The head of the City watchdog has told banks to prepare for a surge in business customers falling behind on their debts, but warned firms must be treated fairly to avoid a replay of 2008 when trust in lenders collapsed.
Speaking to a virtual roundtable of bank bosses on Tuesday, the Financial Conduct Authority chairman, Charles Randall, said it was “an inescapable fact” that some UK businesses would accumulate unaffordable debt during the Covid-19 crisis but that those debts must be dealt with “quickly and fairly”.
“It must not become a drag on the recovery. Lenders and regulators, and the government and the British Business Bank as the authorities standing behind the loans, will need to apply a shared understanding of how to treat borrowers in difficulty,” he said.
The FCA boss said lenders would need to scale up their debt arrears teams quickly and invest in the right training and control. An appropriate dispute resolution system would also need to be ready to handle a potential spike in complaints.
“We can’t allow this to become a replay of the 2008 crisis where the treatment of some small business borrowers did such serious damage to people and to trust in financial services,” Randall warned.
Figures released by the Treasury on Tuesday showed that lenders have so far approved £38.2bn worth of government-guaranteed loans to 913,110 UK businesses since the start of the Covid-19 crisis.
But there are fears that small and medium-sized businesses will be shouldering £97bn to £107bn of unsustainable debt by March 2021 as a result of the pandemic. The City taskforce which put together those projections said a third of that total would come from government-backed loans.
One banking executive told the Guardian that he was preparing to shift significant resources – including hundreds of staff – by October in order to deal with a surge in business customers struggling to repay their debts.
That is when repayment holidays – granted for up to six months – will come to an end, just as government support for employee wages through the coronavirus job retention scheme is expected to wind down.
“We don’t want to find ourselves in the same position we did in March, where literally within 10 days, all of a sudden there was this huge tsunami of demand as the government launched what was initially the Coronavirus Business Interruption Loan Scheme, very, very, very quickly,” the executive said.
“It’s a bit like the government’s mantra of trying to get ahead of the curve. We’re just trying to do the same thing.”
The banking boss said his team had set “severity ratings” for thousands of customers most at risk of a cash crunch, and was preparing experts to handle firms from the hard-hit sectors like leisure, travel and tourism, hospitality and entertainment. “We’re putting all our time and attention into getting teams talking to clients about getting ready for the next few months,” he said.
A second wave of businesses struggling to service their debt is expected to emerge in spring 2021, when small and medium sized businesses will have to start repaying government-backed loans.