Banks have asked specialist debt collectors to help lead the recovery of tens of billions of pounds of government-backed small business loans, as they prepare for an expected wave of defaults and fraud cases.
UK Finance, the trade group, is leading discussions to create a centralised “utility” that will deal with defaults on government-backed bounce back loans. It has contacted several potential outsourcers including London-listed Arrow Global to see if they would have enough capacity to support such a scheme, according to people involved in the discussions.
The task is expected to be too onerous to be handled by a single company because of the large number of small businesses forecast to run into trouble, one of the people added.
Banks have lent around £40bn through the bounce back scheme, providing loans of up to £50,000 to more than 1.3m companies. The loans are backed by a 100 per cent government guarantee, but banks have to prove they have made a thorough effort to recover the cash before claiming the money from the government.
One executive at a high street bank said: “Access to a shared operational utility is a good thing to do in terms of cost efficiency. More importantly, it gives consistency for customer treatment and conduct outcomes.”
Another stressed that they did not expect to save much money through the utility, but said it would help shield individual lenders from criticism. The issue is particularly sensitive for banks such as Lloyds and NatWest, which have been accused of mistreating small businesses in the past.
Executives do not want to be accused by the government of making insufficient effort to collect on the loans, but at the same time are wary of being seen to aggressively pursue small and microbusiness owners who are struggling to stay afloat during the pandemic.
Chris Leslie, the former Labour MP who recently took over as chief executive of the Credit Services Association trade body, said: “The sheer scale of bounce back loan recoveries will be so significant for the taxpayer and the wider economy that the Treasury and the banks — as their agents in this policy — will have to come to a consensus approach.
“It makes most sense to utilise the existing expertise in the UK recoveries sector, where specialist firms are well versed in the sensitive task of offering appropriate forbearance and understanding stresses and vulnerabilities,” he added.
The Financial Conduct Authority supervises around 230 firms in the debt collection industry. Big groups in the sector include UK-listed Arrow and Capita and US-owned Cabot Credit Management.
Discussions with potential outsourcers are at an early stage, but banks are aiming to confirm the structure of the vehicle before the end of the year.
Another person briefed on discussions said: “It’s important that it is credible, regulated people who could do it in a way that’s appropriate . . . if there’s blowback it will come back on the government and banks.”
Under the current plans, the recoveries vehicle will focus on bounce back loan recipients that have no other outstanding borrowing from the lender that provided the government-backed loan. Banks will still be responsible for the initial phase of trying to collect repayments on the bounce back loans, and for recovering money lent to bigger companies through the Coronavirus Business Interruption Loan Scheme.
One executive involved in discussions said Lloyds Banking Group and NatWest were the most enthusiastic supporters of coordinating their responses after a series of scandals focusing on their treatment of small businesses over the past decade.
“They’re by far the most vocal and I completely understand, given the history,” the executive said.
Lloyds was criticised for ignoring victims of a fraud that took place before it bought HBOS in 2008, while the former business restructuring unit at RBS was accused of systemically mistreating businesses that it was supposed to help recover after the 2008 financial crisis.
UK Finance declined to comment.