After the initial lockdown was imposed in the UK, the bounce back loan scheme saved a plethora of businesses from going under. But now, debt collection services are requesting greater powers to recoup debts from the £44bn scheme.
In order to stimulate economic growth as quickly as possible, last spring, the government provided banks with a 100 percent guarantee, through bounce back loans, to incentivise lending to small businesses. To date, around 1.4m SMEs have utilised the scheme. However, following multiple lockdowns and widespread fraud, the National Audit Office (NAO) predicts that it’s likely over half (60%) of borrowers are going to default on their loans.
The Credit Services Association (CSA), the trade body representing the collections industry, is perhaps amongst the most aware of how the debt collection strategy from this scheme will have significant impacts for either SMEs or taxpayers if an effective plan is not executed.
Chris Leslie, chief executive of the CSA has highlighted that an effective plan could be “the difference between recovering 15p in the pound and 30p in the pound (on defaulted loans)”. When looking on a national scale, a 15 percent difference would represent significantly different ramifications for the Treasury, taxpayers and SMEs alike.
Moreover, banks who extended the terms of their loans will initially be held accountable for any debt collection. However, lenders will be able to cash in on the government’s guarantee after an ‘appropriate recovery process’ has been undertaken. Following this, the remaining balances of unrecovered debt will be left for the Treasury to recoup.
The CSA has urged debt collectors and the government to work together for the second round of collections. One main aim is to engage with banks and borrowers before the guarantees are activated; by doing so in a sensitive manner, the report estimates total recoveries could increase by £6bn.
Leslie emphasised how, comparatively, private debt collection firms often treat borrowers more fairly compared to their publicly owned counterparts, who have received a reputation for aggressive debt collection practices. This could be a result of 3rd party regulations enforced by the Financial Conduct Authority (FCA), who regulate the private debt collection industry. This is further highlighted by a 2018 NAO report which acknowledged “the government lags behind the retail lending sector in following good debt management practice”.
Rather than taking a heavy-handed approach, similar to that of councils, Leslie has pleaded for the Treasury to take a sensitive and engaged approach.
Whilst they are still working on minimising losses, the Treasury stressed they are making it easier for firms to repay the loans through things like extending terms from six to ten years.