HM Treasury

UK Government’s COVID-19 Support for Businesses: A First Stocktake Three Months On

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Since March, governments around the world have implemented unprecedented measures in an attempt to avoid a severe economic downturn as a result of the COVID-19 pandemic. In the United Kingdom, HM Treasury (“Treasury”) has spearheaded these efforts for the government. The UK government’s measures include the Coronavirus Business Interruption Loan Scheme (“CBILS”), the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”), the Bounce Back Loan Scheme (“BBLS”) and the Future Fund Scheme (“Future Fund”, and together the “Schemes”). To date, the UK government has provided £38.36bn worth of support through the Schemes (directly or via guarantees), enabling finance to be provided to 913,265 companies under the Schemes.[1]

Since their inception, the UK government has published data and statistics on the implementation of the Schemes. This enables a first stocktake three months since the launch of the first of the Schemes.

UK Government Schemes

Each Scheme targets businesses of different sizes and, as such, provides differing levels of UK government-backed support. The Treasury launched:

  • CBILS on March 23. CBILS is available to small and medium enterprises (“SMEs”) with an annual turnover of no more than £45 million. Under CBILS, the UK government provides the relevant accredited lender with a partial guarantee (80%) in respect of the outstanding balance of the relevant facility (subject to an overall cap per lender). Any facility provided under CBILS is up to a maximum amount of £5m.
  • CLBILS on April 20. CBILS is available to businesses with annual turnover of more than £45 million. Facilities of up to £25m are available, via accredited lenders, for businesses with an annual turnover between £45m and £250m. Facilities of up to £200m (in respect of term loans and revolving credit facilities) and £50m (in invoice finance and asset finance facilities) are available to businesses with an annual turnover of more than £250m.[2]
  • BBLS on May 4. BBLS provides loans, through accredited lenders, of between £2,000 and up to 25% of the borrower’s turnover, up to a maximum of £50,000. There are no turnover requirements, but BBLS is targeted at SMEs.
  • The Future Fund on May 20. The Future Fund adopts a different approach to the rest of the Schemes. It is targeted at innovative UK companies with good potential that typically rely on equity investment—i.e., it is more in line with start-up and venture capital financing mechanisms. The Future Fund is an investor-lead Scheme, and the UK government will match the third-party investment (with a minimum of £125,000, up to a maximum of £5m). Such UK government matching investment is by way of subscribing for convertible loan notes issued by the relevant company.

Taking Stock

Nearly three months on, the Schemes have received over one million applications and supported hundreds of thousands of business across the UK.

As of June 14, CBILS had supported a total of 49,247 facilities out of a total of 96,492 applications, equaling an application success rate of 51%. The value of the accepted applications amounts to £10.11bn, averaging just over £205,290 per debt facility.

In contrast, the CLBILS aimed at large corporations has backed facilities in the value of £1.77bn for a total of 279 successful applicants. This totals just over £6.3m per applicant on average. The success rate for CLBILS has so far been lower than that for CBILS: only around 42% of applicants have been approved.

BBLS boasts by far the greatest number of successful applicants: 863,584 small businesses have been able to secure funding through the Scheme. This high number also translates into a high success rate: Just short of 82% of applicants have had their applications approved. Dispensing a total of £26.34bn, businesses have on average obtained £30,500 in finance.

Funding obtained under the Future Fund Scheme has so far totaled £146m. The money has gone to 155 successful companies out of a total of 577 applicants, who have received an average of approximately 940,000. This amounts to a success rate of just under 27%.[3]

Comparing two metrics reveals notable differences between the Schemes:

1. Success rate: Successful applications under BBLS are by far the highest proportion with 82%, eclipsing the other Schemes. In comparison, the Future Fund has provided finance to just 27% of applicants. CBILS and CLBILS have application success rates of 51% and 42%, respectively, sitting in between the two other Schemes.

While the UK government has not published further analysis of these discrepancies, the varying success rates no doubt indicate the more stringent application criteria and more thorough scrutiny, cultivating a more selective application processes for the larger debt facilities (as opposed to the lower facility size and shorter maturity of BBLS loans). 

2. Approved amounts: The average amount of £30,500 granted under BBLS is considerably closer to the UK government’s cap of £50,000 than that of other Schemes. In contrast, the other three Schemes’ average facilities come in significantly below the maximum amount available under those Schemes. CBILS applicants’ average funding of £205,290 sits against a cap of £5m, whereas the average CLBILS facility of £6.3m pales against an available maximum of £25m or up to £200m, depending on the size of the business (although noting the £200m cap was only increased to that amount, from £50m, on May 19). The Future Fund’s average disbursement of £940,000 is somewhat closer to the £5m cap.

As the UK government has not released detailed application statistics, it remains speculative whether lower levels of support to a larger number of businesses has been prioritized, or whether companies are applying for lower amounts of finance than anticipated. Equally, the UK government-imposed caps may have also been designed to meet all eventualities, acting as a ceiling with substantial buffer, rather than suggesting an expectation that most companies would apply for funding close to the respective caps. That said, the low average size of a CLBILS facility of £6.3m is very surprising given that the maximum facility size was increased to £200m cap (from £50m) on May 19 following discussions between the UK government, lenders and business groups.

Another reason why the CLBILS facility size and/or acceptance rates may be low is that, notwithstanding the Chancellor clarifying that CLBILS could be accessed by private equity-owned companies, it has been reported[4] that private equity-owned companies are still prevented from accessing CLBILS (for example, Hawksmoor, of which the majority is owned by Graphite). The rationale for these refusals is that such private equity-owned companies do not meet the CLBILS criteria, and particularly that they were an “undertaking in difficulty” as of December 31, 2019 (this requirement effectively comes from EU state-aid rules). Private Equity firms often fail this test, even if they are operating successfully and are in no financial difficulty, because they tend to be highly leveraged.[5]

Alternative Lenders

In line with the unprecedented scale of economic support, the UK government has also adopted innovative approaches to lending by approving alternative lenders as part of its COVID-19 Schemes. Alternative lending used in this context (i.e., not including true direct lending/alternative credit funds) tends to mean peer-to-peer lending, but it can also include finance from challenger banks, using technology to connect loan investors and borrowers on online platforms. Borrowers turning to these types of alternative lending providers often struggle to secure funding from traditional lending institutions, such as banks. Such loans typically have higher interest rates, a lower duration and are often unsecured.[6] Emerging in the UK in 2005, the practice gained traction in the aftermath of the financial crisis as a lifeline for SMEs and has since increased its market share consistently.

Amid the COVID-19 pandemic in May, the British Business Bank approved four fintechs as part of CBILS to lend money: Assetz Capital, Atom Bank, Ebury and Fleximise.[7] Other approved alternative lenders include Funding Circle, a dedicated SME peer-to-peer lending platform, and Starling Bank, a leading challenger bank.[8] BBLS has accredited a more limited number of alternative lenders, including Starling Bank and Tide, a challenger bank focused on offering banking services to SMEs.[9] The lenders accredited to provide finance to large corporations under the CLBILS remain, to date, traditional lenders, such as Barclays, NatWest or Santander.[10]

The UK government’s move to approve such alternative lenders and fintech companies may illustrate a broader readiness to engage with a budding group of innovative businesses within the lending sector. Such alternative lenders have long constituted a lifeline to SMEs, which may be unable to access funding through traditional avenues.[11] In the current COVID-19 environment, such lenders may become increasingly important to keep SMEs afloat, inside and outside of the UK government-guaranteed Schemes.

We noted in “COVID-19 UK: Finance – Large Business Loan Scheme launched and available to PE owned and large companies – Insight” that it will be interesting to see whether direct lending/alternative credit funds will look to become accredited lenders under CLBILS to take advantage of the UK government guarantee, given that these types of lenders are used to, and are well positioned to, structure and provide bespoke financing solutions. However, as outlined above, to date direct lending/alternative credit funds have not seemed to want to be become accredited lenders.

Concluding Thoughts

Unprecedented challenges often call for unprecedented responses. The UK government’s readiness to pour significant amounts of money into Schemes supporting various segments of the economy has been critical to the survival of many businesses. As updated figures are published over the next months, it will become increasingly evident whether the UK economy’s need for UK government-supported debt facilities will grow, subside or remain steady; how much finance businesses continue to require; and how successful their applications are. The ultimate stocktake of these Schemes, however, is likely still some time away, once the medium- to long-term economic effects of the pandemic crystalize.

[1] UK government, ‘HM Treasury coronavirus (COVID-19) business loan scheme statistics’, June 16, 2002, <https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics#history>.
[2] Companies that borrow more than £50 million through CLBILS are subject to certain restrictions. These restrictions include: (i) no dividend payments to be made other than those that have already been declared; (ii) no share buybacks; and (iii) no cash bonuses, or pay raises, to senior management and/or directors except in certain limited and specific cases.
[3] All figures from UK government, ‘HM Treasury coronavirus (COVID-19) business loan scheme statistics’, June 16, 2002, <https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics#history>.
[4] “Private equity-owned companies miss out on bailout loans”, Financial Times, May 19, 2020.
[5] Please see a future “Insight” to be published on https://covid19.orrick.com/UK/ for further discussion on this topic.
[6] Kenneth Michlitsch, ‘An introduction to alternative lending’, Morgan Stanley Insights, May 20, 2020, <https://www.morganstanley.com/im/en-us/financial-advisor/insights/investment-insights/an-introduction-to-alternative-lending.html>; Funding Circle, ‘What is alternative lending’, February 26, 2019, <https://www.fundingcircle.com/us/resources/alternative-lending/>.
[7] Victor Chatenay, ‘Four new alt lenders have been accredited under the Coronavirus Business Interruption Loan Scheme’, Business Insider, May 11, 2020, <https://www.businessinsider.com/four-alt-lenders-approved-for-cbils-2020-5?r=DE&IR=T>.
[8] British Business Bank, ‘CBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/>, accessed June 20, 2020.
[9] British Business Bank, ‘CLBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/bounce-back-loans/current-accredited-lenders-and-partners/>, accessed June 20, 2020.
[10] British Business Bank, ‘CLBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/clbils/current-accredited-lenders-and-partners-2/>, accessed June 20, 2020.
[11] SME Finance Forum, ‘MSME finance gap’, <https://www.smefinanceforum.org/data-sites/msme-finance-gap>, accessed June 20, 2020. 

FCA Issues Consultation Paper on Proposed Changes to the Senior Managers and Certification Regime

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The FCA has launched a consultation paper setting out a number of technical rule changes to the Senior Managers and Certification Regime (SM&CR). The changes are being made as a result of HM Treasury’s announcement in October 2015 that it would be amending the current SM&CR legislation as it applies to the banking sector. This included the repeal of section 64B(5) of the Financial Services and Markets Act 2000 (FSMA), which required firms to report to the FCA known and suspected breaches of the FCA Rules of Conduct, before the SM&CR regime enters into force on 7 March 2016.

The FCA proposes to remove references to notifications of known and suspected rule breaches in the associated forms, thereby streamlining reporting requirements so that the forms only require firms to inform the FCA of disciplinary action taken against staff as a result of a breach of one or more Rules of Conduct. The pre-existing obligation to report material breaches will, however, remain in place.

The Consultation Paper sets out how the FCA intends to implement the consequential changes to rules and forms that will be required prior to commencement of the regime, as well as examining the likely impact the changes will have on the industry and on consumers.

UK Treasury Announces Policy on New Payment Systems Regulator

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On October 9, the UK Treasury (HM Treasury) published its response to feedback on its March 2013 consultation paper on opening up UK payments, announcing the details of the new Payment Systems Regulator.

In its March 2013 consultation, HM Treasury set out proposals for bringing payment systems under formal economic regulation and establishing a new competition-focused utility-style regulator for retail payment services.  In the response, HM Treasury sets out its policy decisions on the roles, responsibilities and powers of the new regulator, which will be established by the Financial Services (Banking Reform) Bill 2013-14. 

HM Treasury intends for the Regulator’s powers to come into force in late 2014, with the Payments System Regulator fully operational by spring 2015.  Response.

The AIFMD Developments

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HM Treasury Responds to Consultation on Transposing AIFM Directive

On May 13, HM Treasury published its response to its January 2013 consultation on transposing the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFM Directive or AIFMD).  HM Treasury also published a revised draft version of the Alternative Investment Fund Managers Regulations.  The response mainly provides information about HM Treasury’s approach to sub-threshold managers and transitional arrangements.  Response.

FSA Second Consultation Paper on Implementing AIFM Directive: Consultation Period Ends

On May 10, the consultation period ended for the FSA’s second consultation paper on the implementation of the Alternative Investment Funds Managers Directive (2011/61/EU) (AIFM Directive) (CP13/9, also known as CP2).  Final rules will not be published until June, but the Financial Conduct Authority is meant to confirm some of its final policy positions before then to give firms marginally more time to factor these positions into their implementation plans.  The key policy question is whether the FCA will accept AIFM and depositary authorisation or variation applications before July 22.

AIFM Directive Implementing Regulations Published in OJ

On May 16, the texts of two European Commission Implementing Regulations required under the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFM Directive or AIFMD) were published in the Official Journal of the European Union (OJ).  Text One.  Text Two.

Banking Reform Bill Completes Committee Stage in House of Commons

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On April 16, the Financial Services (Banking Reform) Bill 2012-13 completed its committee stage in the House of Commons.  A revised version of the Bill, as amended in the committee stage, has been published.

The main aim of the Bill is to give HM Treasury and the relevant regulators powers to implement the recommendations of the Independent Commission on Banking (ICB) on ring-fencing requirements for the banking sector.  The Bill is intended to make the banking sector safer, more resilient and more resolvable. The Bill will now pass to the report stage in the House of Commons.  Banking Reform Bill.

Consultation on Draft Secondary Legislation to Regulate LIBOR

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On November 28, HM Treasury published a consultation paper on draft secondary legislation to regulate LIBOR and make its manipulation a criminal offence.

The draft Financial Services and Markets Act (Regulated Activities) (Amendment) Order 2013 proposes two new regulated activities:

  • providing information in relation to a regulated benchmark (currently LIBOR is the only proposed regulated benchmark, although there is provision to add others); and
  • administering a regulated benchmark.

A further draft order, relating to “misleading statements” specifies the investments, activities and benchmarks in relation to three new criminal offences dealing with making misleading statements and conducting misleading practices.  These offences will be created by draft amendments to the Financial Services Bill 2012-2013 and will result in the repeal of section 397 of the Financial Services and Markets Act 2000.

It is intended that the Financial Services Bill will receive royal assent before the end of 2012 and that the draft secondary legislation will be considered by Parliament in early 2013.  Comments on the consultation must be submitted before December 24.

Responses to Consultation on Non-Bank Resolution Regime

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On October 17, HM Treasury published a summary of responses in relation to its August consultation on broadening the financial sector resolution regime to systemically important non-banks.  Indicative draft legislation was also published alongside the consultation, to provide a resolution regime for entities such as investment firms, central counterparties and parent undertakings.

The UK government is considering developing the UK’s domestic regime in this area ahead of European legislation being introduced.  Following the consultation, it has amended the draft legislation and is making amendments to the Financial Services Bill 2012 – 2013.  The core changes include:

  • o    narrowing the definition of investment firms through secondary legislation;
  • o    extending stabilization powers to group companies to aid the resolution of a failing entity (subject to certain conditions);
  • o    adding an objective for intervention in a failing central counterparty in order to maintain critical services; and
  • o    excluding the initial proposal to make the members of a central counterparty liable for losses above and beyond provisions already in place (although such loss allocation rules may become part of the operational requirements that a central counterparty must have in order to operate as a clearing house in the UK).

HM Treasury Consultation Paper on the Macroprudential Directive Tools of the FPC

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HM Treasury has published a consultation paper on the tools available to the Financial Policy Committee (FPC) to address systemic risks to the stability of the financial system entitled ‘The Financial Services Bill: the Financial Policy Committee’s macro-prudential tools’ (the “Consultation Paper”).

The Financial Service Bill provides the FPC with two primary powers.  The first of these is the power to make recommendations (which can be made on a comply-or-explain basis) to the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), the Treasury and the Bank of England.  The second is the power to direct the PRA and FCA to take action, and the tools that the PRA should have under this power (the “directive tools”) are the subject of the Consultation Paper.

In December 2011, the Bank of England published a discussion paper entitled ‘Instruments of Macroprudential Policy’.  The Consultation Paper builds on the responses to the discussion paper and proposes directive tools that the FPC should have, including:

  • o    control over the level of the UK’s counter-cyclical capital buffer;
  • o    a direction-making power to impose sectoral capital requirements; and
  • o    once international standards are in place, the power to set, and vary over time, a leverage ratio cap.

HM Treasury invites responses to its Consultation Paper by December 11.

Wheatley Review Discussion Paper Outlines Initial Thoughts on LIBOR Reform

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On August 10, HM Treasury published a discussion paper outlining initial thinking on the review of the London Interbank Offered Rate (LIBOR) being undertaken by Martin Wheatley, Chief Executive-designate of the Financial Conduct Authority (FCA). Discussion Paper. 

The Discussion Paper states that the review of LIBOR will consider and consult on two options:

  • Strengthening LIBOR. The issues identified could be tackled through significant reform of the existing system. Preserving the LIBOR system would limit the costs of transferring existing contracts, whilst reforms could address failings in the system.
  • Finding an alternative to LIBOR. If the problems with LIBOR cannot be resolved, new benchmarks could be recommended to replace some or all of LIBOR’s role in financial markets.

Comments on the discussion paper are requested by September 7 with Mr. Wheatley aiming to present his findings and recommendations by the end of September.