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Coronavirus - Bounce Back Loan Scheme launch - UK

  • United Kingdom
  • Banking and finance
  • Coronavirus
  • Financial services - Retail finance

13-05-2020

 

Background

On 4 May 2020, the UK Government launched the new Bounce Back Loan Scheme (“BBLS”), the latest in a round of measures proposed by the Government to help small businesses facing significant financial difficulties in the current climate. Under the BBLS, businesses will be able to apply for quick and easy-to-access loans between £2,000 and up to 25% of their turnover; the maximum loan available under the Scheme is £50,000. No loan repayments are required for the first 12 months and the government will cover the interest repayments for the same period.

For those businesses seeking more than £50,000, BBLS is intended to sit alongside the Coronavirus Business Interruption Loan Scheme (“CBILS”).   Under CBILS a participating lender can provide up to £5 million in the form of term loans, overdrafts, invoice finance or asset finance.  Both schemes are operated by the British Business Bank, through accredited lenders; read a summary of the schemes.

This briefing provides an overview of the two schemes, highlights some consequential changes to financial services legislation and Bank of England funding schemes, and also notes the impact on Financial Ombudsman complaint handling processes and Lending Standards Board obligations.

Key features of the two schemes

Eligibility

BBLS is intended for SMEs, micro businesses and other businesses requiring smaller loans. Borrowers can apply for a loan under BBLS if their business: (i) is based in the UK (ii) was established before 1 March 2020 and (iii) has been adversely impacted by the coronavirus. CBILS is intended for smaller businesses with a turnover of less than £45m. In addition to the turnover limit, businesses can apply for a loan if their business is based in the UK and the borrower can demonstrate that their business: (i) would be viable were it not for the pandemic and (ii) has been adversely impacted by the coronavirus.

Application process

BBLS borrowers are required to fill in a short online application form and self-declare that they are eligible for the schemes. Eligible businesses are subject to lenders’ confirmation of eligibility, as well as appropriate customer fraud, Anti-Money Laundering (AML) and Know Your Customer (KYC) checks. For CBILS facilities the application will also usually require management accounts, a business plan, historic accounts and details of assets.

Lender participation in the schemes

Lenders under both schemes require accreditation before they are permitted to lend; read further details on the application process and lender eligibility for the schemes.

Term

BBLS loans are for a fixed term of six years with the option of early repayment without early repayment fees. CBILS offers facilities for up to six years for term loans and asset finance facilities; and up to three years for overdrafts and invoice finance facilities.

Interest and fees

Under both schemes, the borrower does not have to make any repayments for the first 12 months. The government has set the interest rate for BBLS at 2.5% per annum and BBLS lenders are not permitted to charge any fees.  Lender fees are covered by the government for the first 12 months of a CBILS facility. After the first 12 months the business is expected to start repaying the loan and interest under both schemes.

Government guarantee to lender

Both schemes provide the lender with a 100% government-backed guarantee against the outstanding balance of the facility, with the important caveat that the borrower always remains fully liable for the debt.  

Security

Under the BBLS, lenders are not permitted to take personal guarantees or take recovery action over a borrower’s personal assets (such as their main home or personal vehicle). For the CBILS insufficient security is no longer a condition to access the scheme. No personal guarantees are permitted for CBILS facilities under £250,000. For CBILS facilities above £250,000, personal guarantees may be required at a lender’s discretion, but will exclude the Principal Private Residence and recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied.              

Other scheme borrowings

Businesses which already have loans under CBILS or the Covid Corporate Financing Facility will not be eligible for the BBLS, unless that loan will be refinanced in full by the BBLS facility, and subject to the BBLS lending limits and eligibility criteria.

Application period

The BBLS will initially open until 4 November 2020, with the government retaining the right to extend this. CBILS launched through participating lenders on 23 March and is intended to run for at least six months, until 23 September 2020.

Consequential legislative changes and Bank of England schemes alignment

The government will also make amendments to the Regulated Activities Order (“RAO”) and the Consumer Credit Act 1974 (“CCA”), which will impact on complaints that the Financial Ombudsman Service (“FOS”) may hear in relation to BBLS loans.  There are also changes to the Bank of England’s Term Funding Scheme and prudential rules for participating lenders offering BBLS loans:

CCA regime disapplied for BBLS loans of £25k or less

For the purposes of the BBLS, providing small business loans of £25,000 or less to sole traders, unincorporated associations and partnerships of fewer than four people will not require the loan to be documented as a CCA regulated credit agreement as would normally be the case for loans within that threshold and BBLS loans will fall outside the scope of regulated lending activity.  This means the onerous CCA requirements for lending and post-lending will not apply to BBLS loans.  However, debt collecting in relation to BBLS loans in this sub-£25,000 category, whether by the lender itself or a third party, will remain a regulated activity.  In addition, FOS will have jurisdiction to hear complaints about how BBLS loans are arranged and administered, notwithstanding the CCA regime being disapplied.

CCA unfair relationship protections removed

Primary legislation, intended to have retrospective effect from 4 May 2020 (i.e. when BBLS loans launched), will also be introduced to disapply sections 140A-140C CCA for BBLS lending, which would otherwise continue to apply to CCA exempt credit agreements. These sections cover the ability of the court to make determinations on the fairness of the relationships between debtors and creditors (the “unfair relationships” provisions), which should limit the scope of any complaints or claims raised by borrowers. A letter from HM Treasury/Chancellor of the Exchequer sets out the legislative and regulatory changes.

Bank of England facilities

Participants in the Bank of England’s Term Funding Scheme for SMEs may extend the term of certain funding under that scheme to align with the 6-year term of loans under the BBLS. In addition, banks subject to the UK Leverage Ratio Part of the PRA Rulebook can exclude loans under BBLS from the leverage ratio exposure measure. Read the PRA’s announcement.

FOS complaints about BBLS and CBILS loans

The Financial Conduct Authority (“FCA”) called on the FOS to provide clarity to lenders on the question of how they will view lender behaviour under the BBLS and CBILS, particularly in response to the new regulatory arrangements for the BBLS and the new approaches to creditworthiness assessments under the CBILS (and given the wider extension of the FOS regime in respect of SME businesses).

Read the FCA’s letter, along with FOS’ response acknowledging and supporting the FCA’s stance.

Lending Standards

In response to the launch of BBLS, the Lending Standards Board (“LSB”) has also updated the Standards of Lending Practice (“Lending Standards”) for business customers in respect of both BBLS and CBILS.  In particular, the LSB recognises the following:

  • Participating firms’ compliance with the requirements of the government’s schemes will be compliant with the relevant provisions of the Lending Standards, particularly in relation to paragraph 4 (product sale).
  • By participating in CBILS/BBLS,  firms may not be able to fully apply all provisions within the Lending Standards as certain aspects of the products have been determined by Government, and as such firms will have a limited role in the design and review of these products. The provisions at issue relate to customers in vulnerable circumstances, treatment of customers in financial difficulty and paragraph 8 of the provisions on governance and oversight.

Read LSB’s press release and latest guidance.

FCA regulatory perimeter and Senior Managers Regime

While lending to SMEs generally sits outside the FCA’s regulatory perimeter (as highlighted in section 3 of this Discussion Paper and given the changes to the RAO in respect of BBLS loans of £25,000 and under to remove them from the regulatory perimeter, as discussed above), all participating lenders should be mindful of their responsible managers’ obligations towards SME clients under the FCA’s Senior Managers and Certification Regime.  The FCA’s recent “Dear CEO” letter on this topic highlights some aspects that the FCA expects lenders to have regard to in this context.  In addition, participating lenders should have regard to the FCA’s Principles for Businesses when handling complaints under the FCA’s DISP rules.

We understand that this is a challenging time for many lenders and their business customers; our banking and retail finance teams are ready to assist you with any of the issues raised in this article.