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Everybody knows the successful feature of the government’s bounce back loan scheme (BBLS). At the height of the pandemic, there was an urgent need to shovel loans to small businesses. The necessary compromise was to tell lenders not to be overly fussed about laborious credit checks. The operation had to be faster and looser than the separate coronavirus business interruption loan scheme.
The National Audit Office accepts that general thesis. BBLS “succeeded in quickly supporting small businesses,” says its report. Some 1.3m loans to businesses have been made since May worth £38bn. Jolly good.
But here’s the kicker: if the scheme ends up lending £43bn, the NAO thinks that the Treasury (which gave the banks a 100% guarantee) will face an eventual loss of £15bn to £26bn. A 35%-60% default rate on public money is colossal. Yes, the figure was bound to be large since lending to small businesses in the midst of a sudden recession is the definition of high-risk. But this large? Or rather: what was the role of fraud in inflating the hit to the public purse?
Frustratingly, the NAO report did not divide its £15bn-£26bn estimate between conventional lending losses (which one might happily swallow to save thousands of businesses) and outright fraud. But it did nothing to deflect the widespread analysis that BBLS, at least in the early weeks, was riddled with cheating. It listed the ways: “self-certification, multiple applications, lack of legitimate business, impersonation and organised crime”.
One temptation is to blame the banks, but, for a change, that looks unfair. Lenders were under orders, in effect, to perform only cursory ID checks in the interest of speed. That was the government’s choice – indeed, it was made in the face of an explicit warning by the British Business Bank, overseeing the scheme, about fraud.
The main questions are really for the Treasury. First, did it do any pandemic planning at all, and how was the fraud risk assessed? The public accounts committee must demand a clear account.
Second, what’s the plan for catching the cheats? Gareth Davies, head of the NAO, told the government now to put “robust debt collection and fraud investigation arrangements in place”. Rishi Sunak, the chancellor, should take note: when you’re planning to raise taxes, the perception that the Treasury was taken for a ride by conmen for several billions is not a good look.
This bonus scheme will be hard to swallow
There’s a crisis at The Restaurant Group, owner of Wagamama. No, it’s not the loss of £235m in the first half of this year. Rather, the board is worried that executives’ long-term incentives have been rendered worthless by the fall in the share price.
Heavens, the poor souls – including the chief executive, Andy Hornby, of HBOS infamy – even had to take a temporary 40% salary reduction while cutting the workforce by 4,500.
“As a result, whilst these measures were important in the context of the lockdown, they effectively mean that senior management is not currently subject to any retention or incentivisation mechanisms,” explains the board.
The company wants shareholders on Thursday to approve a new scheme that would hand Hornby a share award of up to £787,500 for this year, with more to follow in later years. Such is the urgency, apparently, that the remuneration review was been accelerated by a year “given the exceptional events of 2020 related to Covid-19”.
Fund managers, one suspects, will nod it through because they usually do. The right response, though, given where the share price sits, would be tell Hornby and co to concentrate on recovery and come back in a year. This is not the moment for get-rich schemes.
Let mortgage providers decide on affordability
Housebuilders have been bleating for months about how the sky will fall in if buyers of new-builds are denied high loan-to-value mortgages. It looks as if their lobbying has registered. Boris Johnson is promising that buyers will be given “the chance to take out a long-term, fixed rate mortgage of up to 95% of the value of the home, vastly reducing the size of the deposit”.
There was zero detail, which is a relief. It gives the Bank of England, let’s hope, time to knock some sense into ministers. Stress-test rules on lenders, and affordability checks on borrowers, exist for a reason: they are there to protect both parties. If unemployment projections improve, the banks may be ready, under their own steam, to reintroduce 95% mortgages.
There is no need for the government to intervene in a market that already looks too frothy. If house prices gently decline from here, that’s good news for first-time buyers.
Source: The Guardian
Keyword: Questions for Treasury as Covid loan scheme bites back | Business