The full National Audit Office (NAO) report on bounce back loans has revealed inherent flaws that left the scheme open to mass fraud and the risks for taxpayers of footing a £26bn bill for write-offs.
The debt recovery process for the government-backed loan scheme is only just being formed, but, as the NAO report notes, there are estimates that arrears rates for bounce back loans could reach up to 60%.
The Financial Conduct Authority recently reported that it will be working with the Treasury to develop the “clearest possible approach” to debt collection of these loans, but while this is being conceived, the report sheds light on the risks left wide open, because of the sheer speed at which the scheme had to launch.
An imperfect launch
As the NAO report describes, the chancellor initiated the Bounce Back Loan Scheme (BBLS) after businesses criticised the Coronavirus Business Interruption Loan Scheme (CBILS) for strict eligibility criteria, which created a backlog of applications for the smaller end of the SME market.
The BBLS’ design focused on decreasing the time between application and payment of loans, a main concern for businesses struggling during lockdown.
This was achieved by removing complex administration processes inherent in the application process. Credit and affordability checks required under the Consumer Credit Act, were removed.
This, however, left the floodgates open for blatant fraud, duplicate applications across many lenders, no assessments on affordability and a surging rise in risk of widespread defaults.
The British Business Bank, which administers the scheme, had a reporting system in place at launch but it took about a month to fully operationalise it. The reporting system (the portal) allows the bank to collect data to administer guarantees when borrowers default. But it was not designed to monitor risks or prevent fraud in real-time.
As a result, the bank couldn’t prevent duplicate applications across lenders for the entire first month.
The department and the bank expect the scheme to have lent between £38bn to £48bn by November 4 2020. Around 90% of the loans under the scheme went to micro businesses located across the UK. These micro businesses received £29.4bn from around 1.04 million loans. Sole traders received £6.4bn from 297,000 loans.
Real estate, professional services and support activities received the largest amount of support from the scheme – £8.5bn from 283,000 loans.
The five largest UK lenders provided the largest share of loans under the scheme, increasing their foothold in the SME lending market; risking a negative impact on competition.
The British Business Bank’s data shows that the five largest UK lenders (Barclays, HSBC, Lloyds/Bank of Scotland, NatWest/RBS and Santander) provided £31.3bn of loans under the scheme, while the remaining 18 lenders were responsible for £3.9bn.
The five largest UK lenders are responsible for 89% of the value of the loans distributed. The Bank of England estimates the total SME debt to be £167bn, with the big banks accounting for 65% of this lending.
To help lenders mitigate fraud risks, the British Business Bank established fraud prevention forums with a wide group of stakeholders to share best practice and aid implementation of additional fraud measures
From October 2020, the bank, alongside the department and lenders, will be utilising the reporting portal to provide a monthly fraud report. This will provide details on prevented loss; detected loss; errors; and recoveries.
The BBLS design
The government provides lenders a 100% guarantee against the loans (both capital and interest). The loans have a fixed interest rate of 2.5% and a maximum length of 10 years; in the first year of the loan there are no capital repayments due, and government pays the interest – making it interest-free for the borrower.
Feedback from two large lenders indicates that new customers may take between four and 12 weeks to process. This is because of the volume of applications, and COVID-19-related operational constraints.
The NAO has indicated the nature of bounce back loans may make recovery more difficult as the Treasury has not yet finalised how lenders should collect overdue repayments. Specific operational details on recovery are expected by winter 2020/21.