British Business Bank had warned government on bounce back loan fraud risk

The British Business Bank warned the government four months ago that two of its Covid-19 support schemes could lead to fraud and waste taxpayer money, it has emerged.

Keith Morgan, then-chief executive of the British Business Bank, wrote two letters to business secretary Alok Sharma, after the state development bank was asked to design and oversee the schemes.

The letters, published on Wednesday, revealed the bank’s concerns about the bounce back loan scheme (BBLS), the 100 per cent government backed scheme that delivers business loans of up to £50,000, and the future fund, which offers convertible loan notes to innovative companies, matching their private investment.

The two schemes were launched in May as part of an array of measures introduced by the government to support businesses during the pandemic.

In the BBLS letter, Morgan highlighted that the bank was concerned about the propriety, value for money and feasibility of the scheme.

Read more: Are P2P lenders losing business from the emergency loan schemes?

He also highlighted the risk of potential market disruption due to the scheme’s low 2.5 per cent interest rate and “the extensive reliance on customer self-certification and the corresponding fraud risk”.

The letter cited a draft review commissioned from PwC that classified the fraud risk as “very high” and was worried BBLS “was vulnerable to abuse by individuals and by participants in organised crime.”

“Alongside the fraud risk, there will be considerable credit risk in the current economic environment, which will be exacerbated by removing significant elements of the credit checks that would otherwise have been undertaken,” Morgan said in the letter.

Read more: Woman arrested in bounce back loan scheme scam

He also added the British Business Bank was concerned that BBLS would not be ready for delivery within its short timeframe.

Morgan said these concerns could be mitigated either by proceeding with modifications to the coronavirus business interruption loan scheme instead of a new scheme, or by delaying the implementation of BBLS to ensure these issues were worked through.

Meanwhile, in the future fund letter, the state development bank warned the scheme could be too focused on London and the South East and that, within the short timeframe, it was not possible to test it to the degree it normally tests the launch of a new substantial programme.

He said the scheme may not be value for money, since, based on the industry experience around the British Business Bank’s board table, the bank forecasted a negative benefit cost ratio.

Read more: P2P lenders give the future fund a positive review

“That view was driven by concerns that the best companies will not use this funding route, as investors will fund those companies without [government] support,” Morgan said in the letter.

“This will result in [government] investment going to the second tier of companies, which will likely result in higher associated loss rates.”

Sam Beckett, permanent secretary of department for business, energy and industrial strategy, replied to both letters, saying that Sharma “took the view these risks notwithstanding, the unprecedented situation facing the country meant that it was essential” to introduce the future fund and proceed with BBLS.

A government spokesperson highlighted that it has looked to minimise fraud and the support schemes were vital for businesses.

“Our loan schemes have provided a lifeline to thousands of businesses across the UK – helping them survive the outbreak and protecting millions of jobs,” the spokesperson said.

“Our support has been targeted to ensure we help those who need it most as quickly as possible and we won’t apologise for this.

“We’ve looked to minimise fraud – with lenders implementing a range of protections including anti-money laundering and customer checks, as well as transaction monitoring controls.

“Any fraudulent applications can be criminally prosecuted for which penalties include imprisonment or a fine or both.”

The British Business Bank declined to provide further comment.