Covid-19: Bounce Back Loan Scheme Contents

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1Scheme design and launch

1.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

2.The Scheme was launched on 4 May 2020 and provides businesses with loans of up to £50,000, or a maximum of 25% of annual turnover.2 The loans last up to ten years and have a fixed interest rate of 2.5%. In the first year of the loan, Government pays the interest on behalf of the borrower. After the interest free period the borrower must repay the capital and interest elements. Government intended the loans to be delivered within 24–48 hours of an application. The loans are delivered through commercial lenders and, to reduce loan application processing times, businesses self-certify their application documents and lenders are not required to perform any credit or affordability checks. This lack of checks exposes lenders to risks meaning that, under normal circumstances, they would not make loans: government, therefore, provides lenders a 100% guarantee which means if the borrower doesn’t repay the loans, government will.3

3.On 24 September 2020, the UK Government announced the ‘Pay as you Grow’ option for the Scheme’s borrowers as part of its Winter Economy Plan, giving businesses additional repayment flexibility.4 As of 15 November, the Scheme had provided over 1.4 million loans to businesses, totalling £42.2 billion.5 The Scheme will now run until 31 January 2021.6

Preparedness

4.HM Treasury and the Department have had a considerable time to plan for a pandemic, although perhaps not on the scale of having to shut down most businesses, the economic impacts of which have been on the National Risk Register since 2010. Government could also observe the international responses to covid-19 where impacts were felt before the UK, such as in China and Italy.7 The witnesses did not convince us that the requirement to intervene in support of businesses during an economic crisis caused by a public health event could not have been better prepared for. Only in March did the Department and HM Treasury begin preparations for a large-scale intervention despite the lockdowns abroad also providing more warning about the economic impacts of the pandemic.8

5.When we asked why the Scheme was not ready in March, at the same time as lockdown was announced, the Department told us that, in conjunction with HM Treasury and the Bank, it had done “a really quite considerable amount of planning”.9 This included a framework to adjust the Bank’s Key Performance Indicators, targets, and identify an existing scheme—the Enterprise Finance Guarantee (EFG)—as the foundation of any support measure. However, as UK Finance informed us, the EFG framework was not designed for a mass market product or as a response to a global pandemic.10 Yet it was the EFG which was used as the basis for the Bounce Back Loan Scheme.11 The Department told us there were no detailed plans in place because “it would not have been realistic to have an off-the-shelf plan for all eventualities…”.12

6.Government recognised that its Coronavirus Business Interruption Loan Scheme (CBILS), launched on 23 March 2020, did not enable micro businesses13 to access small loans quickly, because of the credit and affordability checks the Consumer Credit Act 1974 (the CCA) requires for loans under £25,000. However, HM Treasury did not identify this as a problem until early April.14 Government subsequently changed the regulatory requirements for lenders entering into credit agreements to address the CCA restrictions and enable them to make loans more quickly.15

7.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

8.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

9.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 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

10.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

11.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

12.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