COVID-19: Bounce Back Loan Scheme

The Scheme was implemented with impressive speed but does not strike the right balance between supporting business and protecting the taxpayer. Thanks to the hard work and effort of civil servants, the Scheme was launched within two weeks of the Chancellor of the Exchequer proposing it to the Department and the Bank. Re- tasking one of the Bank’s existing business support schemes enabled Government to get things up and running quickly. But 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 2-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. Recommendation: The Department should use all available data when implementing new business support schemes. It should use this to develop scenario- based analysis of most likely outcomes and use this to minimise taxpayer risk. It should be clear where data is insufficient to form evidence-based judgements.

Shortcomings in the Scheme’s design have exposed the taxpayer to potentially significant losses. Government achieved its very narrow objective of distributing cash quickly and to a very large number of small businesses across the UK. It delivered £8.4 billion in the first week and £21.3 billion in the first month, and as of 6 September, 90% of loans went to micro-businesses across the UK. This was achieved by removing the checks that extended the delivery period beyond 48 hours; increasing the level of risk through the lack of credit, application and affordability checks. Applicants need only to self-certify the data provided in their loan 6 Covid-19: Bounce Back Loan Scheme application. In the first year, Government is paying interest on the loans on behalf of borrowers, costing approximately £1 billion. In addition, taxpayers are exposed to both avoidable and unavoidable risks: fraud, viability of the underlying business, and unaffordability respectively. The Department estimates potential losses from both fraud and credit risk as somewhere between £15 billion to £26 billion, with the credit losses being the largest part. This estimate is highly uncertain and could be even higher. It indicates that Government was prepared to accept a higher level of risk to ensure that loans were available to SMEs as quickly as possible. Recommendation: Before launching or renewing a Scheme, HM Treasury should be explicit on the level of losses it is likely to entail and the evidence that this analysis is based on. For the remainder of this Scheme, and future schemes, HM Treasury must better balance the interests of the taxpayer with the interests of businesses. It should demonstrate that its controls are cost effective and associated judgements reflect the appropriate balance between achieving immediate policy aims and protecting taxpayers’ money. It should start by assessing whether full reliance on self-certification is still appropriate.

Government’s plans for managing risks to the taxpayer—from both fraud and borrowers who are unable to repay loans—are woefully under-developed. 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 £1.1 billion but it has no data on Scheme fraud levels. Nor does it have any information on how businesses which have received loans have used the proceeds. The Bank say it will look into this during 2021, which may therefore be after the Scheme closes. The lack of data undermines the Bank’s ability to monitor and report levels of fraud and to use information to better inform future schemes. Recommendation: The Department needs to provide clear updates on how it intends to deal with different cases of fraud, including on how it will prioritise recovery and prosecution. British Business Bank should write to the Committee, within two weeks, with a report on the latest fraud estimates in the existing portfolio.

HM Treasury has not yet finalised the rules lenders need to follow to ensure overdue loans are repaid. If a borrower does not repay the loan HM Treasury expects lenders to try to recover the money owed. But there is no requirement to complete this recovery process before the lender can claim the Government guarantee. HM Treasury is yet to outline the specific rules around the recovery process but 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. 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 HM Treasury risks borrowers being treated differently depending on their lender, and a Covid-19: Bounce Back Loan Scheme 7 potentially inconsistent use of the Government guarantee. Recommendation: HM Treasury should ensure that the recovery rules are confirmed prior to repayment, and that they are uniform in their fair and thorough recovery of loans.

Government has no apparent plans to measure the Scheme’s impact, including identifying how many businesses have been unable to access support. The Department indicates that its initial barometer for success was delivering cash to as many businesses in need, as fast as possible. However, no written objectives were outlined at the inception of the scheme and no business case was put forward. The Bank, HM Treasury and the Department, did not agree the Scheme objectives until 15 July 2020 and there are no plans in place to measure the scheme’s impact. The performance measures—for example the number of insolvencies prevented— have therefore not been decided, making it difficult to evaluate and measure the success of the scheme to date. This is similar to the Bank’s other schemes, where it has not brought together information on costs, activity, and outcomes to be able to effectively measure impact and evaluate success. 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. The Government intends to set up a further lending scheme in the new year meaning learning lessons from this Scheme is very important for the value for money of future schemes. Recommendation: The Department and the British Business Bank should set out, within the Treasury Minute response, how they plan on measuring the Scheme’s impact on businesses. They should ensure that any new schemes have, prior to launch, agreed performance measures. The Department should also analyse the impact of the Scheme on the lending market, paying attention to levels of competition and consumer choice. 8 Covid-19: Bounce Back Loan Scheme 1 Scheme design and launch

On the basis of a report by the Comptroller & Auditor General (C&AG), we took evidence from HM Treasury, the Department of Business, Energy & Industrial Strategy (the Department) and the British Business Bank (the Bank) on the Bounce Back Loan Scheme (the Scheme). The Scheme was developed to support the smaller end of small- and medium-sized enterprises, or ‘micro businesses’, and maintain their financial health during the pandemic.1

Both Germany and Switzerland delivered schemes to support small and medium- sized enterprises (SMEs) much earlier than the UK.16 Their schemes offered 100% guarantees.17 CBILS, although in place at a similar time, offered an 80% guarantee attempting to remain line with state aid legislation, but unlike other jurisdictions was not suitable for the smallest businesses.18 HM Treasury has not taken advantage of the increased support it can provide to businesses in certain sectors, including 20,000 venues in pubs and hospitality.19 Getting the Scheme up and running

Notwithstanding the lack of preparedness, it is clear that staff at HM Treasury, the Department, and the Bank pulled out all the stops to get the Scheme up and running as quickly as possible; we should not underestimate the level of commitment they have shown in the response to the pandemic. The Scheme launched within two weeks of HM Treasury proposing it to the Department and the Bank. Once the Scheme was launched, lenders approved 268,000 loans to businesses totalling £8.4 billion in the first week of operations.20

The Scheme is designed with the objective that borrowers receive the loans within 24–48 hours of a valid application. This target was based on independent research which suggested that one-third of businesses would probably not be able to access enough cash to continue trading for more than two weeks of lockdown. Based on lender’s reports to HM Treasury, the average time from application to receipt of loans for existing business customers was between 24 and 72 hours. However, for some applications it has taken 10 Evidence UK Finance submission para 5 11 C&AG’s Report, para.1.12 12 Q 9 13 As defined by Companies House, businesses which have an annual turnover below £632,000. 14 Q 11; C&AG’s Report, para.1.3 15 Evidence UK Finance submission para 11 16 Q 21 17 C&AG’s Report, Figure 3 18 Q 12 19 Q 4 20 C&AG’s Report, para 11 10 Covid-19: Bounce Back Loan Scheme considerably longer; for new customers, it may take between four and 12 weeks.21 When asked whether the speed of delivery remains relevant at this stage in the Scheme, the Bank determined that given the system in place is successful at distributing cash, there is no need at present to slow it down.22

The government’s view that businesses were unable to survive more than a two- week lockdown period was based on anecdotal evidence, and a survey conducted by the Association of Chartered Certified Accountants in mid-April.23 The Department told us that its prime role when gathering data to inform decisions on support schemes is to consider the economic impact, however it did not prepare a business case for the Scheme.24 Furthermore, the Department was not aware of any estimates made of the anticipated loss to the economy if the Scheme had been designed differently.25 Nor did Government have any information on which types of business were most in need of support, and which would be unsustainable even in the absence of a pandemic.26 Shortcomings in the Scheme’s design

The Department informed us that the speed at which finance could be provided was a key design and operational requirement. We were told that the Department placed no budgetary cap on the Scheme and that demand was far greater than the Department anticipated. Government does not know how much of this demand resulted from businesses needing the cash or just taking advantage of cheap and readily available finance as there are no credit and affordability checks under the Scheme, and the Department and the Bank are not collecting relevant data.27 International schemes required more detailed application checks and are more restrictive in the use of proceeds.28

Under the Scheme, the Government pays a borrower’s first 12 months of interest directly to the lender. At the end of September, when some 1.2 million loans were issued, the Department and the Bank forecast this to cost £1,068 million (£847 million in 2020–21 and £221 million in 2021–22); this will rise as more loans have been issued. The Taxpayer, because of the Government guarantee, will also bear other costs: fraud and credit losses. A credit loss is where an eligible borrower does not repay a loan. Fraud results from dishonesty which can be a false representation or a failure to disclose information with the intention to cause financial gain or loss such as applications by ineligible businesses.29 The Department estimates that these losses could be anywhere between 35% and 60% of the value of the loans made: in the region of £15 billion to £26 billion, with the credit losses being the majority.30 This estimate is highly uncertain and could be even higher.31 21 C&AG’s Report, paras 13, 14 22 Q 31 23 Q 81 24 Q 3; C&AG’s Report, para 14 25 Qq 75–79 26 Q 44 27 Qq 17–19, 38 28 Q 24 29 C&AG’s Report, paras 20–21, 2.15 30 Qq 18, 27 31 C&AG’s Report, para 3.7 Covid-19: Bounce Back Loan Scheme 11 2 Scheme risks and impacts Managing the risk of fraud and non-repayment

The Bank told us that lenders are responsible for the Scheme’s fraud management. The Bank does, nevertheless, have a weekly lender fraud prevention collaboration working group, as well as conducting ‘data-analytics’ work with the Cabinet Office.32 Lenders are responsible for processing loan applications and are required to conduct counter-fraud, anti-money laundering and ‘know your customer’ checks. The Bank believes that these checks have prevented around 27,000 fraudulent loans that represent £1.1 billion, but it has no data on fraud levels among approved loans.33

The Department has not identified what types of fraud it will prosecute, with the Department suggesting there is a range of criminality in fraud; it has euphemistically referred to ‘hard’ and ‘soft’ fraud.34 Hard fraud refers to a type of fraud committed by criminal organizations with the intention to defraud an organization. Soft fraud consists of borrowers exaggerating otherwise-legitimate claims, such as overstating turnover in order to receive a larger loan. We are is not convinced that this definition sufficiently answered the question regarding the counter-fraud protocols and the need for additional legislation to tackle fraud.35

The Bank does not collect information on how businesses have used the loans.36 The NAO report outlined that there is some evidence that businesses are using the money to pay back existing debt, which the Bank describes as a ‘economically rational’ for businesses to do.37 But this would reduce the benefit of the Scheme as it would only make a small difference to a businesses’ available cash; it would, however, help lenders reduce their exposure to bad debts as the Scheme loans are subject to a government guarantee. The Bank said it will investigate how businesses have used the loans during 2021, which may be after the Scheme closes.38 This lack of data undermines the Bank’s ability to understand the impact of the Scheme, to monitor and report levels of fraud, and to use information to better inform future schemes. The Department told us that any initial evaluation of the Scheme will not start until 2021, with further reviews over time, across the six to ten year pay-back period.39 Rules for lenders to follow to debt recovery

After the initial interest-free period, borrowers will need to make repayments (capital and interest) to the end of the loan period, in line with their loan agreement.40 There is a high likelihood that some businesses who wish to re-pay the loans will simply be unable to do so. UK Finance informed us that TheCityUK Recapitalisation Group estimates between £20 billion and £23 billion of ‘unsustainable business debt’ is expected to stem 32 Qq 57, 58 33 Letter of 3 November 2021 from the British Business Bank, para 4] 34 Q 61 35 Q 61 36 Q 24 37 Q 39; C&AG’s Report, para. 3.13 38 Qq 38, 40 39 Q 42 40 C&AG’s Report, paras 20–21 12 Covid-19: Bounce Back Loan Scheme from all UK government guaranteed lending schemes. And there are further cashflow demands for businesses on the horizon including: VAT and other taxes which have been deferred; loan repayment holidays; and interest free periods ending. Thus, Government expects that many SMEs will struggle to pay back what they owe when payments are due.41 The Department explained to us that when a borrower does not repay the loan, this will appear in their credit history and affect future borrowings.42

HM Treasury and the Bank told us they are continuing to work with lenders on debt recovery protocols and processes that are fair to businesses, lenders and taxpayers. HM Treasury expects lenders to try to recover the money owed but there is no requirement to complete this recovery process before the lender can claim the government guarantee.43 HM Treasury is yet to outline the specific rules around the recovery process but plans, alongside the Bank, to complete the work in relation to the loan recovery process by winter 2020–21, in advance of the first loan repayments which are due in May 2021.44 The Department and the Bank are in the process of “codifying expectations for recoveries”. 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.45 Currently, the recovery process is unique for each lender. Thus, without detailed rules, HM Treasury risks borrowers being treated differently depending on their lender, and a potentially inconsistent use of the Government guarantee.46

HM Treasury explained to us that, at present, recoveries for the smaller loans are captured and overseen by the FCA and, for larger loans, by the Lending Standards Board. Thus, although the details have not been clarified, there is already an existing structure regarding recoveries. In turn, it is the case that, if lenders do not pursue recoveries as expected, they will not be able to collect the guarantee.47 Measuring the Scheme’s impact

The Government indicated that its overarching objective was speed.48 No written objectives were outlined at the inception of the Scheme and no business case was put forward. The Bank, HM Treasury and the Department, did not agree the Scheme objectives until 15 July and there are no plans in place to measure the Scheme’s impact.49 Performance measures, such as the number of insolvencies prevented, have not been decided. The Department believes the Scheme was a success as it reached micro- businesses across regions and sectors.50 However, neither the Department nor the Bank know which businesses would not have survived with or without a pandemic. The Bank informed us that it would seek to identify those businesses during its Scheme monitoring and evaluation.51

The National Audit Office has previously recommended that the Bank focus more 41 UK Finance Written Evidence, para 27 42 Q 49 43 Q 70; C&AG’s Report, para 3.8 44 Q 72 45 Q 64 46 Qq 70, 71 47 Qq 48, 71 48 Qq 19, 26, 27 49 C&AG’s Report, paras 14, 1.11 50 Q 19 51 Qq 37, 44 Covid-19: Bounce Back Loan Scheme 13 closely on the cost effectiveness of its support schemes. During its audit the NAO found that the bank did not bring together information on costs, activity, and outcomes to be able to effectively measure impact and evaluate success.52 HM Treasury confirmed to us that, in preparation for future schemes, they will look at the lessons to be learned from this Scheme.53

As HM Treasury informed us, during the 24 September Winter Economy Plan Statement, the Chancellor indicated there would be a further loan scheme, which is currently in development and will be announced early 2021.54 It is important that any replacement guarantee scheme also enables all lenders to compete effectively in the market. The Bank’s Reservation Notice at the start of the Scheme highlighted concerns about the impact on competition in the market. This is in direct relation to the Bank’s objective of creating “a more diverse finance market for smaller businesses, with a greater choice of options and providers”.55 The five largest lenders provided 89% of loans under the Scheme, compared to 65% of total SME debt, increasing their share of the SME lending market.56 52 C&AG’s Report, British Business Bank, Session 2019–20, HC 21, 10 January 2020 53 Q 83 54 Q 34 55 https://www.british-business-bank.co.uk/what-the-british-business-bank-does/ 56 C&AG’s Report, para 24 14 Covid-19: Bounce Back Loan Scheme