Call for Covid Loan Debt Protection as Return on Investment Begins | Banking
More than 1.5 million small businesses across the UK prepare to repay some Â£ 47bn of government-backed Covid credit from this week, as the first tranche of rebound loans fall due .
Lenders are committed to treating customers fairly, while doing their best to avoid triggering government guarantees that could cost taxpayers billions of pounds. But activists say banks may find it difficult to cope well with distressed borrowers, given the pressure to collect cash.
This same tension is believed to have been the source of the RBS GRG scandal, which affected thousands of professional clients in the aftermath of the 2007 financial crisis. The government’s Asset Protection Agency has been accused of pushing the bank to withdraw support from corporate clients and secure their assets, following the RBS ‘costly government bailout in 2008. A shocking memo from 2009 told RBS bankers of “Just Hit Budget!” And offered advice on how to get money for small businesses: “Rope: sometimes you have to let customers hang themselves. “
The problem is that business loans are unregulated in the UK, which means abused borrowers are not protected by law or the Financial Conduct Authority. Covid’s debt boom – fueled by commercial customers trying to stay afloat in successive lockdowns – is reigniting calls to regulate the industry before another scandal emerges.
MPs from the All-Party Parliamentary Group (APPG) on Fair Commercial Banking are calling on the government to introduce laws that would protect small and medium-sized business owners and give them leverage in court.
âThe conversation is important now because of the huge amount of commercial debt that has just been incurred during the Covid crisis,â said conservative APPG chairman Kevin Hollinrake. Some businesses will inevitably default on their loans, triggering a hunt for debt collectors. “In many cases it will be done well and fairly, but in other cases it will not be very good and very unfairly.”
In total, more than 1.6 million businesses have taken advantage of the government’s three major Covid loan programs, which between them generated credit worth a combined Â£ 75 billion.
Only the smallest businesses – those with an annual turnover of less than Â£ 6.5million – can use the Financial Ombudsman Service. Some borrowers will use the new Bank Resolution Service, but it is voluntary, affects only seven lenders, and has been criticized for its eligibility criteria. Most will end up at the mercy of internal company policies and voluntary codes that have little weight in court.
“There are a host of regulations that business owners large and small believe protect them,” said Ned Beale, a lawyer at the Hausfeld law firm. âBut the problem is, regulation is only as powerful as your ability to enforce it. In fact, when the going is good, much of this regulation is unenforceable. “
This means that companies take considerable risk when borrowing, even from government-backed programs.
As recently as last week, the FCA had to remind borrowers that the Recovery Loans Scheme, which is expected to replace bounce loans and other Treasury programs, was unregulated. The APPG has even proposed putting “health warnings” on loan contracts because it believes most small and medium-sized businesses do not understand the risk.
Without stronger protections, MEPs fear new scandals are on the horizon.
âWhat we’ve learned from history is that we won’t learn from history,â Hollinrake said. âI could see it was going bad again. “