13.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. 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.
14.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. 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.
15.The Bank does not collect information on how businesses have used the loans. 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. 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. 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.
16.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. 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 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. 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.
17.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. 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. 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. 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.
18.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.
19.The Government indicated that its overarching objective was speed. 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. 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. 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.
20.The National Audit Office has previously recommended that the Bank focus more 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. HM Treasury confirmed to us that, in preparation for future schemes, they will look at the lessons to be learned from this Scheme.
21.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. 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”. 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.
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
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
52 C&AG’s Report, British Business Bank, Session 2019–20, HC 21, 10 January 2020
53 Q 83
54 Q 34
56 C&AG’s Report, para 24