Posted on Sep 05, 2014 by Iain McDougall | Tags: EFG, enterprise finance guarantee loan, financial mis-selling, negligence, breach of contract, misrepresentation, financial conduct authority, loan mis-selling, | 0 Comments
Enterprise Finance Guarantee (EGF) loans have been mentioned in the press quite recently in the context of mis-selling. The scheme was designed by the Government at the height of the recession to encourage the banks to lend to small and medium sized businesses that would not meet the bank’s increased lending criteria (i.e. having enough assets to cover the loan in the event of default). In essence the Government was prepared to guarantee these loans in favour of the bank providing the loan finance.
However there have been allegations that these loans were mis-sold. Some businesses were allegedly told or were provided with marketing materials which suggested that the government guarantee was in their favour, or were encouraged to leave assets they owned out of loan applications in order to meet the lending criteria for the EFG scheme when more appropriate products should have been available to them.
The EFG Loan Scheme
The scheme was introduced in November 2008. In order to receive an EFG loan the following criteria had to be met:
- The business had to operate in the UK;
- The business had to have a turnover of less than £41 million;
- The business had to have been seeking finance between £1,000 and £1 million;
- Repayment terms from 3 months to 10 years; and
- Operate in a sector that was eligible for EFG (most sectors were eligible).
Despite the loan being guaranteed by the Government, the borrower was still responsible to the bank for repaying 100% of the loan. In the event of default the bank would always seek to recover the outstanding balance from the borrower and via any security provided by the borrower. If the bank could not recover all funds, the government guarantee would kick-in.
The decision whether to offer the loan rested with the bank. In return for receiving loan finance which they would not usually have access to the borrower would have to pay a premium interest rate as well as a quarterly payment to the Government. The banks were the gatekeepers of the loan application process. The Government did not have a say as to whether a loan was made or not.
The appeal of the scheme to both the bank and borrower is easy to see. The customer gets access to funding they would not normally have been able to obtain. The bank on the other hand can lend money under the scheme safe in the knowledge that the bulk of it will be repaid by the Government in the event that the borrower defaults and is unable to pay the loan moneys back themselves.
The scheme also provided the banks with a useful way to deal with “problem” customers by providing a means by which the unsecured debts of borrowers could effectively be guaranteed by Her Majesty. A borrower with a large unsecured overdraft but with little assets could convert the bulk of that overdraft to an EFG loan. Not all of the overdraft, which is repayable by the borrower on demand i.e. at any point at the bank’s choosing, would be converted to the EFG loan leaving the bank a means to call in all of the borrowing whenever they saw fit.
Were these loans mis-sold?
It would appear that there were serious issues as to how these loans were sold. Broadly speaking the allegations of mis-selling fall in to two categories:
General unsuitability of the product
The first is that the EFG loans were simply inappropriate products for the borrowers in question. Some borrowers should have had access to ordinary borrowing under the banks’ usual lending criteria. Instead they were pushed down the EFG loan route by their relationship managers for the reasons set out above.
As such these borrowers ended up paying higher interest rates and premiums to the Government. Worse, some of these borrowers were advised by the banks not to disclose assets which they owned, which could have been used to securitize or guarantee regular loan finance, to ensure that the borrower met the criteria for the EFG scheme.
The second element of mis-selling is in relation to the nature of the government guarantee. Some borrowers were provided with marketing materials which implied that the Government guarantee covering 75% of the loan sum was in their favour. This was further backed up by statements to the effect that the increased premiums and quarterly payments the customers were paying were in consideration for such a guarantee.
Some customers were apparently told outright by their relationship managers that the Government guarantee was in their favour. As such they entered in to the loan in the mistaken belief that if they defaulted, they would only be liable for 25% of the debt when in reality whey would liable for all sums outstanding. This brings mis-selling cases of this kind in to the realms of misrepresentation and perhaps even fraud when combined with the inaccurate asset statements described above.
Hurdles to Mis-selling claims
As demonstrated by recent cases on interest rate swap agreements claims against the banks for the mis-selling of financial products are notoriously difficult. Companies are still unable to bring actions for breaches of the FCA Conduct of Business Rules which would provide the foundation of cases brought on the basis of general unsuitability. Furthermore the banks in question would no doubt seek to rely on the numerous liability waivers and statement to the effect that no-advice was being provided.
There is also the added difficulty that many borrowers must have known that deliberately leaving assets off their loan applications in order to meet the EFG loan criteria was wrong. A borrower who was complicit in completing an inaccurate statement of assets in order to obtain a loan which they knew they were not actually eligible for in the (albeit mistaken) belief that the money they were borrowing was guaranteed by the government in their favour would have significant hurdles to overcome in bringing a claim.
Have you or your business been sold an EFG loan? We would like to hear from you.
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