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

Oral evidence, 29 June 2021.

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.

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.

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 day‑to‑day 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.

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.

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 non‑GFG introduced businesses at that point. There were only two clients at that point that were in the new model, as it were, of being UK‑introduced. 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 first‑phase 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.

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.

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 connected‑party 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 connected‑party 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.

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.

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.

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.

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.

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.

Richard Fuller

I just have a couple of quick follow‑ups. 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.

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.

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.

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.

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.

Richard Fuller

But you undertook all the appropriate tests—KYC 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.

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.

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 high‑quality 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 high‑quality 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.

Chair

It may have been useful with hindsight, but I am interested to understand how your relevant decision‑makers 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.

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.

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 good‑quality 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.

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.

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.

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 third‑party rate. I saw no evidence that it was anything other than that.

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.

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.

Paul Howell

It is at about £20 million now.

Stephen Rose

Give or take, yes.

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.

Paul Howell

Yes, the difference between a working capital‑type asset and a fixed capital asset. You are saying it was all on the working capital‑type assets.

Stephen Rose

Yes, absolutely.

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.

Chair

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

Stephen Rose

Correct.

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.

Chair

What is your understanding of future receivables?

Stephen Rose

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

Mark Pawsey

Mr Rose, Mr Gupta acquired Wyelands Bank in 2016. Is that right?

Stephen Rose

Yes, that is correct.

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.

Mark Pawsey

Mazars is still the auditor.

Stephen Rose

It is still the auditor, yes.

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.

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.

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.

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.

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 connected‑party 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.

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—

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 fast‑growing 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.

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.

Mark Pawsey

It was an order, Mr Rose, not a request.

Stephen Rose

I will use the right language. I apologise—the order. In February 2020, the independent non‑executive 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.

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.

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.

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.

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 London‑based 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.

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.

Chair

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

Stephen Rose

No, none at all.

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.

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 connected‑party 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.

Chair

I see. The connected‑party analysis essentially shrunk the amount of money that was available in the network of companies that you were analysing.

Stephen Rose

Yes.

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.

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.

Chair

There are six partners and two chartered accountants.

Milan Patel

We are two chartered accountants and four chartered certified accountants.

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.

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.

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.

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.

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?

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.

Mark Pawsey

You continue as a dormant company.

Milan Patel

We continue as a partnership.

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.

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.

Mark Pawsey

Can you tell us which of the partners were responsible for the accounts for the last year—the 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.

Mark Pawsey

At Companies House, there are over 100 companies with Mr Gupta listed as an active director. How many of those 100‑plus 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.

Mark Pawsey

King and King audits all the companies of Mr Gupta.

Milan Patel

No, we do not.

Mark Pawsey

Right, okay. Who are the other auditors, Mr Patel?

Milan Patel

I would not know all the auditors.

Mark Pawsey

You know which companies you audit.

Milan Patel

Yes.

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.

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.

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.

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.

Mark Pawsey

Okay, you will provide that information in writing to the Committee.

Milan Patel

Yes.

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.

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.

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.

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.

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.

Mark Pawsey

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

Milan Patel

I would have to check.

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—

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.

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.

Mark Pawsey

Is it possible or likely?

Milan Patel

It is likely.

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.

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.

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 group—there 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.

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.

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 said to me earlier that, on average, it takes two to six weeks to do an audit and you have six partners. You could not confirm how many of your partners were acting on GFG companies, but let us take a generous assumption that all of your partners are acting for GFG companies and assume, perhaps generously, that you work five days a week and seven hours a day. I am sure you work some late nights and possibly weekends, but let us just take that as a basic example. There are 253 working days in the year, which means that, between the six of you, working seven hours a day, you have about 10,000 hours a year to do the audit work. If it takes around six weeks to do an audit of a company, that is about 200 hours per company. On average, you could maybe do 50 companies a year. Is that right?

Milan Patel

No, sir. When I say you need that time to do an audit, I do not personally do the audit. We have a whole team that does the audit. I am the engagement partner and I—

Chair

Who is in the team? You told me there were six people at King and King. Are there others?

Milan Patel

No, there are six partners. We have a team of about 40 people working for us.

Chair

You have 40 other members of staff.

Milan Patel

That is right.

Chair

How many of them are working on the GFG companies?

Milan Patel

That is confidential. What I would say is that we have over 25 qualified staff, who are either chartered accountants or chartered certified accountants.

Chair

Okay. I want to refer to some analysis of the number of GFG companies that King and King is listed as being the auditor of. I am looking here at a database called Orbis, which does some whizzy assessment of the number of companies. According to Orbis, there are 944 companies that King and King either has acted for in the recent past, i.e. since 2018, or is still acting for as auditor. There are about 944 companies in total according to this service. Out of those, 455 are currently listing you as the active auditor, of which about 60 are listed as GFG Alliance. Does that sound familiar to you?

Milan Patel

Not at all, no. We probably have companies that we act for as accountants, not as auditors. We do not have 450 audit clients.

Chair

You have 59 companies that are part of the GFG Alliance as your customer.

Milan Patel

That is possible.

Chair

According to the analysis of company records, it is 59 GFG Alliance companies since 2018. Surely, as the engagement partner, you would know who your clients are. You do not know this.

Milan Patel

Of course I do.

Chair

Is 59 correct?

Milan Patel

It is possible. It is public data. I would have to look at the latest list. We can confirm that.

Chair

Okay, thank you. There are then a further 11 companies, based on this analysis, that are companies connected to GFG Alliance. These are entities that are owned and operated by people associated with Mr Gupta, which sell and transact with each other. Does that sound familiar with you?

Milan Patel

That would be confidential. These are clients.

Chair

I am not asking you for names, Mr Patel. I am just asking you if it sounds familiar that you maybe have a small number of companies that do business with GFG Alliance that you also audit.

Milan Patel

Yes, that is possible.

Chair

That is possible. I am sure everything is possible. Do you know the answer to any of the questions or are you just telling me about the worlds of possibility?

Milan Patel

Yes, sir. It is right that we have certain companies that would trade with GFG Alliance.

Chair

Okay, so now you are confirming that that is the case.

Milan Patel

Yes.

Chair

It would be helpful if you did that the first time I asked the question as opposed to the third time.

Milan Patel

I am sorry.

Chair

In terms of the companies that I have just mentioned, if we look at the operating revenue between 2018 and 2020 of those 59 GFG Alliance companies, there is a combined revenue of about $3 billion. Does that sound familiar to you?

Milan Patel

It does not sound familiar, because I personally have not done that calculation.

Chair

I can tell you that it is accurate, because it is their reported revenue from the accounts that have been assessed as being $3 billion of revenue between 2018 and 2020 for the 59 companies. Presumably, as the audit firm, you would be aware of their revenue and turnover.

Milan Patel

As I said, we do not audit the group; we audit individual companies.

Chair

These are the individual companies, Mr Patel. This is not the group. These are 59 individual entities, plus 11 of friends of Mr Gupta, that have a combined turnover of $3 billion.

Milan Patel

It would not serve any purpose for me to be able to add all of the group of companies that we act for—

Chair

What I am trying to get to is the capacity that King and King has to do proper audits for that number of companies with such significant turnover.

Milan Patel

We have the resources.

Chair

Okay, thank you for that.

Paul Howell

Just developing that slightly further, Mr Patel, and looking at it from King and King’s point of view, industry standards say that auditors should not be generating more than 15% of their revenue from a single client. Again, it comes down to whether you are talking about individual businesses, but, if you look at the number of GFG companies that you are auditing and aggregate them, do they take up more than 15% of your revenue?

Milan Patel

We have been through our standards and ethical standards, and we believe that we do not exceed the thresholds.

Paul Howell

So you believe that, even combining the connected or related parts of GFG that you audit, it is not more than 15% of your revenues.

Milan Patel

We go through those ethical standards. We are appointed as auditors for each individual company that we audit, or a client.

Paul Howell

You talk very much about the fact that you audit individual companies and that you do not audit the GFG group. Do you find it unusual for an entity of this size not to be a group that is being audited, and for it to be so many fragmented parts? Obviously you and other auditors are doing different pieces of it, and normally in an audit you want to understand the pieces of the jigsaw, so to speak. Do you think that it is an unusual structure to be operating in this way?

Milan Patel

I cannot talk about GFG, but it is not unusual in many cases where we are group auditors and not the subsidiary auditors, or vice versa. It is quite common.

Paul Howell

Do you not consider that the way that things are there creates an opaqueness in terms of information for the audit teams to actually be able to assess things?

Milan Patel

Sometimes it is the expertise that you may have, because groups have different businesses and some auditors may have a better understanding of different kinds of businesses within a group. We have such groups that we act for either as group auditor or sometimes just specifically for a subsidiary and not the others, because our expertise may not go to all of the businesses a group may do.

Paul Howell

I spent 40 years in the manufacturing industry as a finance director and I do not think I have come across groups in that sort of structure that has been as vague as this, but maybe that is my relevant experience. Moving on slightly, looking at the audit of the GFG companies, you must have made an assessment of whether there were any irregularities or disproportionate risks because of the way that they used supply chain financing. I know supply chain financing is a very normal thing for many businesses—I used it myself—but the interrelated relationships put another of complexity into that. Did you find anything unusual or anything that gave you concern, in particular the reliance that ended up on Greensill Capital?

Milan Patel

I cannot specifically speak for Liberty, but supply chain finance is generally quite readily used by most businesses that are in either high-volume trading or manufacturing businesses.

Paul Howell

I am aware of that. Obviously in an audit you are going to look at the supply chain financing that is going on and check as to whether it feels right for the business, whether it is robust, whether it has any risks inherent in it because of the way it has been applied. I am asking whether from the audit perspective it gave you concerns, which you might have then found as being reasonable, but did it give you concerns in the audit process itself?

Milan Patel

Generally speaking, from an audit process where we come, the risk is not from a client’s perspective. They are borrowing the money from a bank. It is for the bank that might have the risk of the security, not the client, because it is drawing down on the facility. We do not see any major risk when we are auditing supply chain finance from our clients’ points of view.

Richard Fuller

Mr Patel, on that letter you mentioned you got from GFG’s lawyers, what was the scope of that in terms of saying you cannot talk about things with this Committee?

Milan Patel

I did not hear you clearly, sir.

Richard Fuller

What was the scope in the legal letter you got, restricting what you could say to this Committee?

Milan Patel

That we should not divulge any information confidential to Liberty Steel Group during this evidence session.

Richard Fuller

Quite right too, but there are plenty of questions on GFG group you can answer that would not be of that ilk. For example, can you tell us when you won the business from the GFG group companies?

Milan Patel

We first started acting for them towards the end of 2018.

Richard Fuller

You first started working for any GFG company in 2018.

Milan Patel

When I say GFG, I mean Liberty Steel.

Richard Fuller

What I am asking, as you are well aware, Mr Patel, is when your relationship with companies associated with Mr Sanjeev Gupta, otherwise known as the GFG Alliance, began.

Milan Patel

Maybe I can go back. I met Mr Gupta in around 2012. Mr Gupta was not in the steel business until 2015, I think, so I am trying to draw a line there. We got appointed to the Liberty Steel companies towards the end of 2018.

Richard Fuller

I understand where you are trying to draw the line, but I would like to draw the line where I wish to draw the line, if I may. When was your first audit for any company of which Mr Gupta was a director or a beneficial owner?

Milan Patel

I would say around 2015.

Richard Fuller

Did you win that based on a competitive tender?

Milan Patel

I would not say competitive tender. It was a personal company of his.

Richard Fuller

What about the many other businesses in what we and most other people are terming the GFG Alliance? How many of those have been subject to competitive tender?

Milan Patel

That is confidential.

Richard Fuller

Are you aware of being part of a competitive tender as a firm for any GFG Alliance business?

Milan Patel

That is for GFG to know. We are normally asked to bid and then told by clients whether we have been successful.

Richard Fuller

Have you ever made a bid and not been successful?

Milan Patel

Generally, yes, many times.

Richard Fuller

With the GFG businesses?

Milan Patel

That would be confidential.

Richard Fuller

So your first answer does not necessarily refer to the second answer. For example, you could be saying, “We have made a bid for other businesses nothing to do with GFG and have lost those, but actually have won every single bid with the GFG Alliance companies”. But you are not prepared to answer that question. Is that correct?

Milan Patel

I do not have that knowledge with me at the moment. I can look at it and come back to you.

Richard Fuller

Perhaps you could, and perhaps check with GFG Alliance lawyers whether you can answer that question. How often do you talk with Mr Gupta?

Milan Patel

The real answer is as and when we need to or when it concerns any auditing matters.

Richard Fuller

Roughly how many times a year would that be?

Milan Patel

It would probably be three to four times a year.

Richard Fuller

Would that be the same for your colleagues who are directly on the accounts for each of the businesses, or is all the communication with you, because you are the engagement manager?

Milan Patel

We have colleagues having some communication, but probably even less than that.

Richard Fuller

As you are aware, there has been a financing relationship between Greensill Capital and businesses within the GFG group. Have you or any of your colleagues in the business had any communication with the company Greensill Capital at any stage?

Milan Patel

Not as far as I am aware.

Richard Fuller

Is that a no?

Milan Patel

Yes.

Richard Fuller

Currently I think there are 17 accounts of GFG businesses that King and King audits that are overdue at Companies House. They have not been filed on time. Why is that the case?

Milan Patel

We are working on the audits.

Richard Fuller

But they are overdue.

Milan Patel

Yes. In certain cases, we may have information that is required, so, until we are satisfied and we have all the information required, audits do not get signed off.

Richard Fuller

That might give the impression that your firm is somewhat overstretched. Is that a fair summary to make?

Milan Patel

Not at all.

Richard Fuller

Twenty-four group companies of GFG have changed their accounting period two or more times since 2019. Why?

Milan Patel

I have no knowledge of that. That is for Liberty to know.

Richard Fuller

My experience is that, if a company wishes to change its year‑end, it is usually a conversation it would have with its auditors. What conversations were had with your firm about the changing of accounting period two or more times within the last couple of years by 24 GFG companies?

Milan Patel

You would have the conversation with the auditors, but they do not have to give you a reason why they are changing it. It is just to inform the auditors so that the timing of the audit process would change.

Richard Fuller

Did it not spark a little question mark in the back of your head about why this was happening so frequently?

Milan Patel

It is not frequent, if you look at it, because they were trying to look at a new date to bring all the group companies within a particular date. That was all there was to that.

Richard Fuller

Okay. Have the fees that you charge to GFG changed over time?

Milan Patel

Yes, on the basis that if we deal with more companies for any client the fees would go up, or if there was any particular difference or additional work required in a particular year the fees may change.

Richard Fuller

There is nothing unusual about your fee structure for GFG companies.

Milan Patel

No.

Richard Fuller

What is your routine sampling methodology for revenue recognition when you do an audit?

Milan Patel

When you say routine—

Richard Fuller

Do you choose invoices of a certain size? Do you do a certain number of invoices over a year? Do you pick clients? What is the methodology that you adopt?

Milan Patel

It would vary depending on the client and the environment they are operating under. There would be various sampling techniques used, plus additional key items depending on the industry and the focus of where we consider the risk would be.

Richard Fuller

It would be helpful to this Committee, if you are able—and obviously you may need to discuss with your client—to send the Committee what the principles of the audit sampling that you undertook at GFG companies was. Would you be prepared to ask GFG group if it would allow that to be provided to the Committee?

Milan Patel

I will do that.

Richard Fuller

Are you able to say whether your firm was aware of any circular financing used in GFG companies?

Milan Patel

That is confidential so I am not able to answer that.

Richard Fuller

There have been reports in the paper of companies being cited as having invoices from GFG companies and saying they have never heard of the company and never had any dealings with it—what some might call fake invoices. Are you aware of any falsified invoices in the accounts of any of the GFG Companies?

Milan Patel

It is confidential, but if we come across any fraud or things like that we would have to take the appropriate steps.