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On 28 July 2021, the FCA issued a ‘Dear CEO’ letter relating to coronavirus support lending to SMEs. In doing so the FCA has highlighted their growing concerns about the incidence of fraud associated with this type of lending. This is alongside similar concerns raised by the Public Accounts Committee in their report ‘Fraud and Error’ published in June 2021. The FCA has also indicated a particular interest in fraudulent activity by or involving FCA firms as borrower, including those firms registered for supervision under the Money Laundering Regulations.
The letter requests lenders to specifically notify the FCA of any fraudulent activity associated with BBLS by an FCA regulated firm in addition to a firm’s existing financial crime reporting obligations. It requests that firms notify the FCA of fraudulent activity after completing the initial investigation to assess the validity of any concerns. It also requests firms to consider notifications to other relevant regulators or industry bodies for example, the Law Society.
The letter comes as the number of identified frauds associated with applications for BBLS and CBILS is reported to be high, and the incidence of fraud identification is expected to increase as enforcement and recovery actions commence. This includes the arrest of three men in January 2021, as part of an investigation into alleged fraudulent BBLS loans totalling £6 million.
More than £47 Billion in lending pursuant to BBLS has been provided to SMEs during the pandemic and lenders fear that significant proportions of that funding will not be recovered from borrowers. The speed at which the program was rolled out and the unique nature of the loans and associated approvals process have made them particularly susceptible to fraud. The recent Public Accounts Committee report acknowledged that while getting support to vulnerable businesses quickly during the pandemic was important, the decision by the government to prioritise speed and access to financial aid meant exposure to fraud and error was ‘significantly increased’.
Lenders have of course detected, and rejected, thousands of fraudulent BBLS applications, for example where applications have been made on behalf of fake or dormant businesses as well as applications containing misrepresentations as to turnover or asset status. In anticipation of a further increase in the identification of fraud through recovery and enforcement action, the FCA has now reminded firms to actively monitor resourcing as well as systems and control to ensure timely identification and reporting.
The Dear CEO letter also includes a reminder about the importance of focusing on appropriate outcomes for SME customers, particularly as we emerge from the pandemic, and again refers firms to the various guidance it has issued on treating customers fairly and recovery of BBLS. It reinforces that the Senior Managers and Certification regime straddles both regulated and unregulated lending and the importance of senior managers continuing to ensure their business areas are ‘controlled effectively’.
In summary, now that (we hope) the acute phase of the pandemic is receding in the UK, and the financial system and lender’s recoveries and enforcement actions return to a more normal footing, the detection of fraud in respect of Covid support is anticipated to significantly increase. Financial services clients will need to continue to be alive to this risk, and take proactive steps in order to identify potentially fraudulent applications early in a recoveries/enforcement process so that prompt decision can be made about how to proceed, and whether in the specific circumstances of a case, there are any reporting obligations to a regulatory body.
TLT is very experienced in supporting our Financial Services clients on all aspects of engagement with SME customers, lending recovery and fraud, and continues to regularly engage with both the regulator and our financial services clients in this rapidly evolving area of risk. If you would like to discuss any aspect of this article or how we can support you in achieving recovery whilst balancing duties to customers please don’t hesitate to get in touch with one of our specialist team as set out below.
30 July 2021