Britain’s Financial Conduct Authority has said that the business model used by collapsed supply chain financing firm Greensill Capital is causing a “high level of harm” and tighter rules are needed. The watchdog released proposals for public consultation to apply lessons from Greensill, which collapsed in March leaving investors with losses worth more than £1bn.
The FCA said it would make changes to its appointed representatives regime (AR), which allowed an unauthorised company like Greensill to conduct business activities, because it was supervised by a principal - an authorised firm. The regime, originally introduced in 1986 for sole traders or small firms selling services such as insurance, allowed Greensill to operate in Britain without a licence and conduct business worth millions of pounds.
There are about 40,000 ARs under 3,600 principals in retail lending and insurance. Some ARs have their head office outside Britain, which could be an attempt to access UK markets without a licence. The FCA’s executive director for consumers and competition, Sheldon Mills said, “The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high. There are real risks of consumers being misled and mis-sold with little scope for recourse.”
The FCA said harms arise from the failure of principals to adequately scrutinise ARs before taking them on and then supervising them. It proposed that principals provide the FCA with far more detailed information on an AR’s regulated and unregulated activities, revenue, and history of complaints. The agency is also assessing if firms that host ARs should hold more capital, given that some have hundreds or even thousands of ARs.