Exclusive: UK Cancels State Guarantees on Nearly £1 Billion of COVID Loans, Reports Reuters

By Sinead Cruise and Iain Withers

LONDON (Reuters) – The UK government has eliminated guarantees on nearly £1 billion ($1.2 billion) of bank loans that were issued to struggling businesses during the COVID-19 pandemic, which means lenders will bear the financial burden for some loans that may not be repaid.

Confidential figures obtained by Reuters through a Freedom of Information request reveal that the British Business Bank (BBB), responsible for managing the loan schemes, has withdrawn state guarantees from 10,786 loans totaling £979 million as of October 11. This action aims to protect taxpayers from incurring losses.

Although this amount is relatively small compared to the £77 billion in loans issued, the decision comes in response to criticism from lawmakers and the public spending watchdog, who pointed out that the programs were too lenient. Recent reports indicate that only £17 billion has been completely repaid by borrowers as of June 30.

Many lenders participated in the government-backed initiatives, including prominent banks such as Barclays, NatWest, Lloyds, and HSBC. Barclays and HSBC did not provide comments, while the other two were unavailable for immediate response.

The UK’s emergency lending programs were similar to financial initiatives implemented globally to support businesses during extended lockdowns. However, it is only now becoming evident what the full costs will be and who will ultimately cover these expenses.

Public officials have intensified their scrutiny of the schemes to ensure better value for taxpayers’ money as ministers evaluate the country’s strained finances in preparation for an important budget update later this month.

“In unprecedented times, we stepped up to support the country,” stated a spokesperson from the UK’s business department regarding the loan programs, noting that the government is collaborating with lenders to remove guarantees to safeguard taxpayer funds where necessary.

The bank lobby group UK Finance reported that lenders are in regular contact with the BBB, with some choosing to withdraw loans from the guarantee independently.

Lenders participating in the emergency loan schemes aimed to maintain credit flow in the struggling UK economy since 2020, primarily through three major programs. The largest and most contentious, the Bounce Back Loan (BBL) scheme, provided £47 billion specifically for the smallest businesses.

Participants were encouraged to simplify their usual credit checks to offer loans of up to £50,000 within hours of application. Under the BBL, the government assumed full credit risk.

However, some lenders are discovering they cannot claim on that guarantee, as indicated by the FOI response. Once guarantees are withdrawn, any resulting financial loss is fully incurred by the lender, according to the BBB.

The removal of guarantees occurred for various reasons, such as data corrections and application errors resulting in duplicate funds being granted to businesses, alongside violations of scheme rules.

Potential infractions may include evidence of inadequate borrower treatment, as noted by one source. The BBB can reduce a lender’s future claims for repeat violations, although this has not yet been implemented, according to the source.

Mistakes that led to guarantee withdrawals were either self-identified by lenders or discovered in discussions with the BBB, as reported in the FOI response.

Every lender involved in the emergency loan initiatives has undergone at least one audit, with the BBB confirming this.

When Reuters sought a detailed breakdown of the removed guarantees by lender, the BBB declined, asserting that such disclosure could adversely affect commercial interests. Lenders had reportedly agreed to this confidentiality during discussions.

The lending programs have faced significant controversy amid growing evidence of widespread fraud. Last year, junior government minister Theodore Agnew resigned in protest, decrying the inadequate measures to prevent fraudulent activity as “woeful.”

Recent data published in September revealed that the estimated value of suspected fraud across all schemes reached £1.7 billion as of June 30, a 43% increase from the earlier estimate in March.

It was also noted that the government had disbursed £7.4 billion to lenders under the state guarantees.

“Lenders are making every effort to ensure loans are repaid and are actively addressing issues of fraud,” stated a UK Finance spokesperson.

Suspected fraud alone is not a justification for withdrawing a guarantee, as long as the lender complies with scheme rules, according to another source.

A second individual involved in designing the scheme, who chose to remain unnamed, remarked that it shouldn’t be surprising that loans typically viewed as high-risk by banks are encountering difficulties, adding that lenders had expressed concerns at the outset.

The BBB had also signaled worries prior to launching the BBL scheme, cautioning in a May 2020 letter to the government that the scheme was “vulnerable to abuse by individuals and participants in organized crime.”

In a response to those concerns, the government acknowledged the risks but determined to proceed, citing the “unprecedented situation facing the country.”