The Enterprise Finance Guarantee Scheme: An update from the Regulator
Published 15 October 2014
Background: Enterprise Finance Guarantee Scheme
Launched in January 2009, the Scheme was designed to increase the lending available to small and medium sized businesses ("the Businesses"). Following the recession, high street banks ("the Banks") were reluctant to lend to businesses without adequate security for the requested loans.
Under the Scheme, the Government provided a 75% guarantee on all loans issued to Businesses that could not satisfy the lending criteria of the Banks. This meant the Government would cover the Banks for up to 75% of the capital lent. The Banks controlled the application process and the decision whether to grant a loan rested with the Banks. The Government did not have a say as to whether the loan was made or not.
Although the loan was underwritten by the Government, the borrower remained responsible for repaying the whole loan. In the event of default, the Banks would attempt to recover the outstanding balance from the borrower and would enforce any applicable securities. Only if the borrower was unable to repay the arrears in full, could the Banks could rely on the guarantee.
Issues arising from the Scheme
Although neither the FCA nor the SFO have named the banks concerned, two primary allegations exist in relation to the administration for the Scheme. Firstly, business customers were misinformed by the Banks as to their potential liability under the Scheme. Secondly, the Banks actively encouraged customers to remove potentially valid securities from their Application Form to bring the Application within the remit of the Scheme.
A specific example: The Royal Bank of Scotland and C May Brickwork Limited
In one example of alleged mis-selling, it is reported that the Royal Bank of Scotland ("RBS") is facing legal action from C May Brickwork Limited in relation to the Scheme.
Mr May, Managing Director of the Claimant company, claims that, under advice from RBS, he replaced the company's £245,000 overdraft with a £150,000 EFG Loan and a £70,000 overdraft. Mr May says that the decision was based on assurances from RBS that, in the event his company failed, he would only be liable to repay 25% of the borrowed amount. By contrast, under the terms of the loan, Mr May remained liable for the entire amount. The Scheme only covered RBS for 75% of the arrears. It did not affect the liability of the borrower.
Furthermore, Mr May alleges that representatives from RBS asked him to remove details of a second home, offered as security, from the application form. It is submitted that, had the second home been included, Mr May would not have qualified for an EFG loan. RBS would then have provided the loan in accordance with their standard terms and conditions, without risk to the taxpayer.
Requests for an Independent Enquiry
Over the last twelve months, there have been numerous calls for an independent enquiry. In August 2014, Mr Lawrence Tomlinson, former adviser to the Department for Business, Innovation and Skills and author of the Tomlinson Report into RBS' Global Restructuring Group, commented that 'it did look like [an unnamed] bank used EFG to better their position and didn’t properly advise the customer about the consequences of their part of the deal'.
Responding to news that the SFO was monitoring the situation, the Shadow Business Secretary, Chuka Umunna, stated 'these are serious allegations and it is welcome that the Serious Fraud Office is looking into them. The Business Secretary should order his Department to carry out a full investigation'.
Future Action and Potential Implications
From a regulatory perspective, banks involved in this controversy can expect particular scrutiny from the FCA. The allegations relate both to the ill-treatment of customers, but also to the abuse of a government scheme aimed at kick-starting an ailing banking system and the consequent potential mis-use of taxpayer money.
Very recently, Lloyds/Royal Bank of Scotland was handed a substantial fine for its manipulation of a Repo Rate submission in order to reduce the fees payable by them to the Bank of England for participation in the tax-payer backed Special Liquidity Scheme. Whether criminal liability arises will depend on the facts.
DAC Beachcroft act for parties involved in regulatory investigations concerning allegations of abue of this nature.
For more details please contact:
Jonathan Brogden, Partner
+44 (0) 20 7894 6290
Scott Wallberg, Trainee Solicitor
+44(0)20 7894 6366