Potential code of conduct for collecting COVID-19 related debts cautiously welcomed

There are reports that UK banks are drawing up an industry-wide code of conduct for pursuing businesses that end up defaulting on government-backed loans relating to the coronavirus pandemic.

Repayment of the coronavirus business interruption loan scheme (CBIL) and bounce back loan scheme (BBL) for SMEs are interest-free for the first year, with the first repayments due in spring 2021.

CVR Global’s David Elliott has welcomed the prospect of a code of conduct, and hopes it will go some way to avoiding mass business closures, but also warned of its potential limitations.

David said: “The government has already made it clear that they expect the banks to take steps to recover the loans rather than just relying on the government guarantee, so engagement with customers at an early stage will normally produce the best results.

“Any code of conduct should be based on the banks and their customers working together to agree an affordable repayment schedule, and whilst the bank ordinarily are protecting their shareholders now, they will in effect be protecting taxpayers money.  A balance will be required between recoveries and ensuring as few businesses close as possible.

“However, the approach of the banks is likely to depend upon the customer and the type of loan.

“Those customers who have a CBIL are likely to have borrowed more and have more complex finances. In these cases the banks will be more involved and will no doubt work closely with the customer to work through the problems.

“The treasury has just announced that one million BBLs have been issued, with an average value of around £30,000.  There have been concerns raised about the number of defaults that could arise, with up to 500,000 businesses possibly defaulting on some estimates.

“This level of default could simply swamp the banks and make a code of conduct redundant.

“These businesses are also likely to have few assets if they fail and the banks will simply join the queue of creditors wanting to be repaid.

“A code of conduct will be important moving forwards as it will allow the maximum recoveries to be made, but it will only be useful in the right circumstances.”