Was The Covid Bounce Back Loan Scheme Fit For Purpose?

Bounce Back Loan Fraud

A report from the National Audit Office (“NAO”) on 3 December 2021 had some startling findings about Covid Bounce Back Loan fraud. Considerable remaining uncertainty prevails as to how the Bounce Back Loan Scheme will pan out. In its report called “The Bounce Back Loan Scheme Update” (“the Report”) the NAO noted that the government’s counter-fraud measures and strategy appear to have lacked vision and to have been backed by insufficient resources.

It seems that self-certification of loans was permitted on an industrial scale. So how did it transpire that a scheme designed to help many small businesses escape some of the worst financial effects of Lockdown was issued after dismantling even some rather basic money-lending controls and such brazen fraud permitted to seemingly run rampant?

The Bounce Back Loan Scheme

The Bounce Back Loan Scheme was massive. It issued around 1.5 million loans to small businesses. They hoovered up to around £47 billion of funds from our banking institutions. The government caused the public purse to stand behind these loans if they were defaulted upon.

How Were Bounce Back Loans Used?

When a Bounce Back Loan was issued, it was issued whereby it had to be deployed for the economic benefit of the business that took out the loan. However, the National Audit Office report suggested that it does not have a great deal of evidence as to how these Bounce Back Loans were in fact used.

Repayment Of Loans And Default Estimates

The Report estimates that anything up to 37% of the total sums lent in Bounce Back Loans may not ever be repaid. This suggests that the UK taxpayer may have to fork out to the banks for up to potentially £17 Billion. Naturally, nobody knows the full extent of the eventual default as no-one can realistically claim to be sufficiently clairvoyant to know which businesses will survive these turbulent times.

It seems that this estimate is likely to have sprouted from data emerging from the British Business Bank (“BBB”), suggesting that of Bounce Back Loan repayments made (or defaults), they have in total as at 30 September 2021 according to the NAO Report, amounted already to £3.3 Billion.

Fraudulent Bounce Back Loans Extracted

It has been estimated by the NAO from 31 March 2021, that up to 11% of loans running to nearly a staggering £5 Billion could have been fraudulently obtained.

Why Has Such A Fraud Risk Arisen?

Such a significant potential fraud, at the ultimate expense of the UK taxpayer, appears to have arisen from the method by which the Bounce Back Loans were handed out. They were handed out very quickly at the start and the NAO says that the government was seeking for lenders to address the fraud matters, not the scheme provider.

Fraud Measures Too Little Too Late

The NAO Report refers to 13 measures that were introduced but these were implemented too late in the day to deal with detection issues. Interestingly the NAO Report highlights something many might consider incredible ie. that the Scheme provider (the BBB) was apparently at the mercy of duplicate applications until June 2020 by which time loans to the value of more than £28.5 Billion had already been issued. In order words, more than 50% of Bounce Back Loans had been issued by that point and still, it can be reasonably inferred from the NAO Report, that there had been no insufficient measures introduced to ensure that an applicant for example only, had not already had a Bounce Back Loan from one another lender to stop them getting a new one with a different lender.

Comment

It seems remarkable that during one of the most rapid deployments of government loans, that an application from the same party was not within the scope of the checks and balances before the scheme got off the ground.

It would appear that the implementation of some control checks could have prevented the scale of some of these foreseeable fraud losses.

Government Bounce Back Loan Fraud Strategy Assessment

According to the NAO Report, the government lacked a fraud strategy and the report paints a picture of a system without focus, without vision and without fraud control:

We did not find any documents which set out the Department’s long-term ambitions, objectives, or financial metrics to measure the impact of counter-fraud activity.

The upshot appears to have been that the government has now focused on dealing with organised crime fraud that has sought to take advantage of the Bounce Back Loan Scheme and in view of its resource shortages, thereby focusing on the bigger loan groups. However, even this has been troublesome due to the stretched resources of its enforcement agencies available to address the matter, thereby ever more reliant upon lenders to deal with smaller level frauds.

Lender Recovery Of Loans

Lenders collect in the loans and have different approaches but they must comply with the Scheme recovery principles set out in December 2020. It does however mean that different borrowers may find themselves treated by different banks somewhat differently.

Conclusions: Covid Bounce Back Loan Fraud

A self-certified scheme, therefore, developed as the government, it seems objected to upfront counter-fraud measures when the Scheme continued to be rolled out and as a result, whilst speedy issuance of loans was achieved, it appears to have been done at the expense of high levels of fraudulent conduct.

The situation now appears from the NAO Report, that recovery of fraudulent loans needs to be a core focus for the government to train its sights on, notwithstanding that it is harder to recover from fraud losses than to safeguard against them.

Oliver Elliot Observation

What we appear to have seen as suggested by the NAO Report, is fraud that appears to have gone unchecked and permitted to run with alacrity. The perceived need for speed outflanked the fraud risk. But what we see as history showed in the 2007 financial crisis, borrowers yet again being permitted to self-certify loans is still a process stuck right in the heart of a conflict of interest that so often can have regrettable consequences. Will it be allowed to happen again or will mistakes be reflected upon and learned from?

Disclaimer: Was The Covid Bounce Back Loan Scheme Fit For Purpose?

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