Govt faces heavy losses from unpaid Bounce Back Loans and fraud

The government is facing a potential loss between £15bn and £26bn through businesses not being able to repay Bounce Back loans, as well as fraud resulting from the loan scheme.

A new report from the The National Audit Office (NAO) has revealed that the government imposed “less strict” eligibility criteria for the Bounce Back Loan Scheme (BBLS) than other COVID-19 related business loan schemes. The scheme has relied on businesses to self-certify application details with limited verification, with no credit checks performed by lenders for existing customers.

The NAO suggested these lower level of checks “present credit risks” as it increases the likelihood that loans are made to businesses which will not be able to repay them, leading to losses of taxpayers’ money.

The report also highlighted that the government recognised its decision to provide funds quickly has left public money “exposed to the risk of fraud” – caused by self-certification, multiple applications, lack of legitimate business, impersonation and organised crime.

The BBLS was announced on 27 April to quickly provide loans of up to £50,000, or a maximum of 25% of annual turnover, to help small businesses across the UK during the coronavirus pandemic. The loans are delivered through commercial lenders such as banks and building societies, and the NAO report highlighted that the scheme has placed the responsibility for managing fraud risk on the lenders.

The Department for Business, Energy and Industrial Strategy (BEIS) and the British Business Bank expect the scheme to lend £38bn to £48bn by 4 November, “substantially exceeding” the assumed £18bn to £26bn when it launched, the report said.

As of 6 September, Treasury data showed that the scheme has delivered more than 1.2 million loans to businesses, totalling £36.9bn.

“With concerns that many small businesses might run out of money as a result of the COVID-19 pandemic, the government acted decisively to get cash into their hands as quickly as possible,” said NAO head, Gareth Davies.

“Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct. The government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse. It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.”

The NAO’s report revealed that the British Business Bank is “currently unable” to estimate the overall level of fraud. The Cabinet Office’s Government Fraud Function believes that fraud losses are likely to be significantly above the 0.5% to 5% which is generally estimated for public sector schemes.

As a result of credit and fraud risks, the BEIS department and the British Business Bank have made a preliminary estimate that 35% to 60% of borrowers may default on the loans, based on losses observed in past programmes similar to the scheme. Assuming the scheme lends £43bn, the NAO suggested this would imply a potential cost to government of £15bn to £26bn, although the report also described these estimates as “highly uncertain”.

The report suggested the full extent of losses due to fraud will not become clear until loans are due to start being repaid from May 2021.

In response to the NAO report, the British Business Bank said in a statement that fraud risks within the scheme have been mitigated by accredited lenders undertaking “standard fraud checks”, as part of the scheme’s application process.

The statement read: “The British Business Bank acknowledges, as the report does, that ‘much hard work remains over the coming months and years to ensure that the risks to value for money are minimised’. We have been, and will remain committed to this work, liaising closely with government, lenders and other stakeholders.”

On 24 September, the government announced the extension of the scheme as part of its Winter Economy Plan. The NAO report has called on the government to implement a “thorough” debt-recovery process with lenders, to consider how it might better prevent fraud in future schemes.

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