UK taxpayers stand to foot a bill of £26bn to cover potential losses from loans made via the bounce back loan scheme (BBLS), which was rushed out too quickly and with insufficient checks, the Public Accounts Committee (PAC) is warning
PAC says potential losses are estimated in the region of £15bn to £26bn, and while the government maintains the majority of this will be credit losses, where the borrower wants to repay the loan but cannot, it lacks the data to assess the levels of fraud within the scheme, or its actual economic benefits.
PAC’s inquiry found the government was ‘taken by surprise’ that small businesses would require tailored support in and after the lockdown and moved quickly to create the BBLS, which guaranteed loans, enabling business to borrow money in as little as 24 hours.
The inquiry was critical of the government’s failure to realise that the coronavirus business interruption loan scheme (CBILS), which was the first support scheme to launch, was not appropriate for the smallest businesses. This was mainly due to the extensive credit and affordability checks the Consumer Credit Act required for businesses applying for loans of £25,000 or less.
In designing the BBLS, the Treasury, the Department for Business and the British Business Bank prioritised delivery speed over all other aspects of value for money, and the committee said they have not been able to offer clear objectives or measures of the scheme’s success.
The report said: ‘Government’s desire to move quickly was based on anecdotal evidence, and a survey in mid-April that concluded one-third of businesses would probably not be able to access enough cash to last more than two weeks of lockdown.
‘Beyond this, no clear estimates were drawn up to consider the cost of not delivering cash to the businesses within this two-week period.
‘The scheme had no business case which means we heard limited evidence of a consideration of how many businesses might be unviable irrespective of the impacts of the pandemic, which business sectors needed support and how much, or the level of losses government might be prepared to bear on the scheme.’
This focus on speed means businesses self-certify their application documents and lenders are not required to perform any credit or affordability checks.
BBLC delivered £8.4bn in its first week and £21.3bn in the first month, and as of 6 September, 90% of loans went to micro-businesses across the UK.
PAC’s report pointed out that in the first year, the government is paying interest on the loans on behalf of borrowers, costing approximately £1bn. PAC maintains the lack of checks creates risk for lenders which meant government had to agree to guarantee the loans 100%, which effectively means that if the borrower does not repay the loans, the taxpayer will.
In future it says taxpayers are exposed to both avoidable and unavoidable risks: fraud, viability of the underlying business, and unaffordability respectively.
The report stated: ‘Government does not have a counter-fraud strategy for the scheme and has not identified what types of fraud it will prosecute.
‘The Bank does, nevertheless, have a weekly lender fraud prevention collaboration working group, and conducts “data-analytics” work with the Cabinet Office.
‘Equally, lenders are required to conduct counter-fraud, anti-money laundering and “know your customer” checks on loan applications.
‘The Bank believes that these checks have prevented around 27,000 fraudulent loans that represent £1.1bn but it has no data on scheme fraud levels.’
PAC also pointed out that the Bank does not have any information on how businesses which have received loans have used the proceeds. While the Bank say it will look into this during 2021, the committee warned this may be after the scheme closes.
Crucially, the Treasury is yet to agree the process and protocols that lenders are expected to follow in recovering overdue loans, according to PAC, which says it plans to complete the work in relation to the loan recovery process by winter 2020–21, in advance of the first repayments which are due in May 2021.
The report said: ‘At present, lenders are expected to pursue unpaid loans using their own businesses processes and there is a lack of clarity about when lenders can claim the guarantee.
‘The recovery process is unique for each lender, and without detailed rules from the Treasury risks borrowers being treated differently depending on their lender, and a potentially inconsistent use of the government guarantee.’
PAC is also critical of the government’s failure to assess the impact of BBLS, including details of the number of businesses which were not able to use the scheme.
It says the performance measures—for example the number of insolvencies prevented—have not been decided, making it difficult to evaluate and measure the success of the scheme to date.
Furthermore, the scheme has likely reduced competition in the small business lending market as the five largest UK lenders have provided most loans. This has, in the short term at least, increased their market share which works against the Bank’s target of creating a more diverse finance market for smaller businesses.
Meg Hillier, PAC chair, said: ‘We all hope the BBLS saves a significant number of Britain’s small businesses, who will play a key part in the economic recovery from this pandemic.
‘But despite knowing that it was a case of “when” rather than “if” a serious pandemic hit the country, government didn’t develop plans for how to support the economy.
‘Rushing to get money out of the door after the fact didn’t allow for analysis of how many businesses needed this help, could benefit from it, or could repay it.
‘Dropping the most basic checks was a huge issue that puts the taxpayer at risk to the tune of billions.’