As you will know, I reach out regularly to those involved in the Bounce Back Loan scheme, sadly BEIS for example flat out ignore any attempt for me to contact them, the British Business Bank do respond, albeit usually with highly redacted paperwork, and even the Ex Shadow Chancellor Chris Leslie who was somewhat happy to chat at first mysterious went quiet on me.
So today I am going to give you the transcript of a discussion that Chris Leslie CEO of the Credit Services Association (a debt collectors association), Stephen Pegge the Managing Director of Commercial Finance at UK Finance and Paul Wainwright the Bounce Back Loans Director at the British Business Bank had about BBLs recoveries and collections.
It really is sad that they will not openly discuss things with SMEs who are worried sick about various aspects of the Bounce Back Loan scheme including repayments and defaults, under the pretence that to do so would “tip off criminals on recovery and collection procedures”, for reference to those from those organisations who are reading this, the majority of people who got Bounce Back Loans are NOT criminals, quite the opposition fact, let that sink in.
Anyway, here is that transcript, be aware I had type it all up, and it does go on for quite a bit, so any typos, well, please live with them!
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My name is Paul Wainwright I am the Director of the Bounce Back Loans scheme at the British Business Bank, I joined the BBB last October (2020) so I am relatively new to the bank, prior to taking up this role I spent over 30 years in Commercial Banking, so that was around sort of dealing with customers on a day to day basis and also in some Head Office roles around assurance and risk.
So, I really wanted to become part of today’s panel, obviously the Covid loan schemes are entering their next phase really, as we all come out of this dreadful time we are having, and I think as we come out of the next phase, we really have an opportunity to work very, very closely together to make sure that we continue to support all the businesses that has so far been helped across those Covid schemes.
I am really sort of happy to join the panel and chat through that. If I think about Bounce Back Loans in particular, and I think of the Pay as You Grow options, I think this is a real opportunity for businesses to really continue on that journey for cash flow support and making sure we continue with that support and provide every opportunity that we can to help those business to get back on their feet, and obviously that is what we all want to do and we all want to achieve.
I also think it is important that borrowers to be treated in a consistent and fair way as we all do, I was delighted at the back end of last year, we were able to issue a collaborative statement of agreed principals, just to make sure that we could take that through, and to make sure that we are treating all borrowers consistently and in a fair manner.
I am Chris Leslie and I am currently the Chief Executive of the Credit Services Association we are the UK trade body for the debt collection agencies and debt purchase sector, in my reckless youth I was a Government Minister in the Blair administration and then went on in opposition to be Shadow Chief Secretary and Shadow Chancellor for a little period pre-Corbin era, but have been spat out of politics so this is why the trade association world is now mine and we obviously have an interest in the collections and recoveries side of things.
We had a go at a little research report giving our own sectors about view how the collection process might continue given the sheer massive scale of what we are talking about, I mean I was looking at the Bounce Back Loan Scheme for SMEs is about the same size of market as Lloyds Bank SME loan book, so it is, we are talking about a considerable intervention in the market.
Naturally, given the urgency and the scale of what was going on the scheme was designed, rolled out and I think that everybody got a lot of support out there, the banks did really well, one point five million SMEs taking that up.
But of course, picking up the pieces and figuring out what happens next is well, we are probably a little bit further on from the beginnings of that. I am particular interested in the consequences for not just customers but also the taxpayer.
I cannot shake off that particular interest, given that there is this one hundred percent guarantee, of course the UK went for the 100% guarantee, I think Germany and Canada did the same and I think other jurisdictions Singapore, Norway 90%, Australia, Ireland 80% something like that, but as it is so significant, I think there is going to be an ongoing taxpayer interest.
I think we have already seen the NAO report which came out with some of those figures about collectability and whether, I think their estimate was somewhere between 35 percent and 60 percent may not even repay in full now.
A lot of these things are superstitions’ and we will find out in time, but we thought that we would put out a report, we called it “squaring the circle”, how to deal with this collections process and the recommendations we were making, got to have consistency in the policy, I think this sheer scale and in many ways new set of clients getting involved in borrowing, any sense that it is going to be written off or that the collection process will turn somehow turn into a ground making scheme could just undermine the recoveries process.
So, we need to have consistency at the way through policy, I think that there are some big choice coming forward, in terms of forbearance we have already seen the Government and the BBB look at extending the pay as you grow scheme, so there is quite a lot already on the table, in terms of interest free options, pausing repayments, extending the loans to 10 years I think that is there as well.
So quite a bit of forbearance is already set out, but there is the question in normal process of collections where individual judgement has to go into this, the assessment of a firm’s ability to pay and so forth and that is going to go alongside what we argue needs to be a really rich, sensitive dialogue with that customer base.
I do not think that a business’s usual approach can just be pursued here, I think we recommended a real invest to save approach to engagement, it’s not going to only be existing clients that banks would have had, a lot of new customers involved here, and it needs to be a dialogue that needs to be continuous in order to not least protect the taxpayers interest in the 100% guarantee.
Now I have a few issues with some of the choices that the Government have made, for myself, I think that there is a bit of a fork in the road, about the Government guarantee.
Obviously when the guarantee is redeemed by the banks my initial expectation was that the book would revert to the state, the BBB and essentially the state, that would potentially be sold later on, but I think the plan is for the book remaining with the issuing lenders and that brings a number of incentives for collections and how that would work but we could possibly explore that in the discussion.
I am Neil Evans I am a reformed RBS lifer. I have spent 30 years in various roles at Royal Bank of Scotland in a variety of different cycles, I am now head of credit risk at Oak North Bank which started up about 6 years ago, I joined at that time.
This cycle, this pandemic cycle is new to me and all others I guess, and if I can, I would like to share a snapshot of the last 12 months really.
When Covid first started to hit and we are talking about last January time, from the China perspective at Oak North we stated to run stress scenarios at the time about the supply chain disruption, from China as we thought that was what it was going to be in the early days.
Quickly then in Feb, March 2020 we moved to doing stress scenarios across our whole portfolio as the virus landed in the UK and Europe and we developed what we called the covid vulnerability rating, we scored all of our businesses, which enabled us to prioritise them in terms of impact of covid.
So, for example most of the hospitality sector rose to the top of that rating and then we ran monthly stresses across our whole portfolio looking at things like cash burn, revenue drops, post covid working capital needs as businesses came out of lockdown and their survival needs during lockdown.
We eventually ran 262 different sector and sub sector scenarios as all of our sub sectors were impacted in different ways and two things helped us massively during this period from March onwards last year those two things really, first one IS data and we cannot underestimate the importance of availability of data across the portfolio to use as your base and secondly the Government support scheme, especially CBILS in our case and the other things such as furlough and more generally across the sector, landlord concessions, suppliers allowing businesses to slow down payments.
I guess all of that has helped us to get to were we are today, and I suppose the big question for today is where we go from here and how we see those schemes through.
I am Stephen Pegge UK Finance represents nearly 300 banking and finance groups and whilst our remit is to see the industry prosper, always in the best interest of businesses and customers and wider site, covid could not be a better example of that role in coordinating things.
So alongside the work we have done with our members with the launch of the scheme we have ben looking quite hard at how the situation is managed thereafter as well, and in particular for those businesses that may be facing financial difficulties and distress.
There is a pretty good track record actually of businesses being helped to turn around through business support units and working with Chris’s members to try and help those businesses survive and certainly statistics that 80% actually do go back to good book would hope it would still be possible, particularly as we have the benefits of Pay as You Grow and we were pleased to see PAYG was made accessible in terms of all the options including a full further 6 month payment deferral immediately for those sectors that are still going through some disruption.
But nevertheless, the thing about Bounce Back Loans in particular is that it is a very standard product and Chris has emphasised and Paul has mentioned this is very much taxpayer agency work so a consistent approach is going to be important here.
So we worked with members through a tax force looking at how we can share good practice and we developed some guidelines very much in collaboration with the British Business Bank and Government to try and insure that there is some common frameworks and standards that people can refer to,
Within a broadly business as usual approach to recovery and those guidelines have been shared, they have been underpinned with improvements made since the late financial crisis with standards of lending practices that included some particular requirements around businesses that may be in vulnerable circumstances.
I think the other thing we need to remember here is that it is not just about money, it is about help and guidance and support and I expect there to be more referrals to that sources of support whether its information that we have on the website and the business groups have available whether it is actually the ability to talk to somebody at business debt line for instance.
We will see some re-structuring and we can come on to talk about that but nevertheless there will be some businesses that exit and dealing appropriately with them, sympathetically but at the same time doing that in an efficient way so that it recoveries what can be recovered for the taxpayer and meeting all of the requirements of not just regulations the rules and guidelines that have been outlined is going to be an important balancing factor.
How do you see the pre-existing all money securities such as guarantees being enforced or not in regard to some of these emergency loans and how will these interact with the government guarantees.
So, it is important to say certainly with Bounce Back Loans there are no personal guarantees and indeed CBILS they cannot be taken for less than 250k, above that there is also a limit which they can be called.
There can be no use of proceeds from someone’s primary residence, although of course if a borrower chooses to sell their house and use some proceeds to repay their debt that is at their discretion.
So there are some limitations on that, Bounce Back Loans as I say are unsecured and you know they will be treated as unsecured debt in the recoveries process, but there is an interesting question as to cross default effectively which we have all been working through so we are clear, so if there are difficulties in one part of a businesses borrowing what does that mean for their borrowing they might have government guaranteed and where does the ranking sit in terms of the use of those proceeds.
It is quite technical actually and there is quite a lot of detailed guidelines for lenders that which been set out on that, Paul have I got that right?
You have got that absolutely spot on Stephen in terms of the “all monies clause” I think is what the question is here it is around the general recoveries waterfall guidance that we have sent out to lenders just to make sure that there is a consistent approach, but you are absolutely right, no personal guarantees for Bounce Back Loans and they are effectively unsecured.
Which sectors have the biggest drops and which ones will recover to 100% or more.
The ones who were mostly impacted have leisure and hospitality who were simply unable to find alternative ways, one thing that I have learnt through this is that businesses have been unbelievably resilient, and unbelievably creative in the way that they have tried to find ways around the covid impact.
But certainly, hospitality has been hugely impacted, across pubs, bars restaurants, hotels those are the areas that have been majorly impacted, will they get back to normal, we actually thing through our stress testing the new normal will not get back to 2019 levels for a lot of businesses.
If you think about in particular peoples views now on city office, will city office occupancy levels get back to where they were December 2019, I think there is a lot of doubt about that now, people have realised they can work more flexibly from home.
So therefore, if you think about the hospitality and leisure businesses that are around those office locations in the city centre, will they see the same level of footfall, we are predicting about a 10% drop in footfall and revenue levels compared to 2019 when we get back to the new normal and we are predicting that will not happen that new normal at least until probably the end of 2022 and well into 2023.
So those are some of the thoughts around that, the majority of other businesses have tended to be able to find different ways and even in hospitality sector you have seen previously sit down restaurants adapt into takeaway and using that now and thinking they may continue to use that moving forward.
But other business online delivery businesses have clearly adapted really well, the ones that will suffer and are already started to suffer are retail, so they will, the kind of bricks and mortar traditional retail were already on the line, and this has probably just accelerated this for them.
How do we differentiate genuine hardship versus fraudsters delaying repayments for Bounce Back Loans.
From the collections side of things, I think one point five million customers is about a quarter of all British businesses we are talking about a lot of small firms, some of which are will be quite well known others will be just be individuals who just set up a company arrangement, I think anecdotally a lot of us will have heard stories or whispers as people do on the grapevine, that such and such down the road has two companies and he managed to get two times £50k and he used it for a down payment on a house or a car.
There is a lot of feelings that the Bounce Back Loan scheme has been used to popping up the wider economy and not just the business sector itself, we will find out in due course the extend where the resources have gone, the only reason to find out a genuine hardship on behalf of the business versus something that maybe less than genuine it to have the dialogue and you can only have that dialogue through some of that specialist skills the collection industry, has picking up the phone have conversations understanding the nature of those business, so it cant be a tick box process.
Obviously there will be forbearance already baked in, but it has to be a relationship that will be established and that will be costly and of course in this scheme very little resources has been allocated for the cost of that engagement and that is why we were advocating to the Treasury you need to think about putting aside resources for the cost of that engagement, it is costly and it does need support and we will continue to press for that from wherever it comes.
Very quickly just to add I think we have to assume that many people are genuine and honest and that is my experience with the SME sector there have been a lot of stories about fraud and very clearly it is a large scheme and will always attract those who are looking to take advantage.
I don’t think many fraudsters are going to ring up and talk to their bank and opt in to PAYG reality is they have taken the money and gone so it probably will not have that difficulty where you are getting into that dialogue so much and what’s more they have had their kind of interest free period for the first year and they are having their payment deferrals that is going to cost them more, obviously there will be accrued interest and extended period of time so there isn’t a way of making money but lenders will look to try and be helpful where they can and you know make sure that there’s the right balance being struck.
I think one final thing to say, forbearance is possible also on CBILS, PAYG is only Bounce Back Loans that forbearance could include an extension of the term of the loan to 10 years but that has to be in cases where that really will make a difference to repayments and actually can be repaid over that longer period, so that has been a point of confusion that I just wanted to raise.
Will the waterfall guidance be made available to the restructuring profession.
Probably one for Paul actually, the guidance sits with the BBB I think the answer is probably no not in its granular detail but some high level outlines of that, I think.
Yes, I agree, I think there is something there we can take away and work away with the restructuring profession to ensure we are all supporting the borrowers throughout the process, I think that is something for me to take away and think about.
If the loan is not performing and sold on, is it fair that debt purchasers can continue to report negative markers on client’s credit files if a judge rules the debt has been unenforceable.
There is a couple of conditions to that, I suppose who, it depends whether the debt is sold on, obviously I was mentioning earlier that I personally think there is a policy issue if the Government has underwritten this 100% should the book refer to the BBB the State its currently planned that the book will remain with the originating lender, the embanks, I don’t know myself whether there have been any conditions placed on those banks then placing the book into the secondary market further down the line if that were to happen then collections would continue in the normal way
A judge will only get involved if it got to an enforcement process so you know that would hopefully be right at the end of the chain and efforts would be made as a lot of commercial collection agents will do, to recover what they can in their fair and reasonable way from their clients I think a lot of the judgement rulings are sort of way down the track.
Are there any sectors that are performing really well at the moment that will deteriorate once we get back to the new normal.
That is a really good question and people usually start with that statement when they are struggling to think of an immediate answer, I think it is, there have been a number of sector where we have seen a boom in their revenues and particularly businesses that were previously had on OK offering and suddenly received a huge boost as everybody turned to shopping online
So, there is a number of those who have received a boost so the challenge for us as lenders moving forward as lenders is to identify those who have seen a boost in revenues and then we will be coming to us justifying facilities base don that same level of revenue and whether that will continue to fall away a little in the future so then we have to be really careful how we measure that boost to revenues.
But in terms of who are the winners and losers we have talked about some of the losers in the hospitality sector I think winners have been retail online and pretty much all forms of retail, you will probably know yourself people have saved money from not having to commute a lot of people have wanted to spend that money and people have literally gone online to search for the things they wanted to buy that they have put off buying for some time
One area that has definitely seen a boost Is property refurbishment, every builder small or large that you talk to is run off their feet and they have work into the next two or three years lined up ready to go so I think as Paul pointed out if you find a builder than isn’t busy and can work for you immediately there may be something wrong there, and they are the areas I have seen improved.
John Glenn MP flagged the scheme put into priority social enterprises is there a need for a more nuanced process for recoveries response by the many Bounce Back Loan lenders in that segment rather than just going for consistently.
I think it is a real good point to make obviously as those charities and social enterprise one size does not fit all in recoveries and collections process and if I think back to sort of the recoveries principals that were issued already there is some flexibility there already of them to use there both their existing processes but also think about that customer and how they can support that customer through the overall process so already there is some flexibility already there.
Certainly, if lenders do come to us at the BBB and talk about at how they are looking to recover part of the debt we will be able to help and support wherever we can like I say itis not one size fits all and the flexibly is there.
Repayments to HMRC under the opt in scheme will be the most will be the most aggressive, will lenders link in with HMRC on their stance to recoveries and its impact on affordability of Bounce Back Loans and CBILS repayments
I think that is a good question, there is as much estimated in tax deferrals as there is in these government guarantee schemes which is at some stage going to have at some stage to be repaid.
That particularly at a time where other forms of support such as furlough scheme and grants are coming to an end will probably lead to probably a tightening of liquidity and the questioner is quite right it is usually HMRC that triggers an insolvency process they do have time to pay arrangements.
We are in contact with HMRC and they are emphasising that they do want to take a differentiated and careful approach to businesses that may still be under short term cash pressure but this probably reinforces the need for all of the various stake holders and parties involved in the business to be a bit more joined up than we have been in the past with the way we deal with those businesses whether its conventional lending, and invoice and asset based finance whether its government lending scheme and whether it is just straight forward trade credit we have to make sure one doesn’t cause a trigger that brings down a business that may have been viable.
We had some conversations even with some of the sector organisations that have provided support, so Sports England have had a winter support survival program they are about to do the same with the summer sports and some of the big events here, part of the challenge we are all going to have is to make sure that we can navigate what is going to be balance sheets which are quite out of shape and liquidity which is going to be moving through at different paces.
Long and complicated answer but we are certainly talking to HRMC frequently.
Is there a scenario when offering forbearance on a non-government loan could inadvertently impact on the validity of the government backed loan if it was due to be called upon later.
I mean I think in a way this goes to Stephens point about the connectively of all sorts of schemes and its not just HRMC who will be owed money by a lot of small businesses, but other banks and commercial products and so forth.
Trying to link those up will be tricky from a sort of creditors point of view however from a normal course the assessment of a customers ability to repay a lot of the forbearance that is offered should take into account those other sums owned, so in the round when it comes to the Bounce Back Loan obviously the originating lender of the collections agency will have to weigh up what is affordable for that business to make in its repayment plan and the usual consumer credit source rule book will apply.
You have to take a reasonable and considered view about what is affordable if a payment plan is to be negotiated and what that will have to take into account wider debts that a firm will have in its, on its books so its the best way the individual assessment that all those facts are brought together.
Since June 2020 the counter fraud professions including the fraud advisory panels and transparency has called for transparency on Bounce Back Loans to prevent fraud and reassure the taxpayer by publishing the names of companies that have received Bounce Back Loans, some names have been published is there any plans to publish other names.
I can say a little bit about it, and Paul will be close to this as well. There is a requirement under the EU State Aid rules under which these schemes were launched that there is some transparency of the recipients of state aid discussion are still ongoing with the European commission as to how far that goes down the scale and it’s quite possible that for the smaller business with small amounts of borrowing through Bounce Back Loans that transparency will be aggregated levels rather than very granular customer by customer
I think whilst you know its quite likely that in the data privacy notices businesses will have been made aware their details may be shared, people might be surprised their banking relationship should be reported and disclosed through public websites I think people will understand CCFF the very large end it did involve publication and they might expect Future Fund for instance to be published as well as that is state directly investing
Paul do you have an update?
I think discussions are continuing with the EU Commission, we are still in that space of wait and see.