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Taxpayers face losses of up to £ 26bn in coronavirus “recovery” loans that cannot be repaid or are subject to fraud, the spending regulator found.
The scheme provides quick access to 100% government-backed financing worth up to £ 50,000 for small businesses in difficulty, with fewer checks than others COVID-19 business loan initiatives.
It has turned out a lot more popular than anticipated when it launched in May, and the total value of the loans is now expected to be £ 38- £ 48bn, up from an initial estimate of £ 18bn to £ 26bn.
The plan was launched to support struggling small businesses.
But it relies on firms self-certifying the details of their applications and lenders failing to verify the credit of existing clients, increasing the risks of loss for taxpayers, the National Audit Office (NAO) said.
Senior officials raised formal concerns about it early on, which were overruled by the Treasury, according to the NAO.
It also found that officials were unable to implement measures to prevent duplicate loan applications from different lenders until nearly a month after the initiative was launched.
The NAO concluded that the government “acted decisively” when launching the scheme to prevent small businesses from running out of money.
But Gareth Davies, director of the NAO, said: “Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct.”
“The government will need to ensure that there are robust debt collection and fraud investigation arrangements in place to minimize the impact of these potential losses on the public purse.”
The Department of Business, Energy and Industrial Strategy (BEIS) and the British Business Bank (BBB) estimate that “as a result of credit risk and fraud” between 35% and 60% of borrowers may default on loans , according to the NAO report.
That would imply, based on the £ 43bn loan scheme, a loss of £ 15bn to £ 26bn, although estimates were “very uncertain”, the report added.
Under the BBB “bearish scenario”, the level of default could be as high as 80% if the pandemic lasts longer than expected and efforts to stem credit losses prove ineffective.
Within the overall loss, the extent of fraud in the scheme is likely “significantly above” the usual 0.5% -5% estimate for fraud in the public sector, according to the NAO report.
Risks of fraud included multiple applications from the same borrower, loans to people without a legitimate business, phishing and organized crime.
These were some of the issues raised by BEIS and BBB with ministers.
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They were also “concerned that the lower level of credit checks could result in lenders making loans to businesses that cannot pay, leading to the loss of taxpayers’ money,” the NAO found.
However, the Treasury “considered as a whole that it was necessary to increase the speed of delivery,” according to the report.
Details of BBB’s warning to the government about the potential for fraud, in a letter from then-chief Keith Morgan, were first revealed last week.
On Friday, the National Crime Agency said it would investigate serious and organized crimes related to the recovery plan after intelligence suggested it was being exploited.
A government spokesperson said: “We have sought to minimize fraud, with lenders implementing a variety of protections including against money laundering and customer checks, as well as transaction monitoring controls.
“Any fraudulent application can be criminally prosecuted and the penalties include imprisonment or a fine or both.”
Applications for new loans remain open until November 30.
