron once remarked that Greensill is “one of Britain’s many great fintech success stories.”

Supply chain finance is deployed by most large UK banks, fintechs like Market Finance and Sancus also operate in the sphere and are increasingly partnering with large banks to deliver their (often platform-based) solutions directly. Just last year, Lloyds announced their partnership with working capital fintech Demica.

S&P wrote that the turmoil could cause a ripple effect on the supply chain finance market as a whole, impacting the ability of small businesses in desperate need of liquidity. Erik Hofmann, a professor at the Institute of Supply Chain Management at the University of St. Gallen in Switzerland told S&P that the Greensill case “could trigger ‘a fatal loss of confidence’ in supply chain finance, potentially starting a ‘domino effect’ of investors withdrawing funding.”

This negativity doesn’t appear to be coming to fruition – at least not yet, and not for fintech.

Similarly, the shock and scandal that the Wirecard chaos brought to the fintech sector during 2020 doesn’t appear to have bruised the industry’s strength either. In fact, the FCA’s fast action to suspend the license of Wirecard’s UK subsidiary was viewed as a display of the strength by the regulator, serving to reinforce the UK’s reputation as holding the gold standard of tough but robust financial supervision.

During a UK Fintech Week 2021 session, Shearman & Sterling’s global head of financial services group, Barnabas Reynolds, commented on the Wirecard and Greensill disasters, arguing that such events haven’t impacted trust nor trustworthiness of the fintech sector as a whole.

“I don't think there's anything on a macro level to be troubled by as there will always be fraudulent operators, charlatans and businesses that fail, in any parts of any sector. The key is to make sure that those are dealt with properly and safely.”

Rather, he noted that Wirecard and Greensill are two examples of how market participants can go awry, and what can be ensured is a transparent system which weeds out problems quickly through publicity.

“The regulatory cover up at Wirecard is a concerning example of exactly what not to do, and it's a cautionary tale about the dangers of a system where there's too much deference to a closely knit regulatory authority.”

Reynolds went on to argue that to build trust in the system and allow space for fintech innovation, that the focus of supervisory systems should be on risk, and not unnecessary code or control.

He called for the removal of the “blankets of inherited EU law so that the system is able to operate at its best - as the global gold standard, protecting consumers from their assets worldwide when using UK based financial services virtually.”

“We should only legislate or regulate for identifiable problems. We can move quickly to produce new regulations as the market develops to deal with a new problem, but we shouldn't have a Cartesian approach of trying to provide a blanket of law regulation for a sector, in advance of it developing.”

Sunak’s positive response to proposals set out in both The Kalifa Review and the Lord Hill Review are promising for UK fintech, and were also praised by Lord Gerry Grimstone during UKFW21.

Grimstone stated that “both the Chancellor and the FCA have recently announced reviews. The background to Lord Hill’s review is that investors believe that London is no longer seen as the world centre for listings, life has moved on, other markets are ahead of us. This doesn't mean that we have to relax our standards, but we have to look at things like documentation requirements and our free-float requirements.”

With respect to a loosening of listing rules Lord Grimstone was questioned about whether he thinks the UK should be aiming for a ‘light touch’ regulation when it has historically been known for ‘blue-chip’ regulation, stating: “from my background as a major institutional investor, I would say absolutely that what we want is appropriate regulation. It’s a myth that financial service companies want ‘light touch’ regulation.”

He added that investors like knowing that what they invest in “is what is inside the tin, and that it matches up with what’s written on the outside of the tin.”

“What is a market at the end of the day? The market is nothing more and nothing less than the place where investors interact with investment opportunities and to get that to work, you’ve got to get both sides optimised.”

The announcements made by the Chancellor during the same event indicate a commitment to his previously expressed interest in supporting and growing UK fintech.

“Our vision is for a more open, greener, and more technologically advanced financial services sector. The UK is already known for being at the forefront of innovation, but we need to go further. The steps I’ve outlined today, to boost growing fintechs, push the boundaries of digital finance and make our financial markets more efficient, will propel us forward. And if we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial centre.”

While we are yet to have witnessed the complete story of Greensill, nor do we know who else will be embroiled in the saga, with such an appetite for development, further refined and “appropriate” regulatory frameworks, and government funding, with UK fintech finally being championed so fervently at the upper levels of Westminster it is unlikely that Greensill’s fallout will hamper the sector’s momentum.

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