FCA Warns Banks To Prepare For COVID-19 Debt Surge

By Najiyya Budaly
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Law360, London (June 16, 2020, 3:37 PM BST) -- Lenders should brace themselves for a surge in businesses that cannot pay back loans rushed out under government programs to support the economy during the COVID-19 pandemic, the Financial Conduct Authority said Tuesday.

More than 800,000 businesses have taken on a total of £35 billion ($44 billion) in debt under government-backed schemes, and the FCA has adjusted its rules to accommodate the dramatically changed landscape.

The City regulator drew up the rules as a result of advice from the government and Bank of England. Lenders have been able to hand out cash to businesses without checking whether they are creditworthy, to allow them speedy access to loans.

But FCA Chairman Charles Randell warned that the lack of checks will mean that a higher number of businesses will not be able to pay back their loans.

"It's an inescapable fact that some of the debt that businesses have incurred in the crisis will turn out to be unaffordable," Randell said in an online speech to bank chairmen and women on Tuesday. "Tackling this overhang of debt quickly and fairly will be essential: it must not become a drag on the recovery."

The government announced so-called bounce back loan program in April to allow small companies and sole traders to borrow up to £50,000 during the coronavirus pandemic. The scheme was the latest step in a package of measures launched by Chancellor Rishi Sunak.

The government had already announced the business interruption loan scheme in March, which offered loans of up to £5 million for businesses with turnover of £45 million or less. That was extended to larger companies, which could secure loans of up to £25 million, while businesses with turnover of more than £250 million could gain loans of up to £50 million.

Randell recommended on Tuesday that banks, regulators and the government should work together to help borrowers having trouble repaying their loans. Lenders should employee more staff to handle arrears, and a dispute resolution system should be established for business customers to turn to, which could sit within the Financial Ombudsman Service.

"We can't allow this to become a replay of the 2008, crisis where the treatment of some small business borrowers did such serious damage to people and to trust in financial services," Randell warned.

The Royal Bank of Scotland Group PLC was found to have mistreated small business customers struggling after the last financial crash. An independent consultancy found that the bank's restructuring group mistreated customers in a "widespread and systematic" way.

Commercial lending remains largely unregulated by the FCA, so the watchdog could not fine the bank.

--Editing by Ed Harris.

For a reprint of this article, please contact reprints@law360.com.

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