More than £75 billion of funds were approved for UK businesses through the government’s three primary COVID-19 support schemes: the Coronavirus Business Interruption Loan Scheme (CBILS), Bounce Back Loan Scheme (BBLS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).
Lenders who participated in the COVID emergency loan schemes now face the challenge of not only sensitively recouping capital they have lent through these schemes, but also factoring COVID facilities into the finance or refinancing of clients’ debt, while managing the risk of fraud.
Steve Baluchi: Lenders are facing a great deal of uncertainty when it comes to the recovery of coronavirus support loans.
The advantages of support facilities such as CBILS and BBLS – namely that they were deployed at speed to provide real financial support to those who needed it most – have also left them exposed to fraud. This is an issue that lenders will need to contend with when it comes to collecting the funds, and potentially when making guarantee calls on the Treasury.
There will be concerns regarding what best practice debt recovery looks like; how emergency support loans will interact with any pre-existing security packages that lenders hold with their customers; and what the Treasury’s requirements will be in order for the government to honour its guarantee.
Lenders may, understandably, also be looking to restructure a business’ outstanding debt to enhance their security and provide greater clarity over their full debt stack. But it’s unclear how any COVID facilities should sit within a restructured portfolio, and what risk a restructured security package could pose to lenders subsequently looking to make guarantee calls.
It’s a complex area that is still evolving, and one that lenders will be carefully considering as they plan for what could be a significant administrative pressure on their risk, compliance, and frontline banking teams.
Steve Baluchi: Fraud is an issue that lenders will need to be prepared to address in the debt recovery process – for example, we have already seen instances of multiple applications for COVID support facilities across a group of dormant companies.
The likelihood of fraud will vary from facility to facility, although BBLS schemes are probably those that are going to be most at risk of dishonest activity – primarily because they required the least amount of due diligence on their applications compared to the CBILS and CLBILS schemes.
A proportion of these facilities will default, and in turn lenders will be able to approach the Treasury to ask for the guarantees that were promised. But within these groups of defaulted loans, there will almost certainly be some that were given on the basis of a fraudulent application.
It is not clear yet what the Treasury’s specific requirements will be for handling defaulted loans in practice. However, what is clear is that the government is, understandably, taking a hard line against the misuse of COVID support measures, having already announced over 12,000 interventions across various schemes, such as the Coronavirus Job Retention Scheme and Self-Employment Income Support Scheme, and a number of arrests, alongside additional powers to investigate directors of dissolved companies.
It will therefore be important for lenders to ensure they do all they can to reasonably identify and address any dishonest activity or malfeasant directors ahead of these guarantee calls.
Graeme Freeland: In order for lenders to be able to come prepared to these guarantee calls, the next challenge will be to work out how to identify fraudulent loans. No one – neither government-side, nor lender side – will be resourced to look at every loan that defaults on a case-by-case basis. There are just too many.
An alternative approach could be looking at loans on a batch basis. This will not just be more time-efficient, but also cost-effective too. A single £50,000 BBLS loan may not be worth recovering for a lender when the total bill for the administrative resource is considered – but when the value of an entire tranche of loans is considered, it’s absolutely worth doing.
Graeme Freeland: There are a range of parameters that you could use to profile a portfolio of COVID facility loans and flag potential high risk candidates. However, there will not always be a single indicator that proves activity is clearly fraudulent. In many instances, lenders will need to build a set of risk metrics. If a company is flagged against either one, or multiple risk factors, they may be worth closer investigation.
For example, they could analyse businesses that were incorporated after the pandemic began, or companies owned by directors with a high volume of businesses to their name – this could suggest they may be a vehicle for fraud.
It’s worth noting that often there is not a rich source of public information to go on. This is a particular risk with some of the smaller companies more likely to have taken out a loan such as a BBLS.
But, in almost all cases, there will be things you can examine. And once you have a shortlist of potential high-risk defaulters, you can then look at conducting more narrow forensic investigations with the greatest efficiency – potentially even examining where the money has gone and what it was used for.
Steve Baluchi: Now is the time for lenders to be exploring where the risks in recovery may lie for them – both from a fraud perspective, and in terms of how COVID facilities may interact with the future financing of customers or the restructuring of their existing debt – and what they can do now to help make the process as smooth as possible. The process of managing debt from COVID facilities will likely put a significant administrative weight on lenders.
Each lender will likely require a cost effective solution that reflects its own specific portfolio, which may need to adapt as new precedents are established and new guidance is issued. But whatever lies ahead, proactive action now will put lenders on the strongest possible footing.