PAC: Government “complacent” about preventing “eye-watering” levels of fraud in the Covid Bounceback Loan Scheme

In a report today, the Public Accounts Committee says that the Department for Business Energy & Industrial Strategy’s (BEIS) was “complacent in preventing fraud” in the 100% taxpayer-guaranteed Bounceback Loan Scheme (BBLS) and that Government “cannot just accept” the level of unpaid debt it currently plans to, calling it “unacceptable” that the Department “has no long-term plans for recovering overdue debt”.

The Committee’s previous report on the BBLS in December 2020 warned that the design of the BBLS had “exposed the taxpayer to potentially huge losses” and despite inconsistent data, latest estimates show that of £47 billion paid out in Bounceback Loans, £17 billion is already expected to be lost, £4.9 billion of that - over 10% of the loans - to fraud. 

The Committee says BEIS is now “placing too much reliance on lenders to minimise taxpayer losses” but the Scheme’s design “does not incentivise lenders to do this”. The focus on delivery of the loans “at breakneck speed” meant lenders were not required to do credit or affordability checks or even verify application information, and to offset this risk to lenders the Government guaranteed the loans 100% - meaning that if the borrower does not repay the loan, the taxpayer will. This means “business survival has come” at a “staggering” cost to the taxpayer: money that “could have been spent on improving existing public services, reducing taxes or to reduce government borrowing”. 

The Committee says both BEIS and the British Business Bank (BBB) missed opportunities to prevent fraud and BEIS’ subsequent focus on ‘top-tier’ fraudsters puts “other government schemes at risk due to the lack of a deterrent effect”. Neither BEIS or the BBB were sufficiently prepared to respond to significant economic shocks.” The long-term impact of the Scheme is uncertain, but it has brought other unintended negative consequences, including “distorting the SME lending market in favour of the largest UK banks” converse to the BBB’s “objective of creating a diverse finance market for SMEs”

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “With weary inevitability we see a government department using the speed and scale of its response to the pandemic as an excuse for complacent disregard for the cost to the taxpayer. More than two years on BEIS has no long- term plans to chase overdue debt and is not focussed on lower-level fraudsters who may well just walk away with billions of taxpayers’ money.

“The Committee was unpleasantly surprised to find how little Government learned from the 2008 banking crisis and even now are not at all confident that these hard lessons will be embedded for future emergencies. BEIS must commit now to identifying what anti-fraud measures are needed at the start of any new emergency scheme so the taxpayer is better protected in future. It also needs to set out the trade-offs and what level of fraud it will tolerate at the outset.”

PAC report conclusions and recommendations

7. The Department and the Bank delivered the Scheme at breakneck speed, but the long-term impact of the Scheme is uncertain.The Scheme was launched within 11 days of its announcement. The Scheme met its initial goal to get money to a range of businesses quickly, delivering most of the £47 billion of loans to businesses in its first two months. The Department asserts that early indications are that the Scheme has helped business survival in the short term. While most businesses have started to repay loans, it is only when borrowers reach the end of their six- or ten-year loan period and either repay their loans, or the loans are written off if businesses have not survived, that we will be able to judge the Scheme’s impact. The Department estimated, however, that between 31% and 48% of loans will not be repaid – a narrowing on the estimate in its 2019-20 Annual Report & Accounts that up to 60% of loans would not be repaid. The Scheme is already expected to lose an estimated £17 billion of taxpayers’ money as a result of both genuine borrowers who are unable to repay and because of fraud. The Department has evaluation plans covering the next three years and it expects the first tranche of the evaluation in February 2022. But it has yet to identify the necessary control group of similar companies who took out loans in order to measure the success of the Schemes.  

Recommendation: The Department should put in place a clear strategy to manage the long-term legacy of the Scheme within a month of the publication of its evaluation report.  

The Bank should also write to us with details of its plans to measure the Scheme’s long-term impact, including identifying a reliable control group, within a month of the publication of Department’s strategy. 

8. The potential Scheme losses are eye-watering, and we are not convinced the Department has the data it needs to manage the risks to the taxpayer. The Department estimated in its 2020-21 Annual Report and Accounts that it would lose £17 billion as a result of the Scheme, of which £4.9 billion was because of fraud. We have seen similarly high levels of expected losses due to fraud in other Covid-19 business support schemes, with losses from fraud and error within the furlough and self-employment schemes estimated at £5.7 billion. This staggering amount of taxpayer money could have been spent on improving existing public services. The Department admits that fraud within the Scheme falls well outside what it would consider a tolerable level, although it cannot tell us what that level should be. Its fraud estimate does not include all potential types of fraud, such as suspected turnover inflation fraud to claim larger loans than a borrower is entitled to. To date, it has allocated just £32 million to countering fraud and does not know whether lenders or other stakeholders, including law enforcement agencies, have the resources they need to counter fraud. The Department reports its estimates of losses once each year and these have a high level of uncertainty. The Bank’s loan data from the 24 commercial lenders under the Scheme has data limitations as each lender categorises and reports data in a slightly different way. The Department is trying to improve its approach to quantifying losses in the Scheme, but it is almost two years since its launch. 

Recommendation: The Department should, within the next 3 months, develop a strategy setting out the increase needed in Scheme counter-fraud resources for all relevant government stakeholders to both reduce fraud levels to a tolerable level and to maximise recoveries. 

As part of its Treasury Minute response, the Department should explain how it intends to improve the accuracy and timeliness of its estimates of losses within the Scheme. 

9. The Department has been complacent in preventing Scheme fraud and its prioritisation of ‘top tier’ fraudsters puts other government Schemes at risk. The risks that we identified at the outset of the Scheme have now materialised. The Department requested, and received, a ministerial direction at the start of the Scheme as it expected high levels of losses. Even so, counter-fraud measures were introduced too slowly. For example, it took a month after the Scheme’s launch to set up checks to prevent duplicate applications because of delays in joining up information held by different parties. The Scheme did not require lenders to check a businesses’ claimed turnover against its records for existing customers; this meant some borrowers received a larger loan than they were entitled to. It also took the Department 8 months to introduce checks to ensure businesses’ claimed turnover was correct, by which time 93% of the loans by value had been issued and some received more than they were entitled to. The Department and the Bank have placed less emphasis on tackling those smaller scale fraudsters who deliberately misstated their details, such as turnover, than on organised crime. The consequences of fraudulent activity include the individual being banned from being a company director or being able to borrow in the future, but this assumes they are pursued and caught. The Department’s response for ‘smaller’ fraudulent claims is limited and may mean that fraudsters will walk away with the money – something the Department’s fraud-loss estimates suggests is a real risk. We are concerned that its complacency towards smaller scale fraud and turnover misstatement provides a limited deterrent effect and could encourage fraudsters to try to take advantage of other government schemes. 

Recommendation: Next time the Department launches an emergency business support scheme, it should be explicit on the trade-offs and level of fraud it is prepared to tolerate from the outset.  

The Department should urgently outline how it will change its plans to adopt a more robust approach to reducing all types of reducing all types of fraud, and should commit to including anti-fraud measures from the outset so that it acts as a deterrent effect for other schemes. 

10. We are concerned that the Department is placing too much reliance on lenders to minimise taxpayer losses without incentivising them to do so. When the Scheme launched the Department relied solely on lenders to prevent taxpayer losses by requiring them to do ‘know your customer’, and ‘anti-money laundering’ and some basic counter-fraud checks. It is also relying on lenders to recover overdue loans rather than doing so itself, as it considers commercial lenders to be the experts in this field and already follow similar recovery processes for standard commercial loans. The Scheme guarantees to cover 100% of lenders’ losses which offers limited commercial incentives for them to pursue borrowers for more than the minimum period under scheme rules. The Department relies on contractual, legal and regulatory obligations to ensure lenders comply with the Scheme. Evidence on the effectiveness of the lenders’ operations is slim, but there are some worrying indicators. The Bank runs a lender assurance programme to test whether lenders adhere to Scheme rules; and the commercial lending regulator wrote to lenders in July 2021 to remind them of their obligations to report fraud and put in place adequate counter-fraud resources. But none of the witnesses could tell us how much lenders are spending on this. The department now plans to create a simple dashboard of management information to improve its ability to hold lenders to account. Together this gives an unconvincing picture of how lenders are bearing down on large amounts of outstanding debt and we are not convinced that lender audits are a replacement for commercial incentives.  

11. Recommendation: The Department should, as part of its Treasury Minute response, set out how it will use legal, regulatory and contractual incentives to improve the lenders’ performance in managing the loans and the risks to the taxpayer. Furthermore, it should report to the Committee on individual lender performance using the dashboard data which was due to be presented to the new cross-Whitehall counter fraud board.  

12. It is unacceptable that the Department has no plans to recover outstanding debt after lenders have pursued borrowers for up to 12 months. There is no minimum term that lenders are required to pursue borrowers for payments. Lenders are not expected to continue to pursue borrowers after 12 months. Lenders can claim on the government guarantee before the end of the 12-month period if they have conducted what they consider to be a “sufficient and robust level of recoveries” and have concluded that no further payment is likely. The Bank and the Department assert that lenders could pursue overdue payments for longer than 12 months if they chose to do so, and believe it would be in the borrower’s commercial interest to repay if they want to maintain their bank account with that lender. The Department was also not in a position to state what the shortest time period had been for a lender to claim their guarantee. We are concerned that this presents an overly optimistic view about lenders’ incentives to recover funds and how the Bank’s lender assurance programme would work towards recovering unpaid loans beyond this 12-month period. The Department has, however, agreed to consider alternative approaches to recovering loans. 

Recommendation: The Department should, as part of its Treasury Minute response, set out its strategy for collecting overdue payments after the lenders have completed their 12-month requirements. In addition, the Department should write to the Committee and provide further information on what the shortest time period has been for a lender to claim on their guarantee to date and how this compares to the average.    

13. The Scheme has distorted the Small and Medium Enterprise (SME) lending market in favour of the largest UK banks, which goes against the Bank’s objective of creating a diverse finance market for SMEs. The Scheme’s low interest rate made it uneconomical for smaller or alternative lenders to participate to the same extent as larger lenders. This meant that some smaller lenders did not take part in the Scheme and larger lenders, who traditionally are less active in the SME lending market, lent relatively more. This resulted in the largest UK banks taking a 90% share in the Scheme’s lending to SMEs, distorting competition in the SME lending market as the Department and Bank expected at scheme launch. While we are encouraged to hear that the Department believes diversity is returning to the lending market, we remain concerned about its ability to identify and address any unintended or unforeseen consequences and the longer-term impact of the Scheme on the lending market.  

Recommendation: The Bank should develop a strategy to mitigate the negative impact of the Scheme on the SME lending market and publish its findings in its next Small Business Finance Market report.  The Department should, alongside its Treasury Minute response, identify the unintended consequences of the scheme and what impact these have had.  

14. The Department has not yet identified how it will share the lessons from the Scheme. The Department asserts that it has applied some of the lessons it has learned from this Scheme in the subsequent Recovery Loan Scheme, such as introducing additional reporting requirements on lenders. It also recognises that it needs to ensure stronger counter-fraud capability and data-sharing across government to be in place from the start of any future scheme. Yet these learnings should have been obvious following the Department’s experience in the Financial Crisis when its approach was similarly reactive. We are surprised that the Department and the Bank were so ill-prepared to respond an economic shock, irrespective of the nature of the pandemic. The Department recognises that it would have been possible to design the outline of the Scheme five years ago, but it would not have planned for a scheme of this type because its pandemic preparedness plan did not foresee an event of such gravity. In responding to the pandemic, the Department was able to draw on some of the planning from its experience during the UK’s exit from the EU. Carrying lessons forward to future schemes, however, is hindered by the Department’s lack of corporate memory, with staff moving to other roles. The Department is shortly due to publish the findings of its first of three evaluations of the Scheme, as part of its three-year Scheme evaluation programme, but it has not shared any plans about how it would disseminate the lessons-learned across government.  

Recommendation: The Department and the Bank should establish a strategy on how it intends to share lessons from the scheme within a month of the publication of their first evaluation report.   The Bank should develop a business case for an emergency loan scheme for future crisis within 6 months of publication of this report.