Summary of the BBLS
The BBLS will offer a loan for 25 per cent of an eligible business’s turnover to a maximum of £50,000. The UK government will guarantee 100 per cent of sums borrowed under the scheme. Businesses will not be able to apply if they have already received a loan under the CBILS – which offers loans of up to £5 million for eligible businesses with a turnover of less than £45 million, under which the government guarantees 80 per cent of the loan. However, until 4 November 2020, those businesses may arrange with their accredited lender to transfer eligible loans received under the CBILS to the BBLS.
The announcement of the BBLS follows mounting pressure on the Chancellor from various industry bodies and business leaders, including the Confederation of Business Industry (CBI), to enable SMEs to have their access to funding speeded up. Data published by UK Finance indicated that fewer than half of the 36,186 applications received by lenders for all of the UK government’s finance facilities had been approved by 23 April 2020. Those advocating a 100 per cent state guarantee argued that the 20 per cent of risk remaining with accredited lenders under the CBILS resulted in bureaucratic delays whilst the lenders went through their internal credit approval processes. In contrast, concerns about the ‘moral hazard’ of enabling lenders to advance moneys without risk to themselves and reports of fraud in other countries’ schemes which offered a 100 per cent state guarantee, militated for requiring accredited lenders to keep some ‘skin in the game’.
The eligibility criteria for SME businesses to access the BBLS are that the business:
- Is based in the UK
- Has been negatively affected by coronavirus
- Was not an ‘undertaking in difficulty’ on 31 December 2019
In a similar vein to the CBILS, the following trades and organisations cannot apply:
- Banks
- Insurers and reinsurers (but not insurance brokers)
- Public sector bodies
- Further education establishments (if they are grant-funded)
- State-funded primary and secondary schools
Under the BBLS:
- Eligible business will be able to access a loan for 25 per cent of their turnover (for amounts between £2,000 and £50,000)
- The UK government will guarantee 100 per cent of the loan and will pay fees and interest for the first 12 months
- No repayments will be due during the first 12 months
- Tenors will be up to six years
- In contrast to the CBILS, there will be no forward-looking tests of business viability
The UK government has stated that it will work with lenders to agree a low rate of interest for the remaining period of the loan.
The BBLS will be open to applications from 9am on Monday 4 May 2020. In order to access the BBLS, borrowers will need to complete a short standardised online application form.
Lenders who wish to lend under the BBLS will need to be accredited in the same vein as under the CBILS.
The 100 per cent government backing of the BBLS reflects the approach taken by some other European governments, for instance:
- The 90 per cent state guarantee for 25 per cent of the 2019 revenues that France has provided to businesses with less than 5,000 employees and revenue of less than EUR 1.5 billion in their previous financial year.
- The 100 per cent German Federal government guarantee (KfW Quick Loan) for up to three months’ revenue not exceeding EUR 800,000 (for enterprises with a workforce greater than 50) or EUR 500,000 (for enterprises with a workforce of 50 or less).
FCA Statements for Accredited Lenders under the CBILS
On 27 April 2020, the FCA also published a statement on certain regulatory aspects applicable to accredited lenders in relation to the CBILS.
Assessment of creditworthiness
As an interim measure, where accredited lenders under the CBILS comply with the lending requirements under that scheme, the FCA does not expect them to comply with its rules and guidance on carrying out a reasonable assessment of a customer’s creditworthiness (as required by CONC 5.2A.4-34). For all other regulated lending, the FCA expects firms to continue carrying out creditworthiness assessments in accordance with its rulebook.
Compliance with the requirements of the CBILS in lieu of the CONC creditworthiness assessment rules, means that individuals who are subject to the Senior Managers and Certification Regime within accredited lenders will be deemed to have complied with the Individual Conduct rules and Senior Manager Conduct rules in COCON 2.1 and 2.2 (save for the rules on acting with integrity and engaging openly and proactively with regulators, which accredited lenders will need to actively ensure compliance with).
The FCA intends to give similar clarity on the BBLS.
Financial crime
The FCA provides that where an authorised firm has carried out appropriate customer due diligence (CDD) before it received an application under the CBILS and the BBLS, it need not make further checks, unless it has information suggesting a high-risk fact pattern.
For new customers, authorised firms should carry out their normal CDD process, unless the money laundering and terrorist financing risks posed by the new customer are low, in which case it may decide that simplified due diligence is appropriate.
The alternative verification methods outlined in the FCA’s recent ‘Dear CEO’ letter may also be considered.
PRA Statement on the Regulatory Treatment of the CBILS and the CLBILS
On 27 April 2020, the PRA published a statement on the prudential treatment of loans advanced under the CBILS and the CLBILS for the purposes of recognition as unfunded credit risk mitigation under the Capital Requirements Regulation (EU) 575/2013 (CRR).
Unfunded credit protection for loans which meet the conditions in articles 194 and 213-215 of CRR allows lenders to adjust risk weights and expected loss amounts. The PRA confirms that the terms of the UK government guarantees under the CBILS and the CLBILS do not contain features that would render these guarantees ineligible for recognition as unfunded credit risk protection.
The PRA acknowledges that some of the CBILS guarantees exclude cover for interest and fees, and that accredited lenders should therefore adjust the exposure amount to exclude those elements not covered by the CBILS guarantee.
The PRA also supplements the statement made by the FCA (see above) relating to assessments of creditworthiness. The PRA provides that as a result of businesses facing difficulties in providing positive financial forecasts, the PRA expects accredited lenders to use their judgment on what information is required to make credit decisions. The PRA suggests that accredited lenders should take account of the following factors when making lending decisions in relation to the schemes, including (but not limited to):
- The performance of the business prior to the COVID-19 outbreak
- A view of how the loan will be repaid in due course
- Relying on judgment in the absence of financial forecast information
- The general prospects for the sector in which the business operates once the effects of the pandemic have receded
These suggestions reflect the Chancellor’s statement to Parliament earlier in the day where he stated that “we should not ask the ordinary taxpayers of today and tomorrow to bear the entire risk of lending almost unlimited sums to businesses who may, in some cases, have very little prospect of paying those loans back – and not necessarily because of the impact of coronavirus.”
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com.
Client Alert 2020-270
