BRA0003

Written evidence submitted by UK Finance

Background:

        The Bounce Back Loan Scheme (BBLS) was a unique Government lending initiative launched at a time of economic emergency; due to the pandemic, many smaller British businesses didn’t know if they would survive.

        The scheme strongly delivered, providing over £46bn of urgent liquidity to more than 1.5m, mainly smaller, businesses when they needed it most.  Without this support, many tens, if not hundreds, of thousands of these businesses may not have survived[1].  BBLS, together with the other COVID-19 Credit Guarantee Schemes (CBILS, CLBILS) and the Covid Corporate Financing Facility, was just one of the pivotal ways in which the UK Financial Services industry provided unstinting support to UK companies through the worst of the COVID-19 pandemic and its aftermath.   

Fraud within the context of BBLS:

        The core objective of BBLS was to provide urgent liquidity to smaller businesses.  Therefore, certain regulatory requirements (e.g. Consumer Credit Act) were disapplied.  In addition, eligibility was made dependent upon borrower self-certification and lenders were unable to undertake credit or affordability checks.

        This reliance upon borrower self-certification, and the absence of credit or affordability checks, was key to BBLS passing funding through to businesses in unprecedented volumes and at unprecedented speed.  Equally, this made BBLS more vulnerable to fraud than conventional business lending.

        This fraud vulnerability was viewed by HMG as a necessary trade-off, given the priority to get urgent liquidity to businesses. A BBB Reservation Notice prior to launch outlined, “Our primary concerns relate to the extensive reliance on customer self-certification and the corresponding fraud risk …”.  The subsequent Ministerial Direction noted, “these risks notwithstanding, the unprecedented situation facing the country meant that it was essential to proceed with the scheme”.

        Despite the self-certification reliance and lack of credit or affordability checks, lenders had to undertake customer fraud, Anti-Money Laundering (AML) and Know Your Customer (KYC) assessments.  Furthermore, the taxpayer will not bear any losses where the lender did not fulfil these requirements.  In such scenarios, any loss is incurred by the lender not the taxpayer, although such situations can be anticipated to be few and far between given the importance with which lenders take these obligations. 

Lender Activity re BBLS fraud:

        From the outset, lenders have been cognisant of the fraud vulnerabilities particular to BBLS.  Therefore, lenders have taken actions, over and above their formal obligations outlined in the BBLS Guarantee Agreement, to prevent and mitigate scheme abuse.   

        UK Finance, collectively with the British Business Bank (BBB), formed a BBLS Fraud Collaboration Group in May 2020. This Group comprises a wide range of stakeholders, including BBLS-accredited lenders, UK Finance, the BBB, CIFAS, multiple HMG departments and Law Enforcement Agencies (LEA).  This met weekly through the BBLS on-sale period and, since then, continues to meet monthly.  It provides a platform to share information and intelligence across the BBLS Fraud Landscape and to oversee key BBLS fraud activities of strategic importance. 

        One of the key initiatives overseen by the Group was the creation of a ring-fenced database, via a CIFAS platform, for use by lenders to identify and flag duplicate applications to prevent businesses from accessing multiple BBLS loans across multiple lenders.

        Lenders also worked closely, in the months following launch, with HMG and the BBB to develop BBLS Recovery and Fraud Principles.  These Principles provide guidance in terms of how lenders should manage customers, and BBLS loans, through stress, default and recovery scenarios and, similarly, how lenders should treat instances of suspected scheme abuse or fraud. 

        Collectively, these Principles drive greater consistency across lenders and help to achieve fair outcomes for both BBLS borrowers and taxpayers.

        Lenders continue to devote very material resource to BBLS fraud and have reported that, through their own fraud checks, over £2.2bn of fraudulent BBLS applications were prevented during the BBLS on-sale period. 

        Since the closure of BBLS to new applications at end Q1 2021, the focus has firmly shifted from fraud prevention to identification and mitigation of BBLS fraud.  Lenders are working closely with HMG and Law Enforcement Agencies (LEA) on multiple fraud investigations.  Lender information and insights can be crucial here; lenders maintain active engagement with such agencies as the UK Financial Intelligence Unit, NATIS and the Insolvency Service.  

        Given the particular focus on serious organised crime, lenders have been regularly interacting with the Cabinet Office and Quantexa since late 2021 on specific clusters of BBLS loans where potential organised criminality has been identified.  Lender participation in collaboratively providing information is critical in enabling agencies to bring criminal prosecutions.    

        Alongside these exercises with external stakeholders, lenders also continue to undertake material activity to identify fraud within their BBLS portfolios.  These efforts have been aided by certain potential “red flag” data that has been provided to lenders by the Cabinet Office (primarily using data sourced via Companies House) and the BBB (primarily using data from the BBB’s own Portal).      

Existing fraud levels based on BBB data publication

        The most recent BBLS data metrics, to end July 2022, were published by BEIS in September 2022[2].

        Out of £46.6bn of BBLS lending drawn:

• £1.2bn of guarantee claims have been paid i.e. 2.6% by value;
• A further £2.6bn of guarantees have been claimed by lenders but are yet paid i.e. 5.6% by value.
• In addition, £1.4bn of lending has defaulted but these guarantees have not yet been claimed by lenders i.e. 2.9% by value.  

        Specifically in relation to fraud:

• £1.1bn of BBLS lending has been marked as “Suspected Fraud” i.e. 2.3% by value;
• £0.4bn has been subject to guarantee claims (including settled claims and claims not yet settled) for reasons of fraud i.e. 0.9% by value.  

        This BEIS publication highlights that:

• “Suspected Fraud” data does not necessarily equate to fraud i.e. “suspected” is invariably a wider measure than proven fraud.
• “Suspected Fraud” values continue to evolve; these flags can be added or removed by lenders based on their continued analysis.

        Furthermore, the BEIS publication explicitly acknowledges that, “Lenders employ different approaches to fraud identification according to their own individual systems and operational practices. These approaches can change over time due to technology advances, updated regulatory requirements and industry standards”.  

        “Suspected Fraud” is for each lender to determine in line with their BAU approach to fraud identification and categorisation:

• HMG and the BBB determined that lender approaches to BBLS fraud should be built upon existing lender BAU rails to make use of established systems.  These were then supplemented where appropriate e.g. the CIFAS Duplicate Check (see above).    
• Information sources available to each lender may vary; for example, suspicions of fraud around turnover inflation will be based on available indicators such as turnover through bank accounts which may not capture all revenues (for instance, where a borrower is multi-banked).
• Similarly, there can be legitimate policy and practical reasons for BAU differences across lenders in managing customers where, prima facie, there may fraud suspicions.  For example, a lender with a longstanding relationship with a borrower will, all things being equal, have access to more information sources to help determine any fraud suspicion.  A lender with strict product eligibility criteria may categorise losses as fraudulent more often.   
• Notwithstanding the “one-size-fits-all” nature of BBLS, some lenders may have more inherent levels of BBLS fraud than others, reflective of differing propositions. For example, a lender that opened the scheme to new customers may, all things being equal, have experienced more fraud than a lender that restricted its BBLS offering to existing customers only.

        A factually incorrect self-certification may represent innocent misrepresentation, opportunist behaviour or fraud (with the lender’s determination potentially impacted by information sources available to it[3]).  

        Not all loans marked as “Suspected Fraud” are necessarily fraudulent.  Across those loans currently marked as “Suspected Fraud”, more than £100m has been fully repaid and more than a further £70m is on schedule to be repaid.  This implies that both:

• A sizeable proportion of these borrowers are repaying and, prima facie, many of these borrowers are well-intentioned.
• Not all fraudulent loans will result in full taxpayer loss.  Lenders have to pursue recoveries after defaulting a BBL which will, in some cases, reduce losses.  During the on-sale period, some lenders will have been able to set-off funds from other accounts where a fraud was identified shortly after provision of the BBL[4].  

        Loans that may initially appear fraudulent are often not; rather, they can turn out to be genuine loans to bone fide businesses.  A primary example of this is a cohort of “dissolved” borrowers that accessed the scheme i.e. where the BBL borrower was technically dissolved at Companies House prior to their BBL application. Intuitively, this signifies wrongdoing and, to be clear, there are some instances of abuse in this way.  However, across the industry, case review has highlighted that a large proportion of these BBL applications were made by genuine trading businesses.  For example, a scenario where the borrower was now trading through a new incorporated entity but had not advised the lender of the updated company details or, alternatively, was now trading as a sole trader / partner but, again, had not advised the lender of their updated details.  In these scenarios, the BBL funds have been provided to a legitimate trading business for appropriate purposes but, prima facie, based on a read across of Companies House data to a list of BBL borrowers, the loan would appear to be potentially fraudulent.   

        As noted in their 2021/22 Annual Report & Accounts:

• BEIS have maintained a fraud estimate at 7.50%, although this has been adjusted up to 8% for additional claims identified by lenders as fraudulent within the sampled population. 
• Their estimate of loss across these loans is circa 53% which, according to the BEIS central estimate, would represent circa 3.49% of the remaining BBLS portfolio where losses have not yet materialised[5], noting that 0.75% of losses are already realised. However, the variances in the lower (1.49%) and upper (7.24%) ranges highlight the uncertainties here.     

        The BEIS measurement is different to the lender “Suspected Fraud” flag insofar as:

• The BEIS data measures “fraud and error”.  Prima facie, these are wider and more encompassing parameters than “Suspected Fraud” which requires some suspicion of wrongdoing.
• The lender “Suspected Fraud" data is a snapshot at a point in time whereas the BEIS data is a projection of fraud and error across the scheme’s lifetime.   Lender “Suspected Fraud” figures can change over time, esp. given the lenders’ ongoing activity with law enforcement agencies and HMG to identify further fraud within the scheme.  Already the 2.3% figure is considerably higher than lenders would see across normal loan books and is reflective of activity to identify BBLS fraud.  

What is the industry doing to mitigate taxpayer loss?

        Lenders are aligned with HMG and BBB in a collective desire to minimise taxpayer losses.

        A reality is that, for some borrowers who took out BBLs in good faith, the debt is unaffordable.  It will not be possible for these loans to be repaid in full, no matter what forms of forbearance are provided.         

        Where a BBL defaults, the BBLS Recovery Principles ensure that lenders take appropriate activities to recover as much from the borrower as is reasonably possible.  Prima facie, a lender will undertake comparable recovery activities on a BBL as they would be for an equivalent loan without a government guarantee.  This activity could be undertaken by the lender itself or outsourced to a Debt Collection Agency (DCA). 

        Notwithstanding these activities, actual amounts recovered on BBLs can be limited:

• Under BBLS rules, no security could be taken. This includes a prohibition on the taking of Personal Guarantees in support of company debt so owners and directors of limited liability companies are not personally liable. 
• Although a sole trader or partner is personally liable for BBLS debt, the loan cannot be enforced against their main home or vehicle.   

        Although a lender has a legal obligation to undertake recovery activities for 12 months post default (unless recovery efforts have been exhausted before then), in reality, in many cases, lenders will continue to undertake activities post 12 months.   For example, in relation to regular repayments where the customer may agree to pay what are often small amounts per month. These repayment plans can conceivably stretch for many years post default. It is an accepted scheme principle that, where a repayment plan is entered into post-default, the lender should attempt to “repair” a break in such repayment plan at least once to promote overall recovery.

        In addition, even though the BBL being unsecured does make enforcement options more difficult, there are borrower consequences where formal enforcement action is not taken:

• Where the lender provides SME data to Credit Reference Agencies (CRA), the loan default will be registered and the borrower’s CRA record will also highlight where no repayments have been received post the default.   
• Where there is fraud, the lender will take appropriate action.  This could include:
• Application of internal markers and external markers / filings. 
• The relationship may be exited.  Where the lender has the borrower’s main banking relationship, the borrower may have difficulty in rebanking. 
• Law enforcement referral; for example, if suspicion of serious & organised crime.

        Since late 2020, UK Finance and the BBB have jointly held a BBLS Recoveries Collaboration Group meeting at least monthly for BBLS-accredited lenders and other relevant stakeholders.  This has helped to ensure lenders have clarity on rule-sets that apply across the scheme’s in-life and recoveries scenarios.

Recovery on fraudulent BBLs:

        Recovery of defaulted BBL amounts is more challenging where the loan is fraudulent.  The fraudster will usually have transferred the funds away from their accounts with the lender (so the lender will be unable to “set-off” funds from other accounts against amounts owed) and, more so, will be unwilling to substantively engage on repayment options.  

        We acknowledge the announcement in the Spring Statement 2022, of an additional £48.8 million of funding over 3 years to tackle public sector fraud, including a further £13.2m of funding for NATIS.  Collaboration with Law Enforcement Agencies is already good and there is more that can be done here.

        Not only is the industry more than fulfilling their scheme requirements but there is an increasing and particular focus around those borrowers who have abused the scheme.  Many of these borrowers may be in scope for criminal prosecution.  Whilst criminal prosecution is not a direct matter for lenders, lenders have a role to play in terms of highlighting potential criminal abuse and providing relevant information to Law Enforcement Agencies where it is legal and appropriate to do so.  

        As regards civil enforcement options, lenders have been considering the potential for additional, incremental recovery activities in cases of egregious BBLS fraud.  These would be activities undertaken by a lender that are over and above their guarantee obligations.  Although this is a matter for each lender to determine, there is a general consensus across lenders that some form of additional recoveries activity should be considered in response to more serious instances of fraud.  Given the costs of these enforcement activities, which are ultimately borne by the taxpayer, civil options are most likely to be explored where there is maximum chance of incremental recovery i.e. where it is identified that the borrower or businessowner has assets.      

        There is further work to be undertaken with HMG and their agencies in relation to the potential for additional recovery activities.  In particular:

• There is a need for lenders to have a clear roadmap that identifies where Law Enforcement or Insolvency Service referral would be appropriate vis-à-vis a lender’s civil enforcement options (recognising that lenders are not an equivalent to law enforcement and it is not their role to penalise wrongdoing).    
• Given costs incurred with civil enforcement options (for example, a winding-up petition and an insolvency route to include the Insolvency Practitioner investigating any wrongdoing) will be netted off against recoveries made (i.e. taxpayer impact), there is a need for HMG policy confirmation around these activities being appropriate. 
• Civil enforcement against unincorporated borrowers (i.e. sole traders and partners) can be problematic given the scheme directly prohibits enforcement against their primary residence or primary vehicle.  To enforce against either, notwithstanding borrower wrongdoing, would give rise to significant legal and reputational risk.  An alternative and more legally robust route would be bankruptcy but this still gives rise to reputational risk.  Therefore, a clear policy direction from HMG would be required as regards pursuing bankruptcy in these scenarios.
• Given the importance of ensuring regulatory requirements are upheld and that customers are treated fairly, there is a requirement that high-level principles and approaches are agreed in writing with the FCA and the Lending Standards Board (LSB).       

        There is also the potential for more government-sponsored responses in the pursuit of BBL fraudsters.  One option that could be considered is the insolvency route being led by the public sector with the lender named as the principal debtor. 

Notwithstanding fraud vulnerabilities, BBLS has delivered:

        BBLS was brought to market at very short notice in a time of national, and global, emergency.  There are key learnings we can take regarding scheme design and fraud, to be fully understood and embraced to stand our economy in good stead should another emergency ever arise, including looking at the experiences of comparative international programmes[6].  

        The positive impact of BBLS should equally not be overlooked.  The early stage evaluation, by London Economics and Ipsos, published in June 2022, estimates that:

• Between 10% to 34% of BBLS borrowers (146,000 to 505,000 businesses) and 7% to 28% of CBILS / CLBILS borrowers may have permanently ceased trading without this support.  
• Collectively these schemes may have safeguarded 0.5 million to 2.9 million jobs. 

        The OECD noted over 160 jurisdictions launched monetary and fiscal support programmes to alleviate COVID-19 impacts and highlighted common features of best COVID-19 Guarantee Programmes[7]. BBLS benchmarks well on these:

November 2022