COVID Loan Fraud & Changes To Insolvency Regulation

Covid Loan Fraud

Set up in April 2020, the Bounce Back Loan scheme has been considered to be a huge success in helping businesses overcome the perils and decimation that the pandemic had caused. In total, 1.5 million loans (equating to £47bn) were issued through the initiative, with approximately a quarter of all UK businesses applying in some capacity. The Bounce Back Loans worked by banks, building societies and other accredited lenders loaning businesses up to £50,000, or a maximum of 25% of annual turnover, with the government guaranteeing repayments if the firms defaulted.

In September, the British Business Bank, claimed £2bn of loans had been repaid and £1.3bn had been defaulted on. Moving forward, in December 2021 the National Audit Office stated, ‘Counter-fraud activity for the Bounce Back Loan scheme was implemented too slowly to be effective and government’s activity to limit taxpayers exposure to fraudulent loans is inadequate’.

With a lot of talk and murmurings surrounding liquidations and insolvency, particularly concerning the Bounce Back Loan scheme, it’s hard to keep tabs on all the ongoings and developments. We’ll explain all the potential reform changes to the insolvency services and the details behind the COVID loan write off.

What Is Known About COVID Loan Fraud & How Much Has The Government Written Off?

It estimated that the business department had put the estimated cost of fraudulent loans at £4.9bn, which was 11% of the total payments given out to businesses. According to the Lord Agnew, Conservative Minister in the House of Lords, ‘over 1,000 businesses that were not even trading received Bounce Back loans’, and that ‘over a quarter of the £1bn given to banks by taxpayers has so far been for fraudulent loans’. Lord Agnew in his speech subsequently announced his resignation, leading to huge questions as to why the government have chosen to take this route.

This included the opposition Labour Party, tabling an urgent enquiry in parliament to force ministers to explain why they have written off at least £4.3bn of the funds fraudulently obtained through coronavirus help schemes. During the parliamentary debate on 18th January 2022, Labour’s Chief Secretary to the Treasury, Pat McFadden MP, called on the Treasury to, “launch an investigation into how this happened and do more to recover this money from the fraudsters who stole it in the first place. This writing off comes as families are facing a cost of living triple whammy of rocketing energy bills, tax increases and a decline in real wages.”


Why Have The Government Chosen To Focus On Changing Insolvency Regulation?

What has been witnessed however, is a focus from government to reform insolvency services which will in turn help to identify and punish fraudsters who have benefitted from COVID loans. On 21 December 2021, the UK government issued a consultation entitled “The future of insolvency regulation” asking for input from interested parties by 25th March 2022.

The Insolvency Service is a UK government agency which is designed to deliver economic confidence through supporting those in financial distress, tackling financial wrongdoing, and maximising returns to creditors. It also acts as regulator on behalf of the Secretary of State.

The UK insolvency profession is relatively small in numbers of qualified professionals, with approximately 1,570 professionally qualified Insolvency Practitioners authorised under the Insolvency Act 1986. Their role is to act as officeholders in formal insolvency procedures for individuals and businesses. Supervision and the overseeing of insolvency practitioners is presently controlled and governed by four professional bodies recognised by the Secretary of State at the Department of Business, Energy and Industrial Strategy.

The government have argued that the current regulatory regime of insolvency practitioners outdated and has not kept pace with changes to the direction in which the insolvency market operates and functions. It is proposed that there has been a rise in practitioners employed by a firm which already employs several insolvency practitioners. This has led to calls that the current regime’s inability to tackle behaviour at a firm level has resulted in major conflicts of interests involving the relevant firm and the statutory duties of the individual insolvency practitioner.

The consultation document set out by Lord Callanan, Parliamentary Under-Secretary of State, proposes ‘to modernise the existing regulatory framework by creating a single independent government regulator to sit within the insolvency service and introduce the regulation of firms that provide insolvency services. The consultation is also seeking views on a formal mechanism for compensation where a party has been adversely impacted because of poor service or an error by an insolvency practitioner or a firm. Finally, the consultation has some proposals to amend the current requirements for practitioners to hold security to cover losses to creditors as a result of dishonesty or fraud pending any further substantive change to the regulatory regime.’

This major reform to insolvency services has provoked a cause for concern from many within the insolvency profession. The Institute of Chartered Accountants in England and Wales (ICAEW), the largest insolvency regulator in the UK, ‘welcomed government plans to modernise regulation of the insolvency sector but raised concerns about the transfer of responsibilities from professional bodies to a new single regulator’.

The ICAEW Chief Officer of Professional Standards, Duncan Wiggetts, commented, “The biggest problem with the current framework is not the identity of the enforcing body but the regulatory framework itself. This is focused on the regulation of individual IPs and therefore prevents complaints – and substantial penalties in cases of misconduct – to be brought against firms. In our view, the creation of a single regulator is both unnecessary and potentially damaging to the UK’s insolvency and restructuring profession, and we look forward to explaining why in our response.’’

With the consultation deadline due to be on the 25th March 2022, it remains to be seen whether the government chooses to streamline the regulation of the insolvency sector and whether or not it will result in re-opening the cases of fraudulent COVID loans being handed out, which were consequently written off by government. The backlash from the public, media and cross-party political figures suggests that the government will need to tread carefully and aim to recoup more of the billions wasted on illicit businesses and individuals.

We hope this has outlined to you the scale of the COVID loan fraud during the pandemic, as well as the potential future plans for the insolvency service. If you require any further information on our insolvency services, any government legislation, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.