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The impact of Covid-19 has placed businesses under the greatest financial pressure in modern memory, with the UK's nearly six million SMEs and micro-enterprises particularly affected. Financial services clients have been tasked by the government to support these businesses, whether through conventional financial assistance or via government backed loan schemes. This requires lenders to make important decisions, in line with government guidance, as to which businesses they can support and how. Inevitably, not every customer will be content with the result.
In this article, we consider some of the short term complaints that might be seen from SME customers. It is the first in a series of insights that we will publish over the coming weeks looking at SME complaints, with topics including access to financial support; advice on government loan schemes and personal guarantees; and the role of the Business Banking Resolution Service and the Financial Ombudsman Service.
Delay is an unavoidable consequence of the Covid-19 pandemic. Financial services clients, like all businesses, have or have had staff either working from home with possible issues around access to required computer systems or are unable to come into work because they are ill, self-isolating or simply do not have childcare available.
Many customers are desperate for access to funds as quickly as possible, but the physical constraints relating to staff availability and the huge ramp up in demand over a very short period of time has inevitably put a strain on even the best resourced lenders - in particular as to how quickly they can process credit applications. How long is “reasonable” to turn around a lending request in current circumstances is open to debate, but as important a question is whether, given strong government guidance, there is any requirement for lenders to provide funds to existing or prospective customers within a particular timeframe, or if it is left to a matter of commercial competitiveness?
Necessary (and in many cases government required) due diligence has become more challenging to undertake, in part due to the restrictions imposed across society. Some customers who have not required funding for some time may also be surprised by the additional due diligence requirements being required by lenders in order to comply with more recent regulations.
In order to accelerate customers’ access to funds, on 27 April 2020 the FCA issued guidance to lenders stating that, pending the introduction of the Bounce Back Loan Scheme (BBLS), lenders did not need to comply with creditworthiness procedures in CONC 5.2A.4-34 for regulated lending. However, somewhat cryptically, the FCA also stated that firms were still expected to “carry out creditworthiness assessments in line with the whole of CONC 5.2A on all other regulated lending”.
Whilst delays in completing due diligence checks will continue to result in complaints from customers seeking faster access to funds, we would caution that any changes in due diligence steps must be managed extremely carefully. Omitting certain steps of course not only increases the risk of financial loss, but also increases the risk of potential financial crime going undetected. Completing without discharging all required steps may also lead to further customer complaints, for example where mandates have not been applied correctly.
Outside of the complaints space, there is also a real risk of the FCA investigating insufficient application of appropriate due diligence.
Almost from the first day that the Coronavirus Business Interruption Loan Scheme (CBILS) and the subsequent BBLS were introduced, the media have run stories of lenders being overwhelmed by applications and delays in customers receiving funds. Bearing in mind the speed at which these schemes were introduced and the enormous steps taken by industry to set up these products in the incredibly tight timeframes expected, some of this criticism feels unreasonable and lacks understanding of what exactly the government has introduced. Nevertheless, the criticism is likely to fuel complaints by SMEs during this highly difficult time for them.
The FCA has made it clear that lenders are still required to treat customers fairly irrespective of the Covid-19 pandemic. One area particularly targeted by the FCA for attention is pricing - a sensitive area for any business struggling with cash flow.
Lenders can expect complaints from customers that the interest rates or fees being charged in exchange for additional financial support are excessive. The FCA has suggested pricing concerns can be mitigated by lenders by not increasing pricing, reducing published interest rates or by manual adjustment. Further mitigation can be achieved by appropriately explaining the reasoning behind any necessary pricing increase to customers.
The BBLS provides SME businesses access to loans of between £2,000 and £50,000 for terms up to six years. Businesses cannot, however, apply under the BBLS if they have already received funding under CBILS.
Some customers who have already taken out a CBILS facility may view the terms of the BBLS as more advantageous than their loan under CBILS. Whilst it is possible to transfer funding between schemes until November 2020, we have already seen lenders receive complaints from customers about perceived difficulties in switching schemes or complaints that they were “advised” to enter into the wrong loan scheme in the first place. This is the case despite there of course being no specific or implied duty on lenders to advise in this way. Given the current fraught circumstances and some of the messaging coming from government, we anticipate a number of quasi-advice type disputes to arise from the current situation and financial services clients would do well to take steps now to mitigate this risk by carefully wording external facing communications and interactions with customers to make this distinction clear.
Eligibility criteria for CBILS facilities issued by the British Business Bank (BBB) has been criticised in some quarters for lacking certainty. The criteria also leaves substantial scope for variance between lenders’ own risk appetites, pricing mechanisms and lending policies.
We will expand on this in a later article, but inevitably applications will fail lending criteria and the way in which lenders have sought to apply the BBB’s eligibility criteria could result in complaints.
Lenders should seek to mitigate these complaints by publishing as much guidance as appropriate explaining the basis of the scheme and how it will apply to lending decisions. Whilst this flies in the face of ordinary commercial (and other) practice, these are far from ordinary times. Clearly communicating the reasons for negative decisions to customers is key, as is ensuring good records are kept as to the rationale of any decision.
The security position for CBILS has been shifted by the government since it was first introduced. The current government mandated position is that lenders cannot require personal guarantees for lending under £250,000. For loans in excess of £250,000, personal guarantees can be required, but recovery is limited to 20% of the outstanding balance of the CBILS facility after the assets of the business have been applied.
CBILS facilities and personal guarantees entered into before these latest requirements were introduced may need to be amended. Lenders can expect complaints from affected customers in the short term that the terms on which they entered into the CBILS were unfair. There is a risk that in the longer term some of these customers may seek to argue that the entire loan is unenforceable against them.
To avoid this, lenders could take the initiative by repapering all CBILS loans which do not comply with current requirements and agree to waive or adjust personal guarantees as necessary.
Finally, the spike in complaints caused by the sheer number of affected customers combined with productivity constraints caused by Covid-19 upheaval means that financial services clients may struggle to investigate and respond to complaints within DISP requirements and as quickly as they would usually expect to. Unfortunately, this is already leading to more complaints by impatient and frustrated customers desperate for any financial support they can secure. Lenders may wish to consider having contingencies in place to handle any overflow or spikes in demand and TLT is very experienced in providing support in this way.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.
20 May 2020
by Peter Richards-Gaskin