U.K. Banks Said to Be Probed Over Government Loan Program

U.K. prosecutors are looking into allegations that the nation’s banks abused government programs aimed at encouraging lending to small businesses, a person with knowledge of the matter said.

The Serious Fraud Office has not yet announced a formal investigation, said the person, who asked not to be identified because the details aren’t public. The SFO is aware of the issue and monitoring developments, said a spokesman in London.

British lenders have toughened their internal controls following a series of scandals including the rigging of benchmark interest rates and mis-selling of insurance on consumer loans. Lloyds Banking Group Plc last month agreed to pay 7.8 million pounds ($13 million) in redress to the Bank of England after traders cut the fees banks paid for an aid program of which Lloyds was one of the biggest beneficiaries.

The SFO is reviewing the use of a government program known as the Enterprise Finance Guarantee, and its predecessor the Small Firms Loan Guarantees Scheme, set up to help boost lending to small businesses, said the person. The prosecutor is looking at claims lenders may have used the program to pass on riskier small business loans to the taxpayer among other allegations, according to the person.

Small Firms

The EFG encourages lending to firms that “have been turned down for a normal commercial loan due to a lack of security or a proven track record,” according to the government website. While the state provides a guarantee to the lender, it’s not involved in the decision-making process.

To be eligible, firms need to have annual revenue of less than 41 million pounds, seek between 1,000 pounds and 1 million pounds and repay the loan over as long as 10 years, the website shows. Barclays Plc, HSBC Holdings Plc, Lloyds, and Royal Bank of Scotland Group Plc are among EFG lenders.

RBS, the biggest government-owned lender, was the largest provider of EFG-backed loans to small companies between the start of the program in January 2009 and June this year, with 902 million pounds, according to data provided by the Department for Business Innovation and Skills. A total of 2.3 billion pounds of loans have been drawn in that period, the data show.

‘Better Position’

Barclays declined to comment. Lloyds, RBS, HSBC and the British Bankers’ Association and the Federation of Small Businesses didn’t immediately return calls seeking comment.

Lawrence Tomlinson, a government adviser who last year published a report saying that RBS pushed small companies that owed it money into difficulties to help bolster earnings, said some companies have approached him about EFG loans. The allegations relate to misleading customers about the program.

“It did look like the bank used the EFG to better their position and didn’t properly advise the customer about the consequences of their part of the deal,” Tomlinson said by e-mail, without naming any specific companies involved.

The program provides lenders with a government-backed guarantee for 75 percent of the value of the loan. While it protects a bank in the case of default, it’s not an insurance for the borrower, according to the government website.

At RBS, Clifford Chance LLP, a London-based law firm, found no evidence the bank distressed viable businesses following Tomlinson’s report, according to an investigation commissioned by the Edinburgh-based lender. The FCA has asked Promontory Financial Group LLC, a consulting firm, and the accountant Mazars LLP to review RBS’s treatment of business customers.

The Times newspaper reported the allegations today.

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