HoC 85mm(Green).tif

 

Business, Energy and Industrial Strategy Committee 

Oral evidence: Liberty Steel and the Future of the UK Steel Industry, HC 118

Tuesday 29 June 2021

Ordered by the House of Commons to be published on 29 June 2021.

Watch the meeting 

Members present: Darren Jones (Chair); Alan Brown; Judith Cummins; Richard Fuller; Paul Howell; Mark Pawsey; Alexander Stafford.

Treasury Committee member also present: Rushanara Ali.

 

Questions 214 - 439

Witnesses

I: Stephen Rose, Chief Executive Officer, Wyelands Bank.

II: Milan Patel, Partner, King and King.

III: Patrick Magee, Chief Commercial Officer, British Business Bank.

 


Examination of witness

Witness: Stephen Rose.

Chair: Welcome to this morning’s session of the Business, Energy and Industrial Strategy Select Committee for our third hearing on Liberty Steel and the future of steel in the UK. We have three witnesses today each in turn, and we start with Stephen Rose, who is the CEO of Wyelands Bank. Good morning to you, Mr Rose.

Stephen Rose: Good morning.

Q214       Chair: Can I start with a question about your understanding of why Sanjeev Gupta bought Wyelands Bank in December 2016?

Stephen Rose: Yes. When I joined the bank in October 2019, I joined to help the bank implement the second phase of its regulatory business plan, which had a primary focus on developing its business for UK customers outside the GFG Alliance. The first phase, if I look back in the business plan to when Mr Gupta acquired Wyelands Bank, was that the bank would provide supply chain finance, 70% to 80% of which would be sourced from the GFG Alliance or from customers of the GFG Alliance.

When I refer to supply chain finance, what I mean is that the intention was that entities within the GFG Alliance would sell invoices to the bank. The bank would pay cash for those invoices, and the bank would then take the exposure to the buyers of the transaction and collect in the cash from the buyers. The intention was that, certainly for the first three years of the plan, the bank would be providing cash flow into the GFG Alliance by purchasing invoices.

Q215       Chair: It was bought as a private entity to help fund GFG Alliance businesses. Presumably, it could not have been claimed in the first phase to be independent of Sanjeev Gupta. He owned it; it was for his business interests; and it was his clients who were accessing supply chain finance.

Stephen Rose: As the regulatory business plan sets out, the bank was set up to be an independent business. While, as the ultimate beneficial owner, Mr Gupta would have input on the bank’s strategy, the bank’s daytoday working was run by an independent board that was strengthened and built further over time. The bank had all its controls and compliance set up to run independently.

It is true to say that the majority of its business, as was intended in the regulatory business plan, was sourced through GFG Alliance. That is not that unusual. Several large industrial companies have finance houses that provide finance through to customers. They still run operationally and from a governance point of view in an independent way. The bank was independent and did run itself independently. From when I joined in October 2019, I have seen the bank perform that function independently.

Q216       Chair: In phase one, what proportion of the bank’s clients were GFG Alliance customers?

Stephen Rose: If I can describe that in terms of the volume of its business when it was buying the invoices from those clients, it was roughly 80%, or something like that.

Q217       Chair: It was 80% in phase one. You said that in phase two you had to diversify to other clients. Since the start of the phase two process, how has that percentage changed?

Stephen Rose: The percentage has not changed a lot, because phase two was just being implemented and made live post my joining, which was in October 2019. The PRA placed restrictions on the bank about the same time as I joined. In reality, while we had built the capability to deliver the second phase, we were not able to roll that out and give additional support to nonGFG introduced businesses at that point. There were only two clients at that point that were in the new model, as it were, of being UKintroduced.

There were in the first phase other invoices purchased that were not connected to GFG, but the second phase of the business plan never really had a chance to get going. Once the board had decided in March to go down the path of collecting in the firstphase balance sheets, which we refer to as the solvent winddown plan, we were not putting new business on until that had completed. Our focus changed, and my focus was then on collecting in the business so we could repay our depositors safely.

Q218       Chair: In May 2020, Mr Gupta lent the bank £75 million. About half of that has been converted to equity. What has happened to the other half?

Stephen Rose: The other half remains as a subordinated obligation to be repaid to Mr Gupta. I emphasise that it is very heavily subordinated. All other creditors would be met and repaid first. The money is not due back to Mr Gupta before any other creditors have been repaid. It is more likely, given the trajectory we are on to complete the solvent winddown plan, that the outstanding loan would be used to purchase back some of the outstanding invoices from GFG rather than be paid back as cash.

Q219       Chair: There is some concern about how the corporate governance of GFG Alliance is very unusual. There is this issue about whether different entities are related parties and what that means for regulatory compliance in terms of lending regulations. Do you have any views on how the bank lent to GFG Alliance entities in the context of what are related parties? As a consequence of your view of that, did you lend in a way that was different to perhaps a commercial bank?

Stephen Rose: If I can draw on my work on the connected parties, which really began around June 2020, we looked at the book that was outstanding at that point, which would have included SSUK and Liberty Steel. When we completed that work, we identified that some of the initial connectedparty analysis that had been done was insufficient in some respects. That mainly reflected the way in which the company had been going through fast growth and reflected where some of the training initially could have been better for some of the team.

As a result of that, we reached a different conclusion on the level of connectedness than the initial team had done. That partly reflects the fact that some of the buyers had developed trading relationships that were different to what was expected and therefore had become connected. It also reflected that some of the facilities were not operating as they were expected to.

GFG companies were not treated differently, but there were challenges with how the initial connectedparty assessment was done. In retrospect, the facility should have been set up with more robust safeguards—we would have referred to those either as conditions precedent before the facility went in or conditions subsequent after the facility had been put in—that would have protected the book from increasing connectedness over time, which is what we saw.

Q220       Chair: Initially there were related parties that the bank did not identify as being related parties, and when you redid the work it turned out that they were.

Stephen Rose: I am not trying to be pedantic here, but there is a difference between “related” and “connected”. “Related” refers to essentially a control relationship and forms the basis of what we file in the accounts. “Connected” has two elements in the test, one of which is around control and the second of which is really around economic dependency. It was the economic dependency that developed over time, rather than changes in the control relationship, which would have meant we would have had a different view of related parties.

Q221       Chair: To be clear on that, there is a concern that a number of companies were owned by friends of Mr Gupta, even if Mr Gupta was not a listed director at that company. You would not deem that relationship to be a related party but perhaps a connected party if, for example, that entity was wholly reliant on income from the other one.

Stephen Rose: That is right. We would not have deemed it to be related. If it turned out that it had levels of economic dependency on other parts of GFG, we would have connected it. When we completed our review in June 2020, we did identify that some of the counterparties were either trading between one another or trading with a third party not related to the bank at all, or had developed common sources of funding. In different ways over time those entities had demonstrated economic dependency. As that was identified, that was included in our reporting. Certainly from June 2020 we reported as connected those amounts that were outstanding.

Q222       Chair: That is what you meant just now when you said that some of those entities were operating in a way that you had not expected initially.

Stephen Rose: The ways in which they operated did contribute to the increase in connectivity. They contributed in two main ways. First, a supply chain transaction itself is fairly straightforward, but it depends on people operating it with discipline: sending the right documents at the right time, creating the right invoices at the right time, et cetera.

The way the facility was being operated meant that the bank was not getting its security, in legal terms. That problem with getting the bank’s security meant it lost the ability to view the exposure as being with the buyer and then had to look through to the seller. That was a principal issue that created connectivity. Mechanically, the transactions were not being completed in the way that they were expected to complete when the transaction was entered into.

There was a second problem area in terms of how the facilities were operating. In some cases in a facility with supply chain finance, it is a common and important factor that, when cash comes in on the assets you finance, the cash is sent to the bank. There were occasions when that cash was not returned to the bank in a timely fashion. As a result of that, they had breached the terms of the facility, and therefore the level of connectivity went up.

Q223       Chair: Since you have done this review of related and connected parties, and taken what sound to me like sensible decisions, which you have just explained, Mr Gupta’s GFG Alliance confirmed that it was reviewing its relationship with Wyelands Bank. Do you understand why it has decided to review that? What has the outcome of that been so far?

Stephen Rose: The collapse of Greensill inevitably means that, as an ultimate beneficial owner, Mr Gupta has much higher priorities in terms of looking after thousands of people’s jobs in the steel industry. I am sure that is a higher priority than being able to provide additional funds to relaunch the bank. That is a priority one can understand.

The result of it is that we now are not able to relaunch the bank with financial support from Mr Gupta, and I am in discussions with some parties who may look to acquire the intangible assets of the bank or may look to take over some of the people from the bank, as clearly we have a readymade team who can run a bank and who have demonstrated that they can adapt to some difficult circumstances. We will see where that goes.

Q224       Chair: It is not that Mr Gupta has walked away from you because you are no longer helpful to him, right?

Stephen Rose: No, not at all. I do not have that impression at all. In my dealings, I have always found Mr Gupta to be straightforward. No sense of that has been put over. In fact, on a personal level, when I had a family bereavement he offered very good personal support. I do not think he just walked away from this, no.

Q225       Richard Fuller: I just have a couple of quick followups. Mr Rose, on this issue of the reclassification, could you just confirm whether that was because the businesses involved changed their relationship or because your review was more thorough?

Stephen Rose: If I am honest, in retrospect—you have to bear in mind that I am looking with the benefit of hindsight here—it is a bit of both. We had clear evidence that new trading relationships appeared to develop. As I said, they were not always between one another; they could be with a completely independent third party but happen to be the same. We would identify that through things like debtor lists, and we would see common names on the debtor list and things like that. Another example might be where they took common sources of finance. It became clear as we went through 2020 that some of the counterparties had funding from Greensill. Once we could see what happened to Greensill, that meant we connected those entities.

So there were changing circumstances over time that increased the levels of connectedness, but we do recognise—again, I have to say that this is with the benefit of hindsight—that some of the earlier work was deficient in some respects, partly because it was very difficult for them to get some independent information as some of the parties were relatively new. It is also something where we put a lot of effort into training, developing and taking professional advice, which meant we were in a stronger position to do the testing.

Q226       Richard Fuller: If I take a specific example that you may have to mind, the relationship with Platinum Commodities and BCL Commodities, are you aware of at what point Wyelands became aware of the connection between those two businesses and GFG? How were they classified originally and how do you classify them now?

Stephen Rose: They were originally classified as not connected, because there was no control dependency between them and GFG, and there was no economic dependency identified in the initial review. When we completed our review in June 2020, we had identified that their facility was one of those where they were not operating it in the right way and where some of the stock that was being sold was part of those agreements without the cash being passed to the bank. Because of that, we deemed that the exposure was actually to SSUK rather than to those companies, and we therefore connected them.

That was not because there was change in control relationship, but because the way in which the facility was operating, we felt, meant that in reality the exposure was to SSUK. We have since been trying to collect in that outstanding amount.

Q227       Richard Fuller: You did not mention that the principals of those two businesses, Mr Delgoda and Mr Occhi, were longstanding associates of Mr Gupta. Was that not a factor in your evaluation?

Stephen Rose: It is a factor, but in itself it is not a decisive factor. People know each other from the golf club or something, and they make transactions.

Q228       Richard Fuller: They do not lend each other £10 million. I do not know what golf club you go to, but I do not go down to play golf and get 10 million quid.

Stephen Rose: I do not play golf at all.

Richard Fuller: Perhaps it is not a very good analogy, then.

Stephen Rose: No, maybe not. What I am trying to draw out is that the fact that people know one another, in and of itself, does not mean there is a control relationship or an economic dependency. Our testing was looking very specifically at those items. As I said, from our review in June 2020 we connected those loans and any reporting from that point has been connected.

Q229       Richard Fuller: You confirmed in answer to a question from the Chair that Mr Gupta lent the bank £75 million. Where did Mr Gupta get the money from?

Stephen Rose: I would not know specifically where Mr Gupta got the money from. When we received cash, we validated the source of funds as being from an appropriate account and we completed our normal KYC tests. We are happy it came from Mr Gupta. We would not attempt to find out—because it is not part of our business—where those funds were sourced from.

Q230       Richard Fuller: But you undertook all the appropriate testsKYC et cetera.

Stephen Rose: Yes, we did. It was also monitored closely by our regulator, because it wanted to ensure as part of the solvent winddown plan that the work was properly completed.

Q231       Richard Fuller: You mentioned that 70% to 80% of the business of the bank was with GFG businesses. What was the maximum percent of the bank’s core capital that was exposed to GFG Alliance companies? Was that 70% to 80% or was it a different figure?

Stephen Rose: As a statistic, I do not have that to hand. I would be happy to provide it after the hearing. What I would say, if this helps—hopefully it will help—is that when we completed the connection analysis in June 2020 the largest connection we found was circa £100 million.

Q232       Chair: Mr Rose, it was reported that the bank lent £64 million to buy a property in Mayfair, which essentially was the head office of GFG Alliance. That was a very significant percentage of your capital base at the time, was it not?

Stephen Rose: It was. I can refer to the description of the transaction from my review of the records, as I was not there when the transaction was completed, but the acquisition of the property was a highquality asset. It was acquired from a third party, so it was not the case that funds were not going into the GFG Alliance or anything like that. It was acquired from a third party. The bank collected high levels of rent from that property throughout the period it owned it.

The bank also benefited from having made that decision to acquire the property, because, when the bank decided to implement the solvent winddown plan that I referred to earlier, it then clearly had to liquidate its assets to generate highquality liquid assets so we could repay our depositors. We were able to sell the Maddox Street property just as the pandemic started to have a major impact. One of the impacts of the pandemic on the bank was that it locked the markets where many of the invoices had been acquired from. It was actually quite difficult for the bank to generate liquid assets during that period, whereas the sale of the property did generate over £55 million of cash, which was a vitally important component of the bank being able to repay all our depositors in March of this year.

Clearly, nobody had foreseen the pandemic, but it was nevertheless, as it turns out, a useful purchase. The bank did lose on the sale of the transaction—I am not trying to hide from that—in the sense that the sale price was less than the original purchase price, but in the meantime the bank had received rental income from that property that was all paid appropriately, so the cash loss was actually quite minimal and it was very important to help with the liquidity of the bank.

Q233       Chair: It may have been useful with hindsight, but I am interested to understand how your relevant decisionmakers at the time decided to spend what I understand to be around 50% of your capital base on a building for GFG Alliance. If any other bank did that, that would be a very significant unusual event, would it not?

Stephen Rose: It would certainly be a significant event.

Q234       Chair: And unusual. Do any of the other banks lend nearly half of their capital base to buy a building for one client?

Stephen Rose: I would not know.

Q235       Chair: It is unusual. If you could help me understand this, how did Wyelands Bank decide to do that? It seems strange.

Stephen Rose: From the records that I can see, because clearly I was not there at the time, it was identified as a goodquality asset for the bank to buy. It was generating significant rental income and, as I say, it played a useful role in meeting the requirements to repay our depositors.

Q236       Chair: Who suggested to the bank that it should buy the building?

Stephen Rose: I do not know the answer to that, because I was not there at the time.

Q237       Chair: That was not minuted in the documents when your bank made this decision to spend half of its capital base on one asset.

Stephen Rose: It may have been. I cannot recall it.

Chair: You cannot recall it. If maybe you could check with colleagues and write to us about that, I would be keen to know the answer. Thanks, Mr Rose.

Q238       Paul Howell: Mr Rose, touching back on supply chain finance for a second, you have talked about the simple principle that the bank buys the invoices and facilitates the cash. Normally there is a cost to that in terms of a commercial rate, a discounted value for the invoices or something. Was that at a commercial rate or was it any different because of the relationships that were there?

Stephen Rose: The rate I observed was what I had seen in other companies. It looked like a commercial thirdparty rate. I saw no evidence that it was anything other than that.

Q239       Paul Howell: Moving on to a broader understanding, can you tell us how much money was provided up front by Wyelands Bank to Liberty Speciality Steels over the last three years?

Stephen Rose: The amount varied over time, but, broadly, the amount lent to SSUK was circa £40 million, give or take. It is that sort of amount.

Q240       Paul Howell: Each year?

Stephen Rose: Yes. I do not mean that we lent £120 million by the end of it. About £40 million was lent into the facility, and that amount stayed broadly the same over the period. About £20 million of that was then repaid to the bank, but that was repaid as part of the solvent winddown plan. It was running at about £40 million during the normal life of the bank, and then it has come down to about £20 million.

Q241       Paul Howell: It is at about £20 million now.

Stephen Rose: Give or take, yes.

Q242       Paul Howell: All the conversation so far has been about supply chain financing. Was any financing extended to be used in the purchase of steel assets or businesses by GFG?

Stephen Rose: If I have understood what you are meaning correctly, no. Let me just add this, to make sure I am understanding your question correctly. In acquiring the invoices, the security for those invoices was typically steel stock. There were assets that were financed in the sense of ingots and blooms of steel, and things like that, but not furnaces, buildings, property or anything like that. I hope that helps.

Q243       Paul Howell: Yes, the difference between a working capitaltype asset and a fixed capital asset. You are saying it was all on the working capitaltype assets.

Stephen Rose: Yes, absolutely.

Q244       Chair: On the working capital, how did you verify the steel that was being sold between various companies?

Stephen Rose: We did stock checks, and we were supported by a third party in that.

Q245       Chair: You have records where you would check the stock and there was steel in a container or something.

Stephen Rose: Correct.

Q246       Chair: There were some reports of concerns about trading between different group companies, where ultimately the steel ended up back with the Liberty Steel Newport entity. It sold the steel to another entity, which sold it to another entity, and then it was sold back to Liberty Steel Newport but with supply chain financing raised at two points in the journey. Is that unusual?

Stephen Rose: We saw no evidence of that in any of our work, in the facilities that we had.

Q247       Chair: What is your understanding of future receivables?

Stephen Rose: We do not fund future receivables and I would not ever do so.

Q248       Mark Pawsey: Mr Rose, Mr Gupta acquired Wyelands Bank in 2016. Is that right?

Stephen Rose: Yes, that is correct.

Q249       Mark Pawsey: Could you tell us about the audit history of the bank? Who has provided audit?

Stephen Rose: The auditor for the bank, certainly when I arrived, was PricewaterhouseCoopers. I believe they were the auditors from the start. Forgive me if I am mistaken, but I am pretty sure that they were the auditors from the start. They resigned after completing the 2019 audit and Mazars was our auditor for the 2020 audit.

Q250       Mark Pawsey: Mazars is still the auditor.

Stephen Rose: It is still the auditor, yes.

Q251       Mark Pawsey: Why did PwC stand down?

Stephen Rose: The reason they gave to us was that they had a perceived conflict of interest, which, as I understand it, was because they were pursuing other business with GFG.

Q252       Mark Pawsey: There are some media reports suggesting that the lending practices of Wyelands made some audit firms reluctant to audit the bank. Do you accept that?

Stephen Rose: I cannot speak about what was on the minds of other audit firms. I was not surprised, with the amount of media reporting around the GFG Alliance as a whole, that several other audit firms declined the opportunity, but it was essentially explained to us that, because the audit was at the peak time in the audit year, they did not have the resources to do it.

I personally am extremely grateful that Mazars helped us secure the repayment of our depositors and run our facilities by providing us with a thoroughly professional audit on the March 2020 accounts, without which we would not have been able to continue to run the bank and to repay all our depositors with interest to term.

Q253       Mark Pawsey: You do not believe that the connectedness that you have referred to earlier and the general concerns about the situation at GFG had any hand in audit companies declining to work on the audit of Wyelands.

Stephen Rose: You are asking me to give conjecture that I cannot give. I cannot explain why they decided that. They made their decision. It was not communicated to us in that way.

Q254       Mark Pawsey: If I could now turn to the Prudential Regulation Authority’s investigation into the relationship between GFG Alliance and the bank, those concerns of course were referred to the National Crime Agency and the Serious Fraud Office. Why do you think that was?

Stephen Rose: I note the comments that were made by the PRA in evidence to the Treasury Select Committee in which the Deputy Governor declined to give any further information, because he did not want to prejudice any of that work. I am in the same position. I cannot give you any further information on that. I have had no contact from the National Crime Agency. Clearly, I cannot make any reference to something for fear that it is prejudicial.

Q255       Mark Pawsey: What do you think the CEO of the Prudential Regulation Authority meant when he said in his evidence session to the Treasury Select Committee, “The more we dug, the more concerned we became”?

Stephen Rose: It was clear from the correspondence when I arrived that, whereas the PRA had approved the original regulatory business plan, which clearly sets out that the original source of the supply chain funding would be the GFG Alliance, it then became concerned about some of the internal systems and controls around the connectedparty work. It also had other concerns. I am assuming that that was what he was referring to.

As was made clear in that testimony, they raised restrictions over the bank reflecting those concerns. The bank has fully supported the PRA in all of its information requests, including the unannounced visit that he referred to in the Treasury Select Committee. We have provided information and data throughout, and we will continue to support any work that they want us to do.

Q256       Mark Pawsey: Mr Rose, you have worked in banking and finance for many years. Are the things that you are talking about to us now usual, in your experience?

Stephen Rose: I am fortunate to have had a long and varied career, and I have not been in a company that was so young in its growth before. The challenges that I have seen here reflect a lot—

Q257       Mark Pawsey: Are the issues of concern purely because the business was a young business or are they because of other factors?

Stephen Rose: The fact it was a young fastgrowing business is a major factor to it. I joined the bank to help take it through the second phase of its plan and to help it fix the problems that had developed in the first phase. I came to help fix it.

Once it became clear that the only way forward would be to collect in that first phase of the balance sheet, because it was overconcentrated and the problems needed to be fixed before we could go on, I then led the work to collect in the balance sheet. I am very proud of the fact that, with my team, through a global pandemic we managed to collect in enough cash so that all our depositors were paid with interest to term without any call on the FSCS. In that regard, this has certainly been one of the more challenging times in my career, and I am proud that my team stood up to that challenge.

Q258       Mark Pawsey: Mr Rose, you had to carry out that work because the Prudential Regulation Authority ordered the bank to repay £194 million to its retail depositors. Have you ever known that to happen before with a bank? Have you ever received that instruction?

Stephen Rose: For a moment, I need to step back a little bit. Just give me a minute to position where we got to, to get that request from the PRA.

Q259       Mark Pawsey: It was an order, Mr Rose, not a request.

Stephen Rose: I will use the right language. I apologisethe order. In February 2020, the independent nonexecutive directors of the bank had met and determined that it was necessary to collect in that first phase of the balance sheet and implemented the solvent winddown plan. They determined to have a solvent winddown plan before they then consulted the PRA to get its clearance for that, and then they informed Mr Gupta, as ultimate beneficial owner, that they would be doing that.

They acted independently to instigate that solvent winddown plan. That solvent winddown plan would always culminate in the repayment of the depositors. We were repaying the depositors and had taken positive actions throughout the period to reduce the size of the depositor book. Through the actions we had taken and by collecting in the cash as we did, we were in a position to repay the depositors. At the time, we were repaying the depositors to term when those deposits matured. The reason we were doing that was that many depositors plan their financial arrangements around when they receive the cash, for their tax affairs or whatever, so we did not want to disturb their financial planning by forcing the payment back.

Clearly, the PRA was aware, or I assume it was aware, at that point of information about what was happening at Greensill. I assume that the impact of Greensill collapsing on our ultimate beneficial owner meant that the PRA was concerned that there could have been contagion; therefore, it wanted us to repay the depositors much more quickly; therefore, it issued the order to repay.

If I had been in their position, I would have reached a similar conclusion. I completely get why they did that. We were not privy to that information, so we could not make that decision. What we did do was operationalise that request as soon as it came through. I do not know any other bank that has managed to fulfil an order like that in less than three weeks and repay all of its depositors.

Q260       Mark Pawsey: This is the first question: how many other banks do you know of that have ever been required to fulfil an order such as that? We know it is highly unusual. You are suggesting that the problems arose because of the relationship with Greensill and nothing that was fundamentally wrong within the operation of the bank. Is that what you are saying to us?

Stephen Rose: I am saying that the timing of the repayment of the depositors, I believe, was because the PRA was aware of the problems, potentially, going from Greensill to where we were.

Q261       Mark Pawsey: Are you suggesting that the PRA had no concerns, then, about the operation of Wyelands Bank?

Stephen Rose: No, I have not said that at any point.

Q262       Mark Pawsey: So it did have concerns about the operation of Wyelands Bank, in which case, what were they?

Stephen Rose: As I explained, the concerns, as I understand them, from the PRA were around the operations of systems and controls to determine the level of connectedness in the bank’s exposures. That is looking at the buyer side of the transactions that we carried out. When we completed our assessment in June 2020, we agreed that there were deficiencies in the original versions of the reporting, which we then put right.

Clearly, by this point, we were also in the middle of the global pandemic. One of the impacts of the global pandemic was to exacerbate the delays in repayments. Because of the delays in repayments, clearly, the board shared the PRA’s concern to make sure that our depositors were protected by collecting in those payments so that they could be repaid and not left exposed. When the order was made, we had collected in enough cash to repay them. They would have been repaid over time. That is why I think that the primary concern the PRA had was the risk that events in Greensill might cause things to spiral out of control.

Q263       Chair: Mr Rose, when you joined Wyelands Bank in 2019, what attracted you to the role?

Stephen Rose: I was looking to move to a Londonbased role. I had been out of the City for some time. The opportunity at Wyelands came up. I knew they were having some challenges with their growth plan. As I am towards the later years of my career, I thought I had something to add and I could help them to resolve those challenges.

Q264       Chair: How did you find out about the role? Did a recruiter get in touch? Was it on LinkedIn? How did you find out about it?

Stephen Rose: It was through a recruiter.

Q265       Chair: Did you have any personal or professional connection with Mr Gupta before you took on the role?

Stephen Rose: No, none at all.

Q266       Chair: It was reported in the most recent accounts for the bank that you have doubled your expected credit losses, which I am assuming is coming from defaults on the supply chain finance side of the business. I am quoting here. It says that information and events that have developed since 30 April 2020, and that were unforeseen at year end, have led to that doubling of the credit losses. Could you add a bit more colour to that? What factors led to the doubling of your credit losses in your latest accounts?

Stephen Rose: The contributing factors were several, I guess. There were some exposures where enforcement of our security, because the buyers were based in overseas territories, has proved to be extremely difficult and some legal decisions were taken in those jurisdictions that we did not expect.

Secondly, we had expected there to be refinancing for some of the facilities, like SSUK and the steel facility. We had expected there to be some refinancing, which did not then materialise, ultimately because of the challenges in Greensill, but that meant we took the view to increase the level of provisions.

Q267       Chair: Let me just check. Forgive me if I have got myself confused here. You had lent money on the basis of an invoice for something that would later be paid to you by a company that was waiting to be financed by Greensill and, because of the Greensill collapse, that company was unable to pay you the money that you had already paid out for the original invoice. Is that right?

Stephen Rose: No, I apologise. That was not what I meant. I will try to be more clear. While we had originally believed that we could rely on or take as our exposure point the buyer, if we had made the decision on the connectedparty analysis that the true exposure lay with SSUK, we then had to look at, for example, SSUK and make a decision on its financial strength. Once the Greensill collapse had occurred, our assessment of the financial strength of SSUK had to be reduced and, because we were now showing our exposure to SSUK, we therefore had to increase the provision.

Q268       Chair: I see. The connectedparty analysis essentially shrunk the amount of money that was available in the network of companies that you were analysing.

Stephen Rose: Yes.

Q269       Chair: The bank also said in May that it was looking to engage investors to buy the bank. You have alluded to that already. Do you have any updates on that that you would like to offer to the Committee?

Stephen Rose: It is extremely unlikely that the legal entity of the bank would be sold to anybody, not least because the operation of change in control is now such that a change in control is not an easy path to a licence. There would be no gain to somebody acquiring the legal entity of the bank.

What we are endeavouring to see is whether there is any value to anybody in using the intangibles that the bank has developed, predominantly around the remediation of the issues that were raised by the PRA and its people, if somebody wishes to take those into a new legal entity. We do not think the legal entity of the bank will have a future.

Chair: Thank you, Mr Rose. That is the end of our questions for you this morning. Thank you for taking the time to be with us. We are grateful to you. We will say goodbye to you, Mr Rose.

 

Examination of witness

Witness: Milan Patel.

Chair: We will now welcome Milan Patel, who is a partner at the audit firm King and King. Good morning, Mr Patel.

Milan Patel: Good morning.

Q270       Chair: This is my first question to you. According to the media, King and King has two chartered accountants. Is that correct?

Milan Patel: We are a firm of six partners.

Q271       Chair: There are six partners and two chartered accountants.

Milan Patel: We are two chartered accountants and four chartered certified accountants.

Q272       Chair: Has that been the case for a long time or has that number changed recently?

Milan Patel: We have been between five and six partners for about 20 years.

Q273       Chair: I wondered if you could explain to the Committee how long you would expect an audit of a company to take. You could take one of the examples that we are clearly interested in, Liberty Steel. How much of a partner’s time would be taken up dealing with an audit of one of these companies?

Milan Patel: Generally, most of our audits probably last two to six weeks. In terms of partner time, it is probably three to 10 hours for an audit.

Q274       Chair: It is three to 10 hours per partner on average for two to six weeks for an audit.

Milan Patel: That is right.

Chair: We will come back to some of that in a second.

Q275       Mark Pawsey: Could I just ask you, Mr Patel, about King and King itself? As an organisation, you have filed accounts as a dormant company since 2011. Can you explain to us perhaps how King and King qualifies as a dormant company?

Milan Patel: King and King Chartered Accountants is a partnership. We have a dormant company that has never traded. It is just a company that we set up many years ago in case we wanted to trade as a company, but we have never used that company. We were established in 1956 and have been going on for 65 years.

Q276       Mark Pawsey: As of last week, you are no longer listed as dormant at Companies House. Why did you change?

Milan Patel: Are we not listed as dormant?

Q277       Mark Pawsey: As of last week, you are no longer listed as dormant at Companies House. Is that right?

Milan Patel: No, that should not be the case.

Q278       Mark Pawsey: You continue as a dormant company.

Milan Patel: We continue as a partnership.

Q279       Mark Pawsey: Okay. You have just spoken about the partners working on the audit of GFG Alliance. How many partners worked on those accounts? You said you have six partners in total. Would every partner have been involved in the GFG accounts?

Milan Patel: I do not know whether you are aware, but I do not have consent to talk about GFG or the Liberty companies, but, generally, you would have at least two partners involved in most audits.

Q280       Mark Pawsey: There would only have been two partners at any one time exposed to the activities of GFG.

Milan Patel: As I say, I cannot talk about GFG, but generally we are auditors to a specific company unless we are auditors to a group. Where we are auditing a company, there would generally be an engagement partner and a technical partner, and we would have a team underneath that.

Q281       Mark Pawsey: Can you tell us which of the partners were responsible for the accounts for the last yearthe most recent accounts? Which two partners were responsible?

Milan Patel: It is public knowledge that I am the engagement partner, so I am the partner responsible for signing off audits.

Q282       Mark Pawsey: At Companies House, there are over 100 companies with Mr Gupta listed as an active director. How many of those 100plus companies were audited by King and King?

Milan Patel: I am not sure I can answer that question. We do not audit all the companies of Mr Gupta.

Q283       Mark Pawsey: King and King audits all the companies of Mr Gupta.

Milan Patel: No, we do not.

Q284       Mark Pawsey: Right, okay. Who are the other auditors, Mr Patel?

Milan Patel: I would not know all the auditors.

Q285       Mark Pawsey: You know which companies you audit.

Milan Patel: Yes.

Q286       Mark Pawsey: But you do not know who the auditors are of other GFG companies.

Milan Patel: I have read in the press and that, but I have not gone out to find out who the auditors of all of Mr Gupta’s companies are.

Q287       Mark Pawsey: What proportion of Mr Gupta’s companies does King and King provide the audit for?

Milan Patel: I would not know the percentage, because for all our clients we are appointed for each individual company that we act for.

Q288       Mark Pawsey: How many GFG companies do you provide the audit for?

Milan Patel: Your statement of GFG is difficult first of all because GFG is not an entity. When there is talk about GFG, it is a little confusing in terms of what we are talking about.

Q289       Mark Pawsey: Let us talk about the companies where Mr Gupta is registered as an active director. We know there are over 100 of those. How many of those companies, where Mr Gupta is an active director, does King and King provide audit facilities for?

Milan Patel: I would not have the information with me at the moment, but it is something that we can provide.

Q290       Mark Pawsey: Okay, you will provide that information in writing to the Committee.

Milan Patel: Yes.

Q291       Mark Pawsey: Thank you. GFG Alliance is a pretty substantial organisation. It accounts for, we understand, something like £2.5 billion of revenue. Is King and King of a sufficient size to be able to deal with an entity of that size?

Milan Patel: Due to the confidential nature, I cannot talk about GFG, but generally, in terms of audit and that, it is a matter of the resources that an organisation would have to deal with an individual audit.

Q292       Mark Pawsey: Is your firm, with six partners, of a sufficient size to deal with any organisation representing £2.5 billion of revenue?

Milan Patel: Yes, we are capable of doing that as an organisation.

Q293       Mark Pawsey: As a chartered accountant, is that a usual situation? Would it be usual to find a firm with six partners auditing a group of companies the size of GFG Alliance?

Milan Patel: Just to correct you there, it is not a group that we are auditing. We are auditing some companies.

Q294       Mark Pawsey: You are going to tell us the proportion of the GFG business in writing.

Milan Patel: As a firm, we have many clients who have hundreds of millions of pounds of turnover. It is not unusual for a firm of our size to have clients that have hundreds of millions in turnover.

Q295       Mark Pawsey: May I ask you how many other clients you have with, let us say, for the sake of argument, more than £1 billion of turnover?

Milan Patel: I could look it up. I do not have the details at hand. Like I said, we do not audit a group. We audit individual companies.

Q296       Mark Pawsey: Okay, but you do not audit any groups with a turnover of £1 billion.

Milan Patel: I would have to check.

Q297       Mark Pawsey: But you do not know.

Milan Patel: I do not know that particularly, because I am not the only partner. We have many clients in the firm, so it would all depend on

Q298       Mark Pawsey: You are suggesting to us that there is nothing unusual about companies the size of those that you audit within the GFG Alliance being audited by a firm of your size. You think that there is nothing unusual about that.

Milan Patel: No, there is nothing unusual, because, as I said, we do not audit the group. We audit individual companies.

Q299       Mark Pawsey: Okay, and there are lots of other firms of six partners auditing companies of the same size as the part of GFG Alliance where you carry out the audit.

Milan Patel: It is absolutely possible.

Q300       Mark Pawsey: Is it possible or likely?

Milan Patel: It is likely.

Q301       Chair: Mr Patel, you just said that you do not have consent to talk about GFG or Liberty. Who told you that you did not have consent to talk about them?

Milan Patel: It was the lawyers of GFG.

Q302       Chair: GFG’s lawyers wrote to you and said you were not allowed to speak about GFG or Liberty Steel.

Milan Patel: That is right.

Q303       Chair: Coming back briefly on the status of King and King Ltd, we checked Companies House, and King and King Ltd was dormant for many years until last week, when it was made active. Given the size of your groupthere are six of you—you surely know that somebody filed paperwork at Companies House to make the limited company active after all these years. I just wonder whether you might explain why you did that.

Milan Patel: That must be a mistake. I think they were just filing a confirmation statement that the company continues. We are not trading under the name of King and King Ltd.

Q304       Chair: It is not a mistake, Mr Patel. It is on Companies House. It went from dormant to active last week.

Milan Patel: I do not understand when you say “active”. Even a dormant company is still active at Companies House. The registration and all the details continue. “Dormant” means it is not trading, and we are not trading under the name of King and King Ltd.

Q305       Chair: Right, thank you for that. One of the issues I just want to pursue with you here is the number of companies that you provide audit services to. You