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1. Creditworthiness and Affordability
The Financial Conduct Authority (“FCA”) has recently indicated that it has a continued interest in firms lending in a way that does not lead to harm to consumers, including small businesses who are protected by the consumer credit regime.
Where a customer is applying for a business loan to the which the Coronavirus Business Interruption Loan Scheme (“CBILS”) applies, the fact that the customer may at the time of the application be temporarily experiencing financial pressure does not mean that the firm is prevented by CONC 5.2A.5 from making the loan.
The firm may look historically at data from before the period immediately before the coronavirus pandemic, such as trading accounts for the business and the customer’s bank account. Forecasts from the business owner on expected levels of income and expenditure in a period post the stresses connected to the coronavirus pandemic may also be relevant in assessing affordability.
The terms of the loan, including when the obligation to make repayments begins to apply and whether there is a pause during any period of financial pressure linked to coronavirus will also be relevant.
The FCA even go so far as to say if the loan has been granted on the basis that there will be a future increase in income, but the customer’s income does not in fact increase in line with expectations so as to enable the customer to make the repayments as required under the terms of the business loan, the firm should consider deferring or limiting the obligation to repay until the customer’s income has reached an appropriate level where they can make these repayments.
2. Dear CEO Letter
The FCA has published a “Dear CEO” letter on SME Lending.
The FCA reiterates that over the last few weeks it has seen very significant efforts being made by the banking sector to deal with the impact of the coronavirus pandemic. The FCA confirms that its approach during the pandemic is pragmatic and it will wherever it can assist banks to help their customers and to engage constructively and extensively with them and their representative bodies.
A summary of the key points from the letter is provided below.
- The letter reports that the FCA has issued new guidance to those participating in the CBILS;
- Together with the Prudential Regulation Authority (“PRA”), the FCA will monitor the level of lending that is flowing to Small and Medium Enterprises (“SMEs”);
- Importantly, although SME lending is mostly outside the FCA’s scope, the FCA reminds firms that the Senior Managers and Certification Regime (“SMCR”) defines the responsibilities and accountability of senior managers as being for all activities they conduct whether they are regulated activities or not.
- Accordingly, the FCA confirms that it expects that for each bank that lends to SMEs there is a Senior Manager, or Senior Managers where appropriate, with clear responsibility for SME lending.
- The FCA will consider the Lending Standards Board’s Standards of Lending Practice for Business Customers in looking at how Senior Managers and other relevant employees under the SMCR discharge their duties.
- The FCA expects CEOs and Boards to take reasonable steps to ensure that Senior Manager(s) with responsibility for small business lending is/are discharging his/her responsibilities suitably. The FCA will also look for evidence that the Board is collecting information on the bank’s treatment of SMEs and, where appropriate, challenging the Senior Manager.
- The FCA does however reassure firms that they will take account of the fact that banks may now be making different judgements and adopting a different risk tolerance than they would prior to the Covid-19 pandemic in order to support SMEs.
The FCA has established a new small business unit. This unit will coordinate the activities of the FCA across small business issues, in terms of ensuring regulated firms are supported to manage through the challenges posed by the current crisis, gathering intelligence about the treatment of small businesses by financial services firms during the crisis and ensuring a co-ordinated response by the FCA to any issues identified.
The FCA reiterates that it recognises that SMEs are vital to the UK economy.
Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.