Updates to FCA Creditworthiness Assessment Due to Coronavirus
On 4 May, the FCA updated its 27th April published statement on the UK Coronavirus Business Interruption Loan Scheme (CBILS) and the new Bounce Bank Loan Scheme (BBLS) which confirms the FCA’s expectations. CBILS has been in place for a number of weeks and aims to support SMEs with an annual turnover of less than £45m to access loans of between £50,000 and £5m for a term of up to 6 years. BBLS offers loans of between £2000 and £50,000 with a fixed term of 6 years.
To enable fast and efficient lending decisions, the Government has made changes to the criteria that lenders must apply when considering firms for a loan under these Schemes.
This brings some conflict between the new rules and some of the creditworthiness assessment rules within CONC.
As an interim measure, to enable fast loan decisions under the schemes, if firms comply with the requirements of CBILS, the FCA have confirmed they do not expect firms to comply with CONC 5.2A4-34 where the lending is regulated. This section is the ‘creditworthiness assessment’ section that sets out what a firm must do to assess creditworthiness of a customer before entering into a regulated credit agreement, including the subject matter, consideration of the customer’s income and expenditure, the scope and proportionality of the assessment and lending to joint borrowers and businesses.
CBILS requirements around creditworthiness and affordability assessments is currently that the lender considers that the business has a viable business proposition, without regard to concerns about the business’s short-to-medium term business performance due to the pandemic.
However, firms must continue to carry out creditworthiness assessments for all other regulated lending.
In a letter to the Financial Ombudsman, dated 4 May 2020, the FCA asks for clarity on how the Ombudsman will view lender behaviour under the schemes. The letter points out that Government changes to the Regulated Activities Order mean that lending under BBLS that would otherwise have resulted in regulated credit agreements (loans of £25,000 or under to sole traders and other relevant small businesses) will fall outside regulated lending activity. However debt collecting in relation to these BBLS loans will be a regulated activity.
Given that the usual regulatory regime that relates to loans will not apply (other than debt collecting) – including creditworthiness assessments or affordability checks - to BBLS activity, which could be the subject of future complaints – the FCA is seeking comment from the FOS so that firms will have clarity about how the Ombudsman intends to deal with any complaints arising. The FCA has asked that the FOS respond as soon as possible.
The FCA has also offered some clarity and reassurance for staff with concerns about the knock-on effect on the Individual Conduct Rules. The FCA have confirmed that compliance with the requirements of the CBILS and BBLS schemes will be taken as compliance with obligations under the Conduct Rules (with the exception of tier 1 rule 1 (integrity) and rule 3 (regulator cooperation), and tier 2 rule 4 (disclosure to regulator).
On 28th April, the FCA published a ‘Dear CEO’ letter tackling banks on their treatment of businesses negotiating debt facilities during the current pandemic. The letter highlights that some banks may have attempted to ‘exert pressure’ on firms to secure roles on equity mandates that the issuer would not otherwise appoint them to and in some cases, that few or no additional services would be provided.
The FCA highlights that demanding fees for services that are not provided is not in the best interests of clients, undermines market confidence and calls into question the integrity of these firms and individuals. Such actions could breach the FCA rules and Principles for Businesses (PRIN), as well as the individual Conduct Rules. The FCA has confirmed that where it finds evidence of poor practice, it will take action.