FCA and FOS clarify approach to lending under coronavirus loan schemes

The FCA wrote last week (4 page / 164KB PDF) to the FOS, noting that lenders would want clarity on how the ombudsman would view lender behaviour under the Coronavirus Business Interruption Loans Scheme (CBILS) and the new Bounce Back Loan Scheme (BBLS).

It said the usual regulatory regime that applies to regulated credit agreements would not apply to lending or post-lending under the BBLS, and aspects of the scheme, including how lenders had entered into and administered loans, may be the subject of future complaints to the FOS.

In particular, the FCA said there was no requirement in BBLS for lenders to conduct creditworthiness or affordability checks, contrary to the FCA’s normal rules on creditworthiness assessments for regulated credit agreements.

The FCA said it understood the FOS would take into account the schemes’ requirements when handling any complaints, and asked the ombudsman to acknowledge that the schemes require lenders to take a different approach to lending. In its reply (1 page / 169KB PDF), the FOS made the required confirmation.

Separately, the Lending Standards Board (LSB) issued an update on how its Standards of Lending Practice for business customers give effect to the requirements of the BBLS.

The update and the accompanying information for practitioners recognised that by participating in the government schemes, firms may not be able to apply in full effect all provisions within the standards as certain aspects of the products have been determined by government.

Financial services regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said the FCA’s letter to the FOS clearly set out the balance that the government has tried to strike with the CBILS and BBLS.

“For some small businesses the protections that would normally be provided by the Consumer Credit Act (CCA) for lending and post-lending activities (other than debt collecting) will not be there. The government has clearly decided that it is more important to try and get loans made quickly to borrowers than worry about the complex requirements of the CCA,” Barber said.

Barber said as well as the fact that creditworthiness or affordability checks were not required for the two schemes, the government was also looking to dis-apply the unfair credit provisions in the CCA for the BBLS.

“When lending under CBILS and BBLS firms will want to be confident that their actions won't be judged against existing requirements for these types of borrowers and that the FOS recognises the unique circumstances firms find themselves in. The FOS’ response should go some way to providing that comfort but is always subject to its ability to resolve complaints according to what is fair and reasonable in a particular case,” Barber said.

Barber said the LSB update would also be welcomed.

“The updates recognise that criteria for assessing affordability under CBILS is different to that set by the standards and that firms should be assessing affordability against the requirements for the scheme. The updates also recognise that for BBLS loans only the terms of the scheme need to be applied and that the normal affordability assessment required by the standards will not apply. Again one hopes the FOS recognises the approach taken by firms when modifying their lending behaviour to apply the updated standards,” Barber said.

Contentious financial services expert Jonathan Cavill of Pinsent Masons said: “The co-ordination here between the FCA and FOS shows the two bodies continuing to work in lockstep during the Covid crisis, to bring increased uniformity of approach and certainty to firms and customers; the overall objective being to increase market stability and to ensure that fair treatment of customers during this time.”

Cavill said the October 2018 widening of the FOS’s jurisdiction to entitle more small and medium enterprises (SMEs) to bring complaints to the FOS would please those SMEs, but give pause for thought to lenders.

“Banks may be concerned of FOS exposures where they have opted to not lend and the FOS deems that unfair, particularly as under the BBLS there are no creditworthiness or affordability checks,” Cavill said.

“Banks will need to ensure underwriting by reference to the correct standards, whilst at the same time making sure that they treat their SME customers fairly. Where the directing mind or applicant for an SME is a vulnerable customer, the bank will need to also take into consideration the FOS and FCA’s expectation regarding vulnerable customers to mitigate their FOS and FCA intervention risks,” Cavill said.