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In a recent virtual speech, Chair of the FCA, Charles Randell observed that some of the debt businesses have incurred in the Covid-19 crisis will become unaffordable and that lenders and regulators will need to tackle this overhang of debt quickly and fairly to prevent it becoming a drag on the economy. With an eye to the past, Mr Randall noted that the industry could not repeat the events of the 2008 crisis where the treatment of some SME customers caused serious damage to the trust in financial services institutions and in some cases to customers themselves.
All lenders will be anxious to avoid repeating the costly financial and reputational damage from the 2008 crisis. Like that crisis, the fallout of Covid-19 means that lenders can expect to see a significant number of SME customers defaulting or showing signs of financial difficulty. Our previous two articles in this series (available here and here) examined the types of Covid-19 related complaints lenders could expect from SME customers in the short and longer term.
Given the expected increase in business customer who either already are or will be in need of specialised lending support, this article touches on lenders' restructuring departments. We look at some of the lessons learned from the 2008 crisis and how restructuring teams can focus on communication and policies to help customers through difficult trading and why good customer outcomes are important and the changes in the complaint landscape since 2008. Lastly, we explore the prospect of fraudulently obtained Covid-19 lending and how lenders can respond.
The 2018 Walker Review into complaints and alternative dispute resolution landscape for the UK SME market referred to survey results from 2018, which found that 42% of all banking complaints could be categorised as ‘customer service’ and 21% specifically as ‘poor service’. This was a substantial increase from 2011 survey results which noted complaints in those categories were only 14% and 7% respectively.
This significant upward trend indicates that SME customers are both aware of the need for and increasingly expecting a high level of customer service. What this means for lenders dealing with the potential of a large cohort of transfers to restructuring departments linked to the Covid-19 crisis is that maintaining clear communication and a high level of customer engagement will be vital in reducing the number of anticipated complaints.
The Walker Review found that a large number of customer service or poor service complaints were focused on delay. Even in these early stages we have seen that delay has already been at the forefront of complaints about lenders’ responses to the Covid-19 crisis. Indeed, this partly led to the Government pushing through the Bounce Back Loan Scheme (BBLS) with such pace and making clear its expectations around getting funds out to customers. For customers transferred to restructuring departments, delay in completing restructures or accessing funds will likely remain critical issues and restructuring departments forced to deal with a sudden upswing in work will likely see a large number of these kinds of complaints. Putting in place adequate resource to appropriately deal with the coming slew of customers in difficulty will be a key step in mitigating anticipated difficulties.
It should also be stressed how important it is to ensure that customers are treated with respect and empathy. This goes without saying in direct communications with customers, but the upmost care should also be taken with internal communications and notes. Disparaging comments about customers, even when unintendedly so, can prove damaging in any subsequent investigation, litigation or even DSAR.
Careless internal communications can reflect poorly on lenders and proved easy soundbites for media and affected customers. By contrast, clear, precise and empathetic communication can have the opposite effect, particularly in a complaint handling or litigation environment. It would be naïve to expect that all Covid-19 related complaints will be received in the short-term. Many businesses may not have cause to complain until they default or restructure in several years’ time. Some of those complaints will involve disputes about what was said or agreed years previously. The clearer and more comprehensive a lender’s documentary record is, the easier the resolution of the complaint will be.
We would expect that all lenders would have policies in place for dealing with customers who are or are at risk of defaulting on their obligations and steps in place to assist with turnaround or a managed winding down of the business.
We would recommend that these policies are reviewed frequently given the hundreds of thousands of expected complaints within the next 12 months and the new products (like the BBLS or Coronavirus Business Impact Loan Scheme (CBILS) that customers in difficulty are likely to have entered into are carefully incorporated into those policies.
Lenders will have welcomed the recent High Court decision in Morley (t/a Morley Estates) v Royal Bank of Scotland Plc  EWHC 88 (Ch) which confirmed that while lenders must provide banking services with reasonable skill and care, compliance with internal policies is not a relevant consideration when considering if that standard of skill and care had been met. In that case, Mr Morley sought to argue that the bank had placed too much focus on the enforcement of its security over rehabilitating his business, rather than the other way round as allegedly set out in internal GRG policies. Justice Kerr rejected that argument, finding that the bank had complied with its regulatory duties and had not taken enforcement action against Mr Morley vexatiously or maliciously.
Although this case demonstrates that the formation of internal policies does not bind lenders to rigidly applying them, we would caution against overreliance on the Morley decision. Developing and implementing internal policies is an effective way of ensuring and evidencing compliance with the regulatory standards that are relevant to whether services have been provided with reasonable skill and care. We also note the Morley decision is subject to appeal.
Policies can also aid in ensuring a coordinated and consistent approach is taken between different restructuring cases. It is inevitable that lenders’ restructuring departments can expect a number of pricing complaints arising out of Covid-19-related restructures. Particularly considering the necessary gulf between highly favourable, yet short term, Coronavirus support loan pricing, and loan pricing for customers in default/distress. Ensuring that clear pricing policies are in place will greatly assist complaint handling teams in responding to these complaints in an efficient manner.
Since the previous financial crisis, the financial services industry has seen a rapid increase in claims management companies (CMCs) whose marketing strategies are specifically targeted towards SMEs. In exchange for a percentage of any redress, CMCs have resulted in a proliferation of complaints by businesses who would otherwise not have had the time or willingness to make a complaint in their own right.
Many of these complaints have been filed in large-scale bank remediation projects, which are themselves a relatively recent innovation following closer scrutiny of the industry by the FCA. We expect to see close scrutiny by the FCA of how restructuring departments deal with Covid-19 related issues and potential section 166 investigations launched where areas of concern are identified.
We also expect to see the FCA use its new powers under the Senior Managers and Certification Regime (SMCR), which is designed to make individuals within financial institutions more accountable for their actions. We have set out our assessment of the SMCR in a separate articles here and here.
In addition to closer regulatory scrutiny, the past decade has seen the rapid emergence of litigation funding in the UK. Well-funded providers now have the public-policy and judicial approval to fund litigation brought by a class or classes of litigants against one or multiple defendants. While funders’ willingness to take on litigation is set at a higher bar than CMCs, given the commonality of issues SMEs have encountered in accessing funding and the untested terms of BBLS and CBILS loans, we would not be surprised to see some funded litigation against lenders arising out of the Covid-19 crisis.
For customers not prepared to engage in expensive litigation, we note that the jurisdiction of the FOS was broadened on 1 April 2019 to include certain SMEs and the maximum award increased to £350,000. The newly created BBRS is also likely to play a role in complaints about Covid-19 and subsequent restructures. We will explore the expanded role of the FOS and BBRS in a forthcoming article in this series.
Now that the highly urgent need to provide businesses with CBILS and BBLS lending has reduced, it is an appropriate moment for lenders to take a closer examination of their loan books for any Covid-19 loans that may have been fraudulently obtained. In data published by Experian and the National Hunter Fraud Prevention Service it has been reported that fraud rates rose by 33% across all financial products since the start of the pandemic. Granted, this figure included consumer credit-related fraud, but it is understood that SME lending also saw an increase in fraudulent activity. Indeed, on 10 July 2020, two people were arrested in London in connection with fraudulent BBLS applications.
Only a very small number of frauds are directly investigated by the police and it is considered that lenders should take proactive steps to identify fraudulently obtained Covid-19 lending. A fraudulent application should be sufficient to establish a default and give lenders and their restructuring departments grounds to call in CBILS and BBLS loan monies or commence recovery action in order to prevent further loss. Establishing which applications may have been fraudulent will, however, likely require a rapid investigatory process and urgent action to prevent loaned monies being dissipated to such an extent that tracing or asset recovery is not possible.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.
10 July 2020