Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Analysis & opinionMarch 29 2021

Credit Suisse execs may be at risk over Greensill scandal

Investors are understood to be lining up to litigate against the Swiss bank in London and Zurich.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Credit Suisse execs may be at risk over Greensill scandal

It has been hard to escape the spectacular collapse of Greensill Capital, the latest significant failure in the banking sector. As the dust settles, and administrators step in to control the supply chain finance (SCF) group, regulators and investors want to know how this happened, who is to blame and who will absorb the significant losses, estimated by Credit Suisse at up to $3bn.

Greensill Capital provided reverse factoring to large corporates, who agree with their suppliers that they will be paid by a finance provider, receiving funds more quickly in return for a small discount. The corporate later pays the finance provider in full. Rather than managing this risk internally, Greensill packaged the supplier bills into bond-like investments that Credit Suisse marketed and sold to its asset management clients, which gained exposure to the loans by investing in the Swiss bank’s SCF funds (reportedly worth $10bn). The funds were promoted to yield-hunting institutional investors as low-risk products that offered higher returns than cash deposits.

Credit Suisse insisted on these securitisations being insured, so once $4.6bn of insurance cover against non-payment by Greensill’s borrowers expired overnight, Credit Suisse suspended investment funds relied upon by the London-headquartered firm, triggering the collapse.

Credit Suisse is first in the firing line. Investors are understood to be lining up to litigate against the bank in London and Zurich, as several businesses indicate that they are unwilling to repay debts owed to Greensill (including Sanjeev Gupta’s GFG Alliance).

Credit Suisse scrutiny

What might be the consequences for Credit Suisse’s senior executives?

Questions will no doubt be asked about Credit Suisse’s complex and multi-layered relationship with Greensill, given that founder Lex Greensill was a wealth management customer of Credit Suisse’s private bank. Credit Suisse last year provided Greensill with a $160m bridging loan, which senior bank executives reportedly overruled risk managers to approve.

The Financial Times has also reported that Greensill is facing questions from regulators over its group-wide risk management and conflict of interest procedures. Several staff have reportedly been suspended in the wake of the scandal.

Questions will be asked about Credit Suisse’s complex and multi-layered relationship with Greensill

Despite the fact that the Greensill relationship was managed by Credit Suisse between London and Zurich, in light of a high-profile insolvency process involving a regulated firm, the UK’s Financial Conduct Authority (FCA) will feel obligated to investigate.

What might an FCA investigation uncover? Credit Suisse is required to take all appropriate steps to identify and prevent or manage conflicts of interest between the firm and its clients. The FCA might enquire whether there was any conflict between the bank’s own interests (tied in with the wider Greensill relationships), and also the interests of its asset management and institutional investor clients.

FCA enforcement

Alternatively, the FCA might consider the third principle of its core Principles for Businesses, reflecting the broad obligation requiring that firms “take reasonable care to organise and control … affairs responsibly and effectively” and implement “adequate risk management systems”.

Individual accountability is an increasingly important focus for FCA enforcement action. At the individual level, if senior managers within Credit Suisse’s London operations were under regulatory scrutiny, the FCA might conceivably focus on the following areas:

  • Breach of the Conduct Rules: the enforceable Conduct Rules set out expected standards of personal conduct and provide firms with standards to which most employees can be held accountable. Credit Suisse employees would be required to act with due care, skill and diligence, and additional conduct rules apply for senior managers;
  • Knowingly concerned in the firm’s breach: the FCA may take enforcement action against senior managers found to have been “knowingly concerned” in the firm’s contravention of a regulatory obligation, meaning that the individual in question had knowledge of the facts that caused the breach;
  • Statutory duty to take reasonable care (senior managers): even if an individual senior manager lacked any knowledge of the facts that caused the breach, they could nevertheless be held liable if they failed to take steps, that a person in their position could reasonably be expected to have taken, to avoid the contravention occurring (or continuing).

The FCA has a broad range of disciplinary powers at its disposal, ranging from issuing private warnings, public censure, or financial penalties. In severe cases, getting it wrong could lead to an individual being prohibited from working in financial services. The FCA will consider various factors before taking such action, including the nature and seriousness of the breach and the relevant person’s previous compliance history.

As Credit Suisse’s internal investigations are ongoing and the full facts are not yet known, it is difficult to guess what the ultimate ramifications will be. If crystallised losses are anywhere close to the worst-case $3bn figure, litigation – and the pressure for regulators to grapple with what went wrong and seek accountability – seems inevitable.

Stephen Elam is a partner and Shelley Drenth is an associate at law firm Cooke, Young & Keidan.

Was this article helpful?

Thank you for your feedback!