What is an EFG Loan?
An Enterprise Finance Guarantee Loan (more commonly known as an EFG Loan) is a Government scheme which was launched in January 2009 to encourage Banks to loan to Small and Medium sized businesses (SME) following the Credit Crunch.
Under an EFG Loan the Government would agree to act as a guarantor for up to 75% of the finance loaned. Therefore if the borrowing SME defaulted then the Bank would only stand to lose up to 25% of the loan. The ultimate decision of whether or not to lend would still rest with the Bank and the government required them to only lend to viable SME’s. At the time the Banks had come under criticism for refusing to lend to almost all SME’s, therefore the EFG scheme aimed to greatly increase the number of loans provided by reducing the risk to the Banks.
It is important to note that the SME would still be liable for the full loan and interest. The Government scheme provided a guarantee to the Bank and not the SME. If the SME defaulted on the loan then the Bank was still expected to take all necessary action against the SME such as taking legal action and/or realising any collateral provided.
If a loan was provided then the SME would pay an additional premium to the Government on top of the interest due to the Bank.
Why could it have been Mis-Sold?
The EFG loan scheme was a very appealing proposition for the Banks. Under conventional lending the monies recovered following proceedings or realising collateral (if any), could be insufficient giving a shortfall.
Under an EFG loan the Bank’s maximum exposure was limited to 25% of whatever was remaining on the loan. Further the Bank was still entitled to place conditions on the loan, such as requiring collateral, effectively giving the Bank two opportunities to recover funds.
An SME would be looking to lend money as cheaply as possible. An EFG loan attracted an additional premium payable to the Government and provided no direct benefit to the SME if other options were available.
This creates a potential conflict in which the Bank would prefer the SME to obtain an EFG loan whereas in most cases the EFG loan should have been the loan of last resort.
How may it have been Mis-Sold?
Like many financial products an EFG loan may have been mis-sold in a number of ways. Examples include:-
1) Misrepresenting the nature of the Government guarantee
During the sale process the Bank or their authorised representatives may have misled the SME into believing the Government was providing the guarantee to the SME. The SME would then believe that they would only ever be liable for 25% of the outstanding loan.
Whilst the SME would seek to ensure that its debts were met, the false belief that they had a 75% “safety net” could have led the SME to take additional risks. Examples of these risks include providing collateral that may not have ordinarily have been given and/or borrowing more money to expand over and above their initial proposal.
The reality is that the SME was liable for 100% of the loan and that the Bank needed to take steps to enforce the loan before the guarantee would apply.
At least one bank has admitted that EFG Loans have been mis-sold in this way.
2) Encouraging the SME to take an EFG loan when other options were available
The EFG Loan should have been the loan of last resort in most cases. There were many SME’s who had the necessary collateral or trading history under which they should have been offered a more traditional loan.
Under the EFG scheme it was a commercial decision for the Banks to decide the value the collateral and make the decision whether or not to offer a traditional loan. As demonstrated before the Banks had a vested interest in protecting themselves by offering EFG loans when possible.
Consequently an SME may have been encouraged (either by mis-representing the nature of the EFG loan or suggesting it was the only option) to take out an EFG loan when it should been provided with other options.
Due to the SME being mis-sold an EFG loan it was placed in a position in which the overall cost of lending, due to the guarantee premium, may have been higher than it should have been.
What should I do if I suspect I was mis-sold an EFG loan?
If you have taken out a loan through the EFG loan scheme then it is important to consider the events that led up to you taking the loan. Consider whether any of the above two scenarios apply to you or whether something just did not feel “right” about how the loan was presented to you.
If you believe that you may have been mis-sold an EFG loan then do not delay in contacting us on 01204 322805 to discuss whether you have a claim. We have recovered millions on behalf of customers that have been mis-sold complex financial instruments and loans.
It is important to note that it is worth reviewing the loan even if you have maintained repayments, repaid the loan and/or subsequently refinanced the loan.