Most New Gov't COVID Loans Won't Be Regulated, Says FCA

By Irene Madongo
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Law360, London (May 26, 2021, 6:05 PM BST) -- Britain's finance watchdog has made it clear that it will not regulate most of the new government-backed pandemic loans, which were brought in to help prop up businesses hit by COVID-19.

The Financial Conduct Authority said on Wednesday that most of the loans provided under the Recovery Loan Scheme will not be regulated activity. Therefore, most applications for the new plan are beyond its regulatory perimeter.

"Our rules will apply as usual to regulated lending under the scheme, in this case regulated asset finance," said the regulator, citing rules on creditworthiness assessments.

These requirements state, for example, that a company must look at the creditworthiness of a customer before entering into a regulated credit agreement, or increasing the amount of credit provided under such an arrangement.  Asset financing involves using a company's balance sheet assets, including inventory, to obtain a loan. The watchdog considers asset finance loans of £25,000 and under as regulated activity for the recovery loan scheme.

The City watchdog also urged lenders to carry out financial crime checks when handling applications for the loan scheme.

"The relevant requirements under the Money Laundering Regulations will continue to apply and lenders should undertake appropriate anti-money laundering and fraud checks on [loan scheme] applications," the regulator said.

The Recovery Loan Scheme, which was launched last month, provides financial support to companies in Britain recovering from the virus crisis, and replaces the government-backed Bounce Back Loan and Coronavirus Business Interruption Loan schemes.

According to the watchdog, as an example, the recovery program is for loans of only £25,000 or more on different products, while Bounce Back was for £2,000 to £50,000 on term loans only, and the Coronavirus Business Interruption program was £50,001 and above on different products.

The Bounce Back Loan program, which was designed to help small and midsized companies, closed to new and top-up applications at the end of March, according the British Business Bank, which works alongside the banks on behalf of the government to administer the loan plans.

Its website also said that Coronavirus Business Interruption Loans, meant for smaller businesses, also closed for new applications the same time.

There are concerns that the bounce back facility has been targeted by criminals or abused by companies. Law firm RPC highlighted on Monday that the number of fraud investigations into bounce back loans by City of London Police rose by 50% in February this year.

The FCA said it is aware of the fraud concerns around bounce back loans, and expects regulated companies to report suspicions and cases of fraud to the British Business Bank and to the police where appropriate. The watchdog added that fraud concerning companies that it regulates should be reported to it. Efforts were also made to reach the British Business Bank for a comment.

A spokesperson for UK Finance, the industry group representing banks, said on Monday that lenders have a range of checks to prevent fraudulent activity.

A government spokesperson also said Monday that it has measures in place to lower the risk of financial support programs being targeted by fraudsters.

A British Business Bank spokesperson said: "An increasing number of checks and controls are being put in place to identify fraudsters and allow appropriate action including criminal prosecutions, for which penalties include imprisonment or a fine, or both."

A report published by Switzerland's Money Laundering Reporting Office last week also linked an increase in suspicious transaction reports to pandemic relief programs.

--Editing by Joe Millis.

Updated: This story has been updated to include comments by the FCA and the British Business Bank.

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