In response to the COVID pandemic the UK government introduced a number of loan products including:
- Bounce Back Loans (‘BBL‘s);
- Coronavirus Business Interruption Loan Scheme (‘CBILSV‘);
- Coronavirus Large Business Interruption Loan Scheme (‘LCBILS‘); and
- Recovery Loan Scheme.
Already there have been arrests in connection with allegedly fraudulent applications. In one case, the NCA has taken action in relation to £6million in bogus claims made using false data and documents, as a result of which 3 City workers were arrested last January. There can be little doubt that more such prosecutions will follow.
So far it seems that the COVID loan schemes have performed better than expected and, the Financial Times (source click here) reported that the number of defaulting borrowers is running at between 5 – 10%, although this still runs to an estimated £5billion. However, with the government paying the first year’s interest and fees with CBILS and LCBILS, it may be that many problems have yet to emerge. It may also be that fraudulent applications will remain undiscovered for some time as the loans were made available for up to 6 years.
Just because someone will lend money to you doesn’t mean you should borrow it.”
Jean Chatzky
Each of the COVID loan products involved a high level of government guarantee of between 80 – 100%. However the borrowers remained fully liable for the debt. The amounts involved are large: under the LCBILS scheme companies could access loans of up to £50million.
More usually, though, the loan sizes were relatively small, with the Bounce Back Loan scheme being limited to £50,000. Most businesses could apply, but excluding public-sector bodies, state-funded schools and certain financial sector companies (banks, insurers and reinsurers) excluded.
There can be little doubt that some lenders will have seen the various schemes as a way of increasing market share with little attendant risk, but the reality is that credit analysis was still a vital consideration. It remains to be seen whether the government starts to reject calls on guarantees where there was negligence in the credit process. Early indications are that the level of appraisal and due diligence undertaken by lenders has to date been at best, inconsistent. There are also examples of borrowers making multiple CIBULS applications to different lenders for no more than £250,000 each to avoid being asked to provide a personal guarantee. As the total amount of losses hardly represent systemic risk, it may be that the government takes a robust approach, rather than just rolling over.
The surest way to ruin a man who doesn’t know how to handle money is to give him some.”
George Bernard Shaw
Another dimension comes from the fact that with so many people working from home, supervision has been difficult, leading to normal procedures being adapted, often on an ad hoc basis. This lead to well established systems of risk management breaking down. All of this was happening when there must have been some temptation to rely on the government guarantees, possibly leading to rather less diligence than might normally be expected. In such an environment, mistakes will invariably follow, with major financial implications. This applies even more to situations where security was being taken and we can expect a raft of claims against solicitors arising from the lenders receiving defective security.
So, who is to blame? Was there fraud and, if so, should it have been spotted? Was the credit risk flawed so that even if the security was defective, the loan should never have been made in the first place? Litigators will recognise the characteristics of typical professional negligence claims being met with counter-arguments of contributory negligence.
It must be considered unlikely that the smaller loans will see litigation, simply because they will not be cost effective, but some of the sums will be very large and we can expect a raft of cases in due course.
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