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Financial regulators wrestle with government lending schemes

28 April 2020: the heads of the UK’s financial regulatory bodies are balancing the efficacy of the mass government lending schemes to the economy with risks like fraud and business failure. By ICAEW Financial Services Faculty commissioning editor Brian Cantwell.

The raft of financial rescue measures the government has put out to save the UK economy while the country is in lockdown have posed unique problems for financial regulators.

In the short term, businesses have complained that access to the funding is slow. The number of loans being written is small compared to other countries like Switzerland and Germany.

The government’s original measures to ‘only’ guarantee losses on 80% of the cash mean banks are forced to credit check the remaining 20%, which takes time.

In the long term, regulators are wary of bankrolling businesses that may have failed anyway.

By speeding up the process with a 100% guarantee, the government risks fraudulent claims.

In an evidence session to the Treasury Select Committee last week, the heads of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) said they did not expect every business to survive the coronavirus lockdown.

Even in normal times, 12% of businesses will fail and are wound up, said regulators.

A “bridge” of funding costing upwards of £330bn will hopefully take as many businesses and households through the crisis to the other side, they added.

Saving consumers

Regulators are also trying to keep the financial system together by marshalling financial assistance to workers who have been affected by the lockdown.

The largest scheme is the financial support of the UK workforce, or furloughing, of 80% of wages, up to £2,500 per month per person.1.2 million mortgages are now on a payment holiday for three months. The FCA has introduced a three-month payment freeze for those with motor finance, as well as other measures on overdrafts and credit cards to help people if their income is challenged.

The house and car markets are the largest balance sheet risk to banks if consumers default, which would threaten the integrity of the UK financial system.

Regulators are also trying, like everyone else, to manage an unknown timeline for the financial assistance, and what this could mean for the cost to the economy.

Various models and scenarios are being looked at, ranging from what the Bank of England has prepared for in previous stress tests to the worst-case outcomes recently drawn up by the Office of Budget Responsibility (OBR).

The OBR scenario suggested a three-month lockdown and three-month gradual lifting of the lockdown, which was ‘not implausible given the amount of the economy that is being shutdown’, according to PRA CEO Sam Woods.

The nature of the pandemic has made predicting the financial effects difficult, said regulators.

The reality of the COVID-19 aftermath may mean jobs and businesses will be permanently lost if the lockdown continues for a long time.