There is a “very high level” of fraud risk among bounce back loan scheme (BBLS) borrowers which could result in government losses of between £15bn and £26bn, the National Audit Office (NAO) has warned.
The public spending watchdog is calling for the government to implement a thorough debt-recovery process with lenders and consider how it might better prevent fraud in any future schemes.
The BBLS was announced on 27 April to provide loans of up to £50,000, with a 100 per cent government guarantee, to small businesses suffering during the pandemic.
Most BBLS loans have come from accredited banks, although peer-to-peer lender Funding Circle is also participating in the scheme.
A report by the NAO into the value of the scheme has warned that efforts to improve quick access to finance for smaller businesses has created a “very high level” of fraud risk.
The NAO said the scheme relies on businesses self-certifying application details with limited verification and no credit checks performed by lenders for existing customers.
“This lower level of checks presents credit risks as it increases the likelihood that loans are made to businesses which will not be able to repay them, leading to losses of taxpayers’ money,” the NAO said.
The NAO found that lenders approved loans for existing business customers within 24 to 72 hours but approval times for new customers takes substantially longer.
Two large lenders that offer loans to new customers estimate that these applications may take between four and 12 weeks because of the high volume received and operational constraints relating to the pandemic.
The NAO took government estimates of losses at between 35 per cent to 60 per cent on similar loan programmes and said the BBLS could potentially result in fraud losses of £15bn to £26bn, based on predictions that the scheme lends £43bn.
However, it noted that these estimates are “highly uncertain”.
“Over the coming months, the extent of losses due to fraud will become clearer, but the full extent of losses, both credit and fraud, will not emerge until the loans are due to start being repaid from 4 May 2021,” the report said.
Non-banks, such as building societies and P2P lenders, were responsible for 3,000 or fewer than one per cent of all loans provided under the scheme as of 7 September, the NAO said.
In contrast, the UK’s five largest banks distributed 89 per cent of loans of loans at 1.03m.
“With concerns that many small businesses might run out of money as a result of the Covid-19 pandemic, government acted decisively to get cash into their hands as quickly as possible,” Gareth Davies, the head of the NAO, said.
“Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct.
“Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse.
“It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.”
The British Business Bank, which is facilitating the BBLS on behalf of the government, responded to the NAO’s report by stating that the fraud risks have been mitigated by accredited lenders undertaking standard checks.
“The bank, the government, fraud prevention services, fraud bureaux and the banking and alternative finance sectors have acted swiftly post-scheme launch to put in place additional measures, beyond the standard checks, to further mitigate fraud risks,” the British Business Bank said.
“The British Business Bank acknowledges, as the report does, that ‘much hard work remains over the coming months and years to ensure that the risks to value for money are minimised’.
“We have been, and will remain committed to this work, liaising closely with government, lenders and other stakeholders.”