The Bounce Back Loan Scheme was formally launched on 4 May 2020 and is available until 4 November 2020. It is a new scheme introduced to help smaller businesses impacted by coronavirus (COVID-19). It aims to assist those businesses to borrow between £2,000 up to 25% of a business’ turnover. The maximum amount available is £50,000 and there is no fee payable.
The government will cover any interest payable in the first 12 months through a Business Interruption Payment to the lender, and lenders will benefit from a 100% government-backed guarantee.
The government has set the interest rate for this loan at 2.5% per annum and the repayment term is fixed at six years. No repayments will be due during the first 12 months. Businesses remain 100% liable to repay the full loan amount, as well as interest, after the first year. Businesses are able to repay the loan early without paying afee.
The Scheme is being delivered through a network of accredited lenders.
On 1 May 2020, the Financial Services and Markets Act 2000 (Regulated Activities) (Coronavirus) (Amendment) Order 2000 (‘the Order’) was published and came into force on 4 May 2020.
The advantages of the scheme are that lenders will not be permitted to request personal guarantees from borrowers thus offering a degree of protection to their personal assets.
Arguably, the disadvantages to the scheme however are that it does not offer the same level of consumer protection to the borrower who is ordinarily party to a non-government backed loan scheme. The Consumer Credit Act 1974 places prescriptive requirements on lenders supplying credit to sole traders, small partnerships and unincorporated associations seeking finance up to £25,000 to for example, provide information before a loan is granted and to provide further information throughout the course of the agreement. However, under the Order, the government made changes to Article 60C of the Regulated Activities Order which means that loans of £25,000 or under available to sole traders, certain small partnerships and other relevant small businesses will fall outside regulated lending activity. Debt collection either by the lender itself or through a third party will however continue to be a regulated activity.
It is also proposed that primary legislation will be introduced to disapply the consumer protections offered under sections 140A-140C of the Consumer Credit Act 1974. Section 140A enables the court to award the debtor a remedy if the relationship between a creditor and debtor is unfair on the basis of:
- The terms of the agreement or any related agreement;
- The way in which the creditor has exercised or enforced their rights under that or any related agreement; and / or
- Anything else which was done or not done by, or on behalf of the creditor, irrespective of whether this was before or after the making of the agreement.
Various remedies are provided to the court under s.140B in the event that there is a determination of unfairness. Under the scheme it is proposed that such legislation which applies the disapplication of the above provisions will have retrospective effect. Additionally, the Financial Conduct Authority (“FCA”) has clarified that it does not expect lenders to comply with CONC 5.2A which requires lenders to conduct affordability or creditworthiness checks. Under the scheme, a proposed lender simply has to consider that the business (or its group) applying under the scheme has ‘a viable business proposition’. This is to be determined with reference to the lender’s underwriting policies in place at the time but without regard to any concerns over the business’ short-to-medium term business performance due to the uncertainty and impact of the pandemic.
For smaller value loans (£30,000 or below), in determining the eligibility of the applicant lenders may decide to assess the business’ creditworthiness based on its own internal credit scoring models from time to time.
Prospective borrowers will be able to self-certify that they have been adversely affected by the pandemic and are borrowing to address that.
As part of the scheme lenders are therefore required to take a different approach to lending that they would otherwise have been required to do.
The FCA obtained clarification from the Financial Ombudsman Service (“FOS”) that it acknowledged the new legal and regulatory framework, the differences between the two Schemes, as well as the changes the Government is making to the Regulated Activities Order. FOS recognise that the Schemes require lenders to take a different approach to lending and that this approach will be determined by the Schemes’ requirements and the new regulatory arrangements.
It remains to be seen whether businesses who take advantage of the scheme will be adequately protected from a consumer protection standpoint however.
Victoria Roberts
Joanna Connolly