Debt Collection of Bounce Back Loans

The most popular of the support schemes launched by the Government to assist UK businesses during, and beyond, the Covid-19 pandemic has been in the news again this week: Bounce Back Loans.

1.4 Million businesses of all sizes have taken out loans totalling over £43 Billion, which the Government has underwritten as part of The Bounce Back Loans Scheme (BBLS).

The loans, which are interest-free for the first 12 months and then offer a low-interest rate for the duration of the loan, launched in April 2020 with a maximum loan amount of £50,000 based on company turnover. Some commentators have noted that the loans have loose qualifying criteria.

As soon as The Bounce Back Loan Scheme launched there were reports of fraud, with some cases including financially stable businesses taking out Bounce Back Loans to pay off more expensive existing loans and forms of credit. 

The FCA identifies problems ahead

Back in June, the Financial Conduct Authority (FCA) warned Buy Back Loan Scheme lenders that there would be a surge of struggling businesses that could not pay back the emergency loans and that the lenders should be prepared.

Both the FCA and the Credit Services Association (CSA) have raised concerns about how businesses who have legitimately taken out a loan under the Bounce Back Loan Scheme who may be struggling to recover from the pandemic will be able to service the loans – and what will happen if they do fall into arrears.  

The FCA has consulted with banks, debt collectors and loan providers with an aim to agree on guidance for best practices to assist businesses if they are unable to meet the repayments of the Bounce Back Loan they took out.

It is expected that the guidance will include the recommendation to offer ‘pay as your business grows’ plans extending the terms of the original Buy Back Loan Scheme agreement or offering flexible, increasing monthly, instalments as turnover and profits return to normal.

The FCA guidance will also emphasise the existing rules designed to ensure firms are treated fairly if debt collection action is required.

An FCA spokesperson said:

“The current rules are not changing, however, it is of importance that those firms involved in debt collection and debt recovery activity are aware of the expectations of the FCA in respect of the collection of emergency Government loans.”

New guidance is expected to be published next month in respect of the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Scheme.

These schemes offered loans of up to £5 Million to companies with a turnover up to £45m, loans of up to £25m to companies with a turnover between £45m and £250m, and loans of up to £50m to companies with a turnover greater than £250m.

The CSA takes a different approach

The CSA is the governing body of the UK debt collection and debt recovery sector.

While the FCA appears to see the debt collection of emergency loans as a last resort, the CSA is not urging the Banks and HM Treasury to consider debt recovery as an early option in the process.

It has highlighted in its latest report that the Government could recover an additional £6bn by instructing debt collectors to collect Bounce Back Loan Scheme arrears.

The report also adds that well established, professional debt collection firms should be appointed to handle the Buy Back Loan Scheme recoveries, and calls for a consistent standard of engagement to be implemented to include forbearance measures and guidance on achieving best practice.

Concerns around Buy Back Loan Scheme defaults and fraud are also highlighted in the report. It has been estimated by the Office for Budget Responsibility that the bill for defaults and fraud combined could be as high as £29.5bn.

The Bounce Back Loan Engagement Scheme could help cut the deficit

The CSA has put forward a proposal that would see the creation of a Bounce Back Loan Engagement Scheme.

The cost of the scheme is estimated at £10m per year for the first 3 years of its running. The potential return to the Exchequer could range from £3bn to £6bn during the first 3 years of the scheme.

The proposal suggests that the FCA’s mis-sold PPI deadline campaign which is reported to have cost £42m is a good example of the possible return on investment of the Bounce Back Loan Engagement Scheme.

The co-author of the report explained:

“With the vast scale of the BBLS both in the millions of businesses that have taken out a loan and the billions of taxpayer pounds loaned out, there is a responsibility on the Government and its ministers to ensure that there is an appropriate and effective approach to recovering BBLS debts.”

“Understanding the problems faced by the small and medium-sized businesses struggling to repay the loans is essential and early engagement and dialogue are paramount along with the correct skills and experience. If our recommendation is adopted by the Government, the Treasury will have controls over forbearance based on need, and it could recover up to £6bn more than it could otherwise have expected to. To put the additional £6bn into perspective, for the taxpayer it is equivalent to the annual budget for building new NHS hospitals.”