Covid-19 related disputes involving SMEs - complaints in the longer term

This is the second in a series of insights that we will publish over the coming weeks looking at SME complaints, with other topics including access to financial support; advice on government loan schemes and personal guarantees; and the role of the Business Banking Resolution Service (BBRS) and the Financial Ombudsman Service (FOS).

A recent survey of 500 UK small business decision-makers by the BBRS found that 29% of customers had experienced behaviour from their bank this year that would give them cause to lodge a complaint.  The survey also found that 66% of respondents would be prepared to challenge their bank in court.

We would expect that the high cost of court proceedings and the length of time required to reach a resolution would significantly reduce that second statistic in the real world.  Nevertheless, the survey results demonstrate that lenders will face an increase in complaints and legal action in the longer term.

Statistics released by the British Business Bank on 9 June 2020 revealed that 1,057,719 applications had been received under the Coronavirus Business Interruption Loan Scheme (CBILS) or the Bounce Back Loan Scheme (BBLS) and 829,896 of those applications approved. Assuming that complaints are likely to be received both from customers who have been approved and those who have not been approved, rough modelling of potential complaints based upon the BBRS survey results mean UK lenders might expect to receive upwards of 300,000 complaints from SME customers in respect of just Covid loans within the next 12 months.  Whilst based on a relatively small sample size, and only one survey, those numbers paint a sobering picture.

In this article, we consider some of the complaints that might be seen from SME customers in the longer term. Our first article on complaints in the short term can be found here.

Restructuring and default

The maximum loan term for lending under the Coronavirus Business Interruption Loan Scheme (CBILS) or the Bounce Back Loan Scheme (BBLS) is six years. Overdraft or invoice financing terms under CBILS have a shorter maximum term of three years.

The interest free period under CBILS or BBLS is only 12 months. Lenders can expect to face a number of queries from customers seeking further interest-free periods. As the schemes are currently structured, these are perhaps unlikely to be granted unless at the lender’s own risk.

Even with the initial interest-free periods, it is inevitable that some businesses will be unable to recover once Covid-19 restrictions ease. Faced with the prospect of customers unable to meet their loan commitments, lenders will need to take steps to restructure lending or, in some cases, commence enforcement action against struggling customers.

In respect of that restructured lending, in the absence of Government-backing and given the potential for customers to be under significant financial pressure in the next several years, it is likely that restructured loan terms will be more expensive for most customers. This could lead to some complaints that new restructuring terms are unfair and it is certainly foreseeable that there will be an expectations gap between what customers want or need and what is possible under “normal” commercial terms. Any such gap perhaps influenced by the generous terms offered by the current government intervention.

More complex complaints are likely to arise out of instances where lenders are anticipating or undertaking enforcement action. In those cases, we would expect a number of complaints from customers, in the belief that that they were either mis-advised to enter into the “wrong” funding scheme or, given their financial position, that they should never have been advanced funding in the first place.

Under both schemes, lenders have been asked to dispense with some normal creditworthiness due diligence steps and have been criticised for not making access to funding available soon enough.

Lenders can seek to mitigate such complaints by continuing to be flexible and adaptable to their customers’ needs, particularly around restructures. Maintaining records of lending applications and, to the extent possible, undertaking due diligence and creditworthiness tests as part of CBILS applications will also assist in responding to longer term restructuring and enforcement complaints.

Government backing and mis-selling complaints

CBILS and the BBLS have some parallels to the Enterprise Finance Guarantee (EFG) loan scheme introduced in 2009 to assist businesses affected by the 2008 recession. Under the EFG scheme, the Government secured 75% of the loans.

This led to many businesses believing that, if they defaulted, they would only be responsible for 25% of the outstanding balance. Businesses however, remained 100% liable for repaying the loan. The 75% backing by the Government only took effect once the assets of the business and any guarantee had been realised. This misunderstanding triggered a substantial number of complaints by businesses believing their EFG loan had been mis-sold. 

The Government backing for the CBILS and BBLS aren’t wholly dissimilar to the EFG loan scheme. Currently, the Government provides a guarantee for 80% of CBILS funding and 100% of BBLS funding and the borrower remains entirely liable for the debt. What that means in practice is that, in the event of a default, the Government guarantees are only accessed once any assets of the business have been recovered and, in the case of CBILS loans over £250,000 with a personal guarantee, once any personal guarantees have been called upon.

‘Government backing’ is an easy soundbite and we would expect that many business owners have failed to fully appreciate that the assets of the business are still at stake in the event of default under CBILS or BBLS lending. In fact, the recent BBRS survey noted above found that 43% of business decision-makers who had accessed CBILS or BBLS lending did not expect to repay that borrowing, either because they did not expect to be able to, or they did not believe that the Government would pursue the debt.

In part, this plainly represents a misunderstanding about ‘Government backing’ since CBILS or BBLS lending is of course provided by bank funds, not the Government itself. Banks, as reasonable commercial lenders, will certainly be interested in recovering their funds advanced under CBILS or BBLS, and in fact are required to do so before any Government backing is accessed. The likelihood of such misunderstandings arising may expose lenders to complaints as businesses default on their obligations and subsequently face insolvency action.

In addition, the FCA has recently confirmed that higher jurisdictional limits will mean that the vast majority of SME businesses will be eligible to complain to the FOS. Businesses will also have the opportunity to complain to the BBRS. Therefore, lenders will see such complaints referred to these bodies.

Helpfully, the British Business Bank and Government have issued guidance on how the Government backing works in practice, illustrated with examples and the schemes have been widely reported in the media. To the extent it is not already a matter of standard practice, we would urge all lenders to set out similar guidance to customers at the outset of any CBILS or BBLS lending.

Reputational issues

The types of complaints outlined above will largely flow from the way in which the CBILS and BBLS schemes have been designed and intended to operate. The Government has been heavily involved in that design and for broader policy decisions such as deciding that financial assistance ought to be offered by way of loans rather than, for example, equity.

Once the immediacy of urgent Covid-19 related financial pressure dies away, there will likely be a period of introspection into the efficacy of the CBILS and BBLS schemes.  Though not being responsible for the design of the schemes, lenders may present an easy target for customers wishing to express dissatisfaction at the way in which their CBILS or BBLS loan has operated.

As was seen after the 2008 recession, large numbers of complaints indicating a systematic level of failures can have a significant impact on a lender’s reputation.

We would expect individual lenders ought to be more insulated from this kind of reputational damage in the aftermath of the Covid-19 economic recession since CBILS or BBLS issues are more likely to affect the entire market rather than particular practices of individual lenders. Of course, this might differ as individual lenders develop their own strategies in response to CBILS or BBLS loans in default, and it is fair to say that we have already seen differences between lenders in how the schemes have been rolled out and are operating.

Reassuringly, the BBRS survey mentioned at the outset of this article found that even though nearly a third of respondents expected to make a complaint, 75% expected their bank to handle it transparently and fairly. This is a positive sign of the changing attitudes towards the banking industry, and one of the best ways in managing any reputational risk will continue to be ensuring that complaints are handled in a transparent and fair manner. We would urge lenders to continue to meet and exceed their ongoing good work in this area to support and improve upon the results of the BBRS survey.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions