The well-intentioned schemes were rushed into place by the Government as a consequence of the pandemic, to help resolve immediate financial issues. However, it was always going to be hard to assess the long-term impact and the scale of the financial burden such schemes might have on lenders and ultimately the Government-backed British Business Bank.
1,670,939 government-guaranteed loans worth £79.3bn have been provided to businesses struggling as a result of the pandemic. These loans helped support their cash flows during the crisis through the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Broken down, this equates to 1,560,309 BBLs worth £47.36 billion, 109,877 loans worth £26.39 billion through the CBILS and 753 loans worth £5.56 billion through the CLBILS.
What the BBLS and the CBILS provided
The Bounce Back Loan Scheme (BBLS) was aimed at smaller businesses and provided loans of £2,000 to £50,000 and the Coronavirus Business Interruption Loan Scheme (CBILS) offered loans up to £5 million. Launched to help ease financial strain during the pandemic, both closed on 31 March this year (2021). The schemes were administered by the Government-backed British Business Bank which then accredited certain lenders who applied for the schemes.
These schemes promoted lending and access to fast finance, a lifeline to many smaller businesses when the pandemic struck. Under such arrangements, the Government provided a guarantee to the lender for the borrower’s loan repayments, up to 80% in relation to the CBILS and up to the full 100% for the BBLS approach. Interest payments for the first 12 months are covered by the Government and under the CBILS, the Government also covers any fees levied by the lender.
In terms of security, under the BBLS framework and for CBILS facilities of less than £250,000, lenders were not permitted to take personal guarantees. If a personal guarantee is provided in connection with a loan under the CBILS, any recovery under the guarantee will exclude the guarantor’s main home and such recoveries will be capped at 20% of the outstanding balance. The lender may still require other forms of security to be put in place under either scheme and a borrower cannot benefit from both schemes concurrently.
Issues: what will happen if and when borrowers default?
In the event a borrower defaults under the BBLS, the lender is able to claim up to 100% of all amounts due under the facility (less any recoveries) from the Government if it confirms that it believes ‘no further payment is likely’. The lenders must undertake an ‘appropriate recovery process’ in accordance with their existing processes but can put in a claim on the guarantee from the Government prior to completing such a recovery process.
The lender must repay the Government if it subsequently makes any recoveries however, the concern is that the process doesn’t encourage the lender to continue to pursue the borrower or other security provider for the sums owed if they can make a claim under the Government guarantee.
This has far-reaching consequences as this approach may encourage many lenders of BBLS, of which there were 1,560,309 loans provided worth £47.36 billion, to make a claim under the guarantee from the Government, which is ultimately funded by the taxpayer.
It is understood that recoveries under the CBILS are similar; the lender must follow its usual recovery process in a default situation which is in line with the approach for dealing with non-CBILS debt. This will likely involve the lender enforcing its security because a lender may be more inclined to take a full security package in connection with loans under the CBILS rather than BBLS loans as the value is likely to be higher and the Government guarantee is limited to 80% for all CBILS loans.
As in relation to BBLS loans, the lender can put in a claim on its Government guarantee and if the Government has paid out and the lender makes recoveries, then 80% of those recoveries which relate to CBILS debt, should be returned to the British Business Bank.
There is a process for apportionment of enforcement recoveries between CBILS and non-CBILS debt. Recoveries from any security which expressly relates only to the CBILS facility should be applied solely in satisfaction of the CBILS debt. Standard ‘all monies’ security should be applied first towards any prior and/or simultaneous non-CBILS debt and secondly, pro-rated between any CBILS debt and subsequent non-CBILS debt.
Reliance on the Government Guarantee
Fundamentally at the core of the schemes is the reliance on the Government guarantee, which will undoubtedly raise issues around the eligibility of loans made, for example, were lenders’ underwriting processes sufficient? There will also be major concerns around enforcement as it is impossible to gauge how motivated a lender will be to pursue a borrower if the lender can lawfully call on the 100% guarantee for BBLS and 80% guarantee for CBILS. Ultimately given the state of the economy post-pandemic and the termination of broader schemes, such as Furlough under the Coronavirus Job Retention Scheme which ended at the end of September, borrower defaults are expected.
Fraud cases are also inevitable. Reportedly strike-offs of companies from Companies House increased to 39,601 in the first three months of 2021 compared to just 4,695 in the same period in 2020 which means many companies were incorporated but left inactive and could be an indicator that some companies were being set up for nefarious purposes such as CBILS and BBLS loan fraud. Increased powers for insolvency practitioners may be necessary to investigate dishonest directors in these scenarios and lenders can apply to court to restore companies to Companies House to pursue them but this is not ideal.
The next few months to a year will certainly be telling in terms of the true fallout when borrowers predictably, and perhaps unavoidably, default under the Government’s £79.3bn coronavirus loan schemes.
About the author: Alexander Pelopidas, partner at Rosling King, provides advice to a variety of clients in the private and public sectors in relation to finance, corporate and commercial matters with a particular focus on the real estate finance market. For more information visit www.rkllp.com or email Alexander directly at alexander.pelopidas@rkllp.com.
This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. (more…)
On Wednesday, Sunak is also expected to announce plans to attract highly skilled workers from abroad and amend regulations to make it easier for international companies to relocate to Britain.
International companies with strategically important investment proposals can expect to receive grants towards their schemes under the government’s plans, provided they pass an assessment to ensure they provide value for the UK taxpayer.
“We want to make the UK the best place in the world to start, grow and invest in a business, as we continue to support enterprise, create jobs, and level up as we recover from the pandemic,” Sunak said.
Last week, the government hosted 200 business leaders at a global investment summit in London. The summit included a dinner with Prime Minister Boris Johnson for the world’s top business leaders and a reception at Windsor Castle with the Queen as the country attempted to impress multinational companies.
On Thursday evening, environment secretary George Eustice announced that butchers in abattoirs and meat processing plants will be permitted to come to the UK to work for six months. He said that extra butchers were needed to meet staffing shortages in the sector.
The government’s intervention comes several weeks after farmers in the UK began culling healthy livestock due to a lack of staff in the abattoirs and plants where the animals were being processed. Thousands of pigs have been culled in the past week alone.
The measures “will help us to deal with the backlog of pigs that we currently have on farm, give those meat processors the ability to slaughter more pigs, and crucially as well we are going to make available what is called private storage aid to help those abattoirs to temporarily store that meat,” Eustice said.
UK ministers have also launched a consultation on extending cabotage rights, which would allow foreign HGV drivers to make unlimited journeys for two weeks within the country before returning home. Currently, foreign HGV drivers are only permitted to make two trips within seven days.
The meat industry is one of several sectors in the UK struggling with labour shortages exacerbated by Brexit and the Covid-19 pandemic. A lack of HGV drivers has also led to further disruption for supply chains.
UK businesses receiving a portion of the £1.1 billion in funding include a solar power startup, a protein bar company, a VR gaming company, and a producer of kombucha drinks. The Future Fund closed its applications at the end of January 2021, having been established to "innovative companies which are facing financing difficulties due to the coronavirus outbreak."
The government has said that these convertible loans may be an option for companies reliant on equity investment and unable to access other government business support programmes, either because they are pre-revenue or because they’re pre-profit. If not repaid, the loans would convert into equity stakes at the next funding round, with external investors required to at least match the amount contributed by the government.
158 largely loss-making businesses are now backed by the UK government through the fund. 1,200 startups took loans, meaning Chancellor Rishi Sunak will likely be left with stakes in hundreds of other businesses.
It remains unclear as to how the government intends to monetise any investments upon maturity of the loans, with firm commitments yet to be revealed.
Nic Redfern, finance director at NerdWallet, lays out his predictions for what the Government's priorities will be in the 2021 Spring Budget.
In spite of falling infection rates and the successful rollout of the vaccination programme, the Government is exercising extreme caution in its plans to lift lockdown restrictions.
This approach is understandable. Within the previous 12 months, the UK has faced three national lockdowns, as well as tiered regional restrictions. Keen to avoid a fourth lockdown, Prime Minister Boris Johnson has stressed that the route out of the third lockdown will be gradual, yet irreversible.
Such caution also means that many UK businesses – particularly those within the hospitality, leisure and retail sectors – will remain unable to reopen their doors for several weeks. Consequently, the 2021 Spring Budget is set to be dominated by “continued emergency support” for such organisations.
So, what sort of support can UK businesses expect to be announced by the Chancellor Rishi Sunak on 3 March?
Business rate holiday extension
The Great British high street has been on a well-documented decline over the past decade. However, the pandemic has exacerbated the struggles of bricks and mortar retailer outlets.
Conversely, COVID-19 has facilitated an eCommerce boom as UK consumers, unable to leave their homes, have become more reliant on online shopping. For example, the sales of Amazon UK’s wholesalers rose by an astonishing 51% last year. Put another way: it is predominantly merchants reliant on footfall and instore transactions that have felt the effects of the pandemic the hardest.
COVID-19 has facilitated an eCommerce boom as UK consumers, unable to leave their homes, have become more reliant on online shopping.
Consequently, it is expected that the Chancellor will extend the business rates holiday in an attempt to boost high street stores. Initially intended to end in April 2021, Mr Sunak has come under increasing pressure to extend the holiday for another 12 months.
It is yet to be confirmed exactly how long the business rates holiday will be extended for. However, I anticipate that it will at least extend until non-essential shops, pubs and leisure venues are allowed to fully open.
Extending the business rates holiday will also mean that the Chancellor is likely to hold off on announcing any reform to the business taxation system on Budget day. Last year, a review was launched into “levelling the playing field” between high street and online retailers; for example, introducing online sales tax, targeting tech and eCommerce giants is under consideration. Such changes would have likely been welcomed by high street businesses; however, any concrete decision will likely be postponed until the economy is on a more stable footing.
Nevertheless, while the Chancellor’s immediate priority will be the business rates holiday itself, it is important to note that we could see more dramatic changes to business taxation under this government.
A review of the furlough scheme
The furlough scheme has undeniably helped to safeguard the livelihoods of millions of employees. According to figures from HMRC, a total of 1.2 million employers had placed staff on furlough, as of December 2020 – costing the government £46 billion.
The Government initially planned for furlough to be a short-term scheme, with the intention being to end the initiative altogether in November 2020 and replace it with a new Job Support Scheme. However, rising infection rates and stricter lockdown measures meant that this could not happen, and the furlough was extended. It is now scheduled to end on 30 April 2021.
The furlough scheme has undeniably helped to safeguard the livelihoods of millions of employees.
With the Prime Minister’s roadmap making it clear that many non-essential organisations will be unable to open until summer, there have been inevitable calls for the scheme to be extended even further.
I expect the Chancellor to use the Budget to announce such an extension – at least for more vulnerable sectors such as hospitality, retail or leisure. Of course, the furlough scheme is expensive; difficult decisions regarding how to pay for it must be made in the near future. However, Mr Sunak will be aware that ending vital support such before vulnerable businesses are able to properly reopen will jeopardise their long-term survival.
Possible extension of the CBILS
The Coronavirus Business Interruption Loan Scheme (CBILS) provides small and medium sized businesses access to loans and other forms of finance up to £5 million. The Government guarantees up to 80% of the finance to the lender, whilst also paying interest and additional fees over the first twelve months.
This has offered some welcome financial breathing space for many organisations as they attempt to rebuild, post-COVID. However, the scheme is scheduled to end on 31 March.
Perhaps unsurprisingly, the deadline has been met with opposition; a recent poll revealed that almost a third (31%) of businesses are keen to see the scheme extended.
However, Mr Sunak has stressed that businesses will receive more support beyond March 2021. So, whilst it is unclear whether the CBILS will be extended, the promise of further support should offer some comfort to businesses.
Support for the self-employed
Throughout the pandemic, the Government has received criticism for excluding many self-employed people from its financial support schemes.
It did introduce the Self-Employed Income Support Scheme (SEISS), which offered relief to some. However, those who earned over £50,000 a year, paid themselves in dividends, or recently became self-employed were not eligible. This resulted in approximately 2 million people being unable to access financial support.
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There are rumours that the Government is planning to extend the eligibility criteria of the SEISS, ensuring recently self-employed individuals are able to apply for the grant. Such an extension seems sensible. After all, the self-employed contributed £305 billion to the UK economy in 2019 alone; the Government cannot allow such a prominent economic force fall by the wayside.
It is evident that the Government’s focus for the Budget will be continuing its emergency support schemes for UK businesses. In particular, it is vital that the Chancellor focusses his efforts on safeguarding vulnerable sectors and organisations – those that have been worst impacted and those that will take some time to reopen fully.
Retail, hospitality, leisure businesses, as well the self-employed, have all faced significant challenges throughout the previous 12 months. And without adequate help, their long-term survival will be jeopardised. The Budget is an ideal opportunity to deliver further life support to organisations that need it, easing the transition out of what everyone hopes will be the final lockdown.
A major new report on the UK’s fintech sector has found that, while the UK continues to lead in fintech, according to a long-awaited government-backed review of the sector.
The 108-page Kalifa Review, released on Friday, lays out a five-point plan for the continued development of fintech in the UK. The review was commissioned in 2020 to identify priority areas to support the UK fintech sector.
The report recommends the creation of a fintech growth fund, allowing UK pension funds to invest in early stage companies and disincentivise them from quickly selling to wealthy foreign competitors. It also recommends that a retraining programme be set up to encourage further education colleges to help workers understand new tech skills.
Further recommendations include the development of ten new fintech “clusters” across the UK and the establishment of a Centre for Finance, Innovation and Technology to coordinate and encourage growth across the sector.
Ron Kalifa OBE, former head of payments firm Worldpay, warned that the UK attracted only 4.5% of new financial company IPO listings between 2015 and 2020, falling far behind the 39% that floated on Nasdaq and the NYSE.
“Britain has a proud record of starting-up and scaling-up some of the best known fintech products, but we cannot rest on our laurels," Kalifa warned in a statement. "The next powerhouses will not be created by accident.
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"We must continue to nurture our start-up culture, but crucially we must also give our high growth firms the support to become global giants."
After the 2008 financial crisis, fintech emerged as one of the UK’s most fast-expanding industries. It is now worth £11 billion and accounts for 10% of the global market, with high-profile London-based firms such as Monzo, Revolut and Checkout.com making the capital an international hub for fintech.
Chancellor Rishi Sunak on Tuesday announced a raft of new grants worth £4.6 billion to support firms in the retail, hospitality and leisure sectors.
The chancellor said that one-off top-up grants worth up to £9,000 per property would be issued to businesses in these sectors, with the aim of helping them to last through the winter.
“Throughout the pandemic we’ve taken swift action to protect lives and livelihoods and today we’re announcing a further cash injection to support businesses and jobs until the Spring,” the chancellor said.
“This will help businesses to get through the months ahead – and crucially it will help sustain jobs, so workers can be ready to return when they are able to reopen.”
In addition to the one-off grants, Sunak announced that a £594 million discretionary fund would be made available to support impacted businesses in other sectors, along with £1.1 billion in further discretionary grant funding for Local Authorities, an extension of the furlough scheme and Local Restriction Support Grants worth up to £3,000 a month.
The move follows prime minister Boris Johnson’s Monday evening announcement that non-essential businesses will be shuttered until at least February half-term as England, Scotland and Northern Ireland come under full lockdown measures once again, spurred by an acceleration in the spread of COVID-19 cases and the emergence of a highly infectious new COVID-19 variant.
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Johnson’s announcement prompted business heads to call on the government for support heading into the new lockdown period.
“Tens of thousands of firms are already in a precarious position, and now face a period of further hardship and difficulty,” said Adam Marshall, director-general of the British Chambers of Commerce.
While delivering the government’s spending review for 2020, UK chancellor Rishi Sunak cautioned that the “economic emergency” caused by the COVID-19 pandemic was just beginning.
“Our health emergency is not yet over and our economic emergency has only just begun,” he said, adding that his priority was to “protect people’s lives and livelihood”.
The chancellor’s warning came as the Office for Budget Responsibility estimated that the UK economy will contract by 11.3% by the end of 2020, the country’s largest recorded fall in output for 300 years. Unemployment is also expected to peak at 2.6 million in 2021 and remain above pre-pandemic levels until 2024 at the earliest.
Chancellor Sunak said that departmental spending would be £540 billion next year, up 3.8%. He also promised a “once in a generation investment in infrastructure” towards schools, hospitals and roads, which the government would spend £100 billion on next year. £3 billion in additional funding will be earmarked for the NHS. Government borrowing will rise to almost £400 billion, reaching its highest level outside of wartime, to finance these projects.
The government’s foreign aid budget will also be cut, and there will be a “targeted” pay freeze on public sector workers, the chancellor said, from which the NHS and lowest paid workers will be exempted.
In other news of note from the spending review, the chancellor said that he had accepted the Low Pay Commission’s recommendation that the minimum wage – now rebranded as the National Living Wage – be increased by 2.2% up to £8.91 per hour. It will also be extended to those aged 23 and over, down from the current age of 25, and the minimum age for younger workers will be increased as well.
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"The chancellor will need to find £20 billion to £30 billion in spending cuts or tax rises if he wants to balance revenues and day-to-day spending, and stop debt rising by the end of this parliament,” noted Richard Hughes, chairman of the Office for Budget Responsibility, following the spending review.
New data released by the Office for National Statistics (ONS) showed that HM Treasury borrowed £35.9 billion in August – the highest for any August month and the third-highest monthly amount since records began in 1993. The figure represents a £30.5 billion increase from August 2019, owing to the UK government’s efforts to fund its economic relief measures while also tackling the continued spread of COVID-19.
Borrowing between April and August reached £173.7 billion, £145.9 billion higher than the same period in 2019 – another record.
However, the figures fell below expected levels; Pantheon Macroeconomics’ aggregated average of analysts’ predictions forecasted £38 billion worth of borrowing in August.
The new figures were released a day after Chancellor Rishi Sunak announced a raft of measures to bolster the UK economy during the winter months. The most significant addition was the Jobs Support Scheme (JSS) that will replace the currently existing furlough support scheme when it expires at the end of October.
The JSS will support employees in “viable” jobs by topping up the salaries of those who have returned to work but have had their hours reduced. Additional measures in the plan include new grants for self-employed workers until 30 April 2021 and an extension of the government’s emergency business loan schemes.
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Separate figures released by the ONS on Thursday estimated that around 12% of the UK’s workforce remained on partial leave or full furlough earlier in September.
The UK government’s total debt stood at £2 trillion during August, exceeding the size of the country’s entire economic output. With the new borrowing taken into account, this debt has now reached £2.024 trillion.
Treasury Secretary Steven Mnuchin said in a statement to the Senate Banking Committee on Thursday that the Trump administration and Democratic leaders are set to revive negotiations on a coronavirus relief bill.
“I've probably spoken to Speaker Pelosi 15 or 20 times in the last few days on the CR, and we've agreed to continue to have discussions about the CARES Act,” Mnuchin said.
The CARES Act, signed by President Trump at the end of March, was drafted as a $2.2 trillion relief bill containing, among other measures, a $600 weekly enhancement to unemployment benefits. This lapsed in July, to be replaced by a £300 weekly enhancement issued via a presidential memorandum in August. This, too, will expire before the end of the month unless further measures are instated.
Negotiations regarding potential follow-up stimulus halted in late August as House Speaker Nancy Pelosi refused to go lower than her party’s proposed $2.2 trillion stimulus package, while Republicans have refused to consider a bill greater than $1.1 trillion.
Pelosi confirmed Mnuchin’s suggestion of further negotiations, telling reporters on Thursday, “We’ll be hopefully soon to the table with them.”
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The need for further stimulus has grown more urgent during September, with economic recovery slowing and more than 870,000 new unemployment claims being filed in the US during the past week.
Both Mnuchin and Federal Reserve Chairman Jerome Powell have stated that the government’s main priority should be to give further support to the millions of Americans who are currently unemployed, both to bolster the economy and prevent the continued spread of coronavirus cases.
Powell noted: "If people start to run through it what resources they have, they're at risk of losing their homes or having to move out of the place they're renting, maybe move back in with family, and those things are not necessarily good for controlling the spread of the virus.”
On Wednesday, Chancellor Rishi Sunak announced a raft of new emergency measures to curb unemployment during the ongoing COVID-19 pandemic.
As part of the new measures, which Sunak described as part of a wider “winter economy plan”, the UK government will introduce a Jobs Support Scheme beginning 1 November to replace the existing furlough scheme. It is set to run for six months.
Under the Jobs Support Scheme, the government will subsidise the salaries of employees who have been forced to work part-time due to the pandemic. 30% of these employees’ salaries will be covered by the government, capped at £697.92 per month, with another 30% to be covered by firms.
Employees will need to be working for at least a third of their normal hours in order to qualify for the scheme, which aims to ensure that employees receive at least 77% of their normal salaries each month. A similar scheme for the self-employed will also be detailed, Sunak said.
Also announced was a continuation of the government’s emergency business loan schemes, and the extension of a VAT cut for hospitality and tourism companies enacted in July.
“Small businesses will breathe a sigh of relief today,” said Simon Cureton, CEO of Funding Options. “Ongoing access to business loan support, such as the CBIL and CLBIL schemes, until the end of the year and far greater flexibility on repaying those loans, is a shot in the arm for the economy and a wholly positive step as we head towards Christmas. We of course look forward to hearing more detail on the successor loan scheme due to launch in January.”
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The Economist’s Paul Johnson expressed scepticism over the new scheme in a tweet: “This is a v big change from furlough. Less generous. Only open to those who are working a third of normal hours. Understandable given need to adapt as economy changes. Can't pay all wages forever. But a lot on furlough now likely to lose their job,” he wrote.
According to official statistics, nearly three million workers – representing around 12% of the UK’s total workforce – are currently on partial or full furlough leave.
Her Majesty’s Revenue and Customs (HMRC) informed MPs on the Public Accounts Committee that, according to their estimates, up to £3.5 billion worth of payments made through the Coronavirus Job Retention Scheme (CJRS) has been paid out in error or claimed fraudulently – as much as 10% of payments made as part of the programme.
Jim Harra, head of HMRC, told MPs that the tax authority would focus on tackling deliberate abuse rather than mistaken claims. “We are not going to set out to try and fine employers who have made legitimate mistakes in compiling their claims,” he said, “because this was obviously something new that everyone had to get to grips with in a very difficult time.”
He added that HMRC was currently investigating 27,000 “high-risk” cases where serious errors are believed to have been made in the amount an employer has claimed.
Harra also advised employees who believe that their employer may have claimed furlough money fraudulently to report it to HMRC via the body’s website.
Originally launched in April, the CJRS allowed employers to place staff on “furlough”, where the UK government would reimburse them for 80% of their monthly salaries (up to £5,000 per month). Furloughed employees are disallowed from working during this period.
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Recent data from the HMRC has shown that around 9.6 million employees have been placed on furlough since the scheme was launched, and £35.4 billion worth of payments have been issued.
The CJRS is in the process of winding down, with employers now expected to pay a portion of furloughed workers’ salaries. The programme will close for good at the end of October.
