More than 1.5 million small businesses across the UK prepare to repay some £ 47bn of government-backed Covid credit from this week as the first tranche of rebound loans mature .
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 do good to distressed borrowers, given the pressure to collect cash.
This same tension was said to have been one of the driving forces behind the RBS GRG scandal, which affected thousands of business customers in the aftermath of the 2007 financial crisis. The Government’s Asset Protection Agency has been accused of pushing the bank to attract the support of business customers and secure their assets, as a result of the RBS ‘expensive government bailout in 2008. A shocking memo from 2009 told RBS bankers to “Just Hit Budget!” and offered advice on how to convince small businesses to make money: “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 during successive lockdowns – reignites calls to regulate the industry before another scandal surfaces.
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 or tribunal.
“The conversation is important now because of the huge corporate debt that has just been incurred during the Covid crisis,” said conservative APPG chairman Kevin Hollinrake. Some businesses will inevitably default on their loans, triggering a lawsuit by 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 used the government’s three main Covid loan programs, which between them generated credit worth a total of £ 75 billion.
Only the smallest businesses – those with an annual turnover of less than £ 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 multitude of regulations, which business owners large and small alike assume to protect,” said Ned Beale, a lawyer at the Hausfeld law firm. “But the problem is, regulation is as powerful as your ability to enforce it. In fact, when things are going well, much of this settlement is unenforceable. “
This means that companies take significant risks when borrowing, even from government-backed programs.
As recently as last week, the FCA had to remind borrowers that the turnaround loan program, which is expected to replace rebound loans and other Treasury programs, was unregulated. The APPG has even proposed putting “health warnings” on loan agreements because it believes most small and medium-sized businesses do not understand the risk.
Without stronger protections, MPs fear more scandals are on the horizon.
“What we’ve learned from history is that we won’t learn from history,” Hollinrake said. “I could see it was going wrong again.”