Public Accounts Committee: Risk of UK taxpayer bailout on up to £26 billion of Covid Bounce Back Loans

UK taxpayers face covering billions of pounds in the Bounce Back Loan Scheme with potential losses estimated in the region of £15 billion to £26 billion. The Government estimates the majority of this will be credit losses, where the borrower wants to repay the loan but cannot - but it lacks the data to assess the levels of fraud within the Scheme, or its actual economic benefits.

In a report earlier this year the Public Accounts Committee criticised the Government’s “astonishing” lack of economic planning and preparation for a pandemic, despite it being one of the top risks identified in the National Risk Register. Government was “taken by surprise” that small businesses would require tailored support in and after the lockdown and moved quickly to create the Bounce Back Loans Scheme, which guaranteed loans, enabling business to borrow money in as little as 24 hours.

Through this process, HM Treasury, the Department for Business and the British Business Bank prioritised delivery speed over all other aspects of value for money, and they have not been able to offer clear objectives or measures of the Scheme’s success.

This focus on speed means businesses self-certify their application documents and lenders are not required to perform any credit or affordability checks. The lack of checks creates risk for lenders which meant Government had to agree to guarantee the loans 100% - so that if the borrower doesn’t repay the loans, the taxpayer will.

Crucially, HM Treasury is yet to agree the process and protocols that lenders are expected to follow in recovering overdue loans. The Committee says Government’s plans for managing these risks to the taxpayer - from either fraudulently obtained loans or genuine borrowers who are unable to repay - are “woefully under-developed”.

Meg Hillier MP, Chair of the Public Accounts Committee, said: “We all hope the Bounce Back Loan Scheme saves a significant number of Britain’s small businesses, who will play a key part in the economic recovery from this pandemic.

“But despite knowing that it was a case of ‘when’ rather than ‘if’ a serious pandemic hit the country, Government didn’t develop plans for how to support the economy. Rushing to get money out of the door after the fact didn’t allow for analysis of how many businesses needed this help, could benefit from it, or could repay it.

“Dropping the most basic checks was a huge issue that puts the taxpayer at risk to the tune of billions.”

1 Government was not sufficiently prepared to support micro businesses despite the economic impact of the pandemic being a known risk. The economic impact of a pandemic has been on the National Risk Register since 2010 yet Government was not sufficiently prepared to help small and medium-sized enterprises (SMEs) through the pandemic. The Coronavirus Business Interruption Loan Scheme (CBILS) was introduced on 23 March 2020 to support businesses through the crisis. However, the lack of preparation meant that Government overlooked that CBILS was not appropriate for the smallest businesses. This was mainly due to the extensive credit and affordability checks the Consumer Credit Act required for businesses applying for loans of £25,000 or less: a process that is relatively time consuming and could see many applications rejected owing to the forecast economic impact of the pandemic. Both Germany and Switzerland delivered schemes to support small SMEs much earlier. Germany and Switzerland’s SME schemes offered 100% guarantees. Nevertheless, CBILS only offered an 80% guarantee.

Recommendation: The Department should more clearly set out what it wants the Bank to achieve in the context of Government’s wider support to business. It should analyse and assess whether the Bank can have more tailored plans in place for how to support SMEs of all sizes during a crisis, whatever its source.

2 The Scheme was implemented with impressive speed but does not strike the right balance between supporting business and protecting the taxpayer. Thanks to the hard work and effort of civil servants, the Scheme was launched within two weeks of the Chancellor of the Exchequer proposing it to the Department and the Bank. Re-tasking one of the Bank’s existing business support schemes enabled Government to get things up and running quickly. But Government’s desire to move quickly was based on anecdotal evidence, and a survey in mid-April that concluded one-third of businesses would probably not be able to access enough cash to last more than two weeks of lockdown. Beyond this, no clear estimates were drawn up to consider the cost of not delivering cash to the businesses within this 2-week period. The Scheme had no business case which means we heard limited evidence of a consideration of how many businesses might be unviable irrespective of the impacts of the pandemic, which business sectors needed support and how much, or the level of losses Government might be prepared to bear on the Scheme.

Recommendation: The Department should use all available data when implementing new business support schemes. It should use this to develop scenario-based analysis of most likely outcomes and use this to minimise taxpayer risk. It should be clear where data is insufficient to form evidence-based judgements.

3 Shortcomings in the Scheme’s design have exposed the taxpayer to potentially significant losses. Government achieved its very narrow objective of distributing cash quickly and to a very large number of small businesses across the UK. It delivered £8.4 billion in the first week and £21.3 billion in the first month, and as of 6 September, 90% of loans went to micro-businesses across the UK. This was achieved by removing the checks that extended the delivery period beyond 48 hours; increasing the level of risk through the lack of credit, application and affordability checks. Applicants need only to self-certify the data provided in their loan application. In the first year, Government is paying interest on the loans on behalf of borrowers, costing approximately £1 billion. In addition, taxpayers are exposed to both avoidable and unavoidable risks: fraud, viability of the underlying business, and unaffordability respectively. The Department estimates potential losses from both fraud and credit risk as somewhere between £15 billion to £26 billion, with the credit losses being the largest part. This estimate is highly uncertain and could be even higher. It indicates that Government was prepared to accept a higher level of risk to ensure that loans were available to SMEs as quickly as possible.

Recommendation: Before launching or renewing a Scheme, HM Treasury should be explicit on the level of losses it is likely to entail and the evidence that this analysis is based on. For the remainder of this Scheme, and future schemes, HM Treasury must better balance the interests of the taxpayer with the interests of businesses. It should demonstrate that its controls are cost effective and associated judgements reflect the appropriate balance between achieving immediate policy aims and protecting taxpayers’ money. It should start by assessing whether full reliance on self-certification is still appropriate.

4 Government’s plans for managing risks to the taxpayer - from both fraud and borrowers who are unable to repay loans - are woefully under-developed. Government does not have a counter-fraud strategy for the Scheme and has not identified what types of fraud it will prosecute. The Bank does, nevertheless, have a weekly lender fraud prevention collaboration working group, and conducts ‘data-analytics’ work with the Cabinet Office. Equally, lenders are required to conduct counter-fraud, anti-money laundering and ‘know your customer’ checks on loan applications. The Bank believes that these checks have prevented around 27,000 fraudulent loans that represent £1.1 billion but it has no data on Scheme fraud levels. Nor does it have any information on how businesses which have received loans have used the proceeds. The Bank say it will look into this during 2021, which may therefore be after the Scheme closes. The lack of data undermines the Bank’s ability to monitor and report levels of fraud and to use information to better inform future schemes.

Recommendation: The Department needs to provide clear updates on how it intends to deal with different cases of fraud, including on how it will prioritise recovery and prosecution. British Business Bank should write to the Committee, within two weeks, with a report on the latest fraud estimates in the existing portfolio.

5 HM Treasury has not yet finalised the rules lenders need to follow to ensure overdue loans are repaid. If a borrower does not repay the loan HM Treasury expects lenders to try to recover the money owed. But there is no requirement to complete this recovery process before the lender can claim the Government guarantee. HM Treasury is yet to outline the specific rules around the recovery process but plans to complete the work in relation to the loan recovery process by winter 2020-21, in advance of the first repayments which are due in May 2021. At present, lenders are expected to pursue unpaid loans using their own businesses processes and there is a lack of clarity about when lenders can claim the guarantee. The recovery process is unique for each lender, and without detailed rules from HM Treasury risks borrowers being treated differently depending on their lender, and a potentially inconsistent use of the Government guarantee.

Recommendation: HM Treasury should ensure that the recovery rules are confirmed prior to repayment, and that they are uniform in their fair and thorough recovery of loans.

1. Government has no apparent plans to measure the Scheme’s impact, including identifying how many businesses have been unable to access support. The Department indicates that its initial barometer for success was delivering cash to as many businesses in need, as fast as possible. However, no written objectives were outlined at the inception of the scheme and no business case was put forward. The Bank, HM Treasury and the Department, did not agree the Scheme objectives until 15 July 2020 and there are no plans in place to measure the scheme’s impact. The performance measures – for example the number of insolvencies prevented - have therefore not been decided, making it difficult to evaluate and measure the success of the scheme to date. This is similar to the Bank’s other schemes, where it has not brought together information on costs, activity, and outcomes to be able to effectively measure impact and evaluate success. Furthermore the Scheme has likely reduced competition in the small business lending market as the five largest UK lenders have provided most loans. This has, in the short term at least, increased their market share which works against the Bank’s target of creating a more diverse finance market for smaller businesses. The Government intends to set up a further lending scheme in the new year meaning learning lessons from this Scheme is very important for the value for money of future schemes.

Recommendation: The Department and the British Business Bank should set out, within the Treasury Minute response, how they plan on measuring the Scheme’s impact on businesses. They should ensure that any new schemes have, prior to launch, agreed performance measures. The Department should also analyse the impact of the Scheme on the lending market, paying attention to levels of competition and consumer choice.