Loans to companies fighting to stay afloat during the pandemic must be scrutinised, while reverting to the community model will help support smaller businesses, says Philip Sinel.

The UK’s Coronavirus Business Interruption Loan Scheme (CBILS) was widely praised when it launched. Against the backdrop of pandemic tragedy, support for small businesses was a welcome relief. But now a new approach is needed. 

In a letter to CEOs this April, the Financial Conduct Authority (FCA) warned that it “will not hesitate to take action” should lenders take advantage of desperate borrowers during the pandemic crisis, a sign that billions of pounds paid out in emergency funding may spark a wave of enforcement and litigation.

Further, in July, the Office for Budget Responsibility’s fiscal sustainability report noted in its downside scenario that the government could lose 60% of the money lent under its Bounce Back Loan Scheme, a simplified version of CBILS, as reported by The Times. The UK’s lifeline programme is starting to cast a lengthy shadow.

Straightforward guidance

In principle, the CBILS guidelines are sensible and straightforward, centred on whether a business is viable but for the present difficulties. The government guarantees 80% of the finance to the lenders, and so the taxpayer absorbs the fees and interest for 12 months.

Changes in July to the EU state aid undertaking in difficulty tests have enabled even more small and medium-sized businesses to access funds. Many businesses are desperate and need the money for survival; owners and employees alike are suffering through no fault of their own. I have seen instances where bounce-back loans enabled UK businesses to change their model to suit the new climate and make strategic hires where necessary.

But there is a dangerous flip side to the availability of emergency credit: the choice between immediate failure and over-indebtedness is a hard one. In the best case scenario, banks will lend and recover on reasonable terms and support their clients’ growth. In the worst, banks could see this as a way to boost income while their bottom lines struggle too.  

Lenders will be secure in the knowledge that the taxpayer is going to pick up the tab if they over-lend. What is more, as addressed in its April letter, the FCA has found that a handful of banks have exploited their lending relationship to pressure companies into handing them roles on equity finance raisings that they otherwise would not have obtained.

Warning issued

Hearteningly, in this instance the FCA seems to have foreseen potential issues: it is already issuing banks with warnings in a rare instance, in my experience, of ‘front-end loading’, or considering the potential problems from the start.

Despite this positive sign of preventative action, the FCA is publicly preparing for a number of financial firms to suffer. In early June, Megan Butler, an FCA executive director of supervision, talked about its operational challenges, singled out customer complaints during the crisis and warned against cutting corners on governance, systems and controls. These warnings come only about a month after a rollback of rules to ensure that banks are able to make fast and efficient lending decisions. 

When some things go wrong, as they will, and consumers make claims, the only way of getting monies back if they have been treated wrongly is through some form of clawback organised by liquidators or lawyers. This means the only deserving parties who are going to get any money back are those who survive long enough to stay the course and can afford to get redress. 

Supporting small business

While larger businesses will doubtless gain assistance through the usual systems of patronage and lobbying, committing to smaller clients will, more than ever, make a real difference to those entrepreneurs as well as their local communities. This means investing in advisory services to help small companies adapt to the new market. Many lenders say they do; it would be interesting to see those investments well publicised as provisions for non-performing loans are.

Banks could do more to avoid clients’ distress, such as reopening local branches and hiring staff specifically to work with local businesses. This may seem counter to the digital trend, but it also supports the recent rediscovery of the importance of local communities. An FCA that continues to focus on prevention, strongly and vocally, would also be welcome. 

Although in what may be said to be an imperfect fashion, the fact that both government and banks moved so quickly to assist small businesses is laudable. Many entrepreneurs have benefited from the CBILS. But truly supporting them also means revisiting banks’ business models, as well as early and forceful interventions on bad behaviour.

Philip Sinel is founding partner of Sinels Advocates and specialises in commercial litigation, fraud, private client and trust law.

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