More than 1.5 million small businesses across the UK are gearing up to return some £47bn in government-backed Covid credit from this week, as the first tranche of bounce-back loans fall due.

Lenders have pledged to treat customers fairly, while doing their best to avoid triggering government guarantees that could cost the taxpayer billions of pounds. But campaigners say banks may find it difficult to do right by struggling borrowers, given the pressure to recover cash.

That same tension was allegedly a driving force behind the RBS GRG scandal, which affected thousands of business customers in the wake of the 2007 financial crisis. The government’s Asset Protection Agency has been accused of pushing the bank to pull support for business customers and obtain their assets, following the costly government bailout of RBS in 2008. A shocking memo from 2009 told RBS bankers to “Just Hit Budget!” and offered tips on how to squeeze small businesses for cash: “Rope: sometimes you need to let customers hang themselves.”

The problem is that lending to businesses is unregulated in the UK, which means mistreated borrowers are not protected by law or the Financial Conduct Authority. The Covid debt boom – fuelled by business customers trying to stay afloat during successive lockdowns – is reviving calls to regulate the sector before another scandal surfaces.

MPs on the all-party parliamentary group (APPG) on fair business banking are calling on the government to introduce laws that would protect small and medium-sized business owners and give them leverage in a court or tribunal.

“The conversation is important now because of the huge amount of business debt just taken on during the Covid crisis,” said the APPG’s Conservative chair, Kevin Hollinrake. Some companies will inevitably default on their loans, triggering a chase by debt collectors. “In many cases that will be done well and fairly, but in other cases will be done not very well, and very unfairly.”

In total, more than 1.6 million businesses tapped the government’s three main Covid loan schemes, which between them pumped out credit worth a combined £75bn.

Only the smallest businesses – those with less than £6.5m in annual turnover – can appeal to the Financial Ombudsman Service. Some borrowers will have recourse to the new Business Banking Resolution Service, but it is voluntary, involves just seven lenders, and has been criticised for its eligibility criteria. Most will find themselves at the whim of internal corporate policies and voluntary codes that hold little weight in court.

“There is a mass of regulation out there, which business owners big and small assume protects them,” said Ned Beale, a lawyer at boutique law firm Hausfeld. “But the problem is that regulation is only as powerful as your ability to enforce it. Actually, when push comes to shove, much of this regulation is not enforceable.”

That means businesses take on notable risks when they borrow, even from government-backed schemes.

Just last week, the FCA had to remind borrowers that the Recovery Loans Scheme, which is set to replace bounce-back loans and the other Treasury schemes, was unregulated. The APPG has even proposed putting “health warnings” on loan agreements, since it believes most small and medium-sized businesses do not understand the risk.

Without more stringent protections, MPs fear further scandals could be on the horizon.

“What we’ve learned from history is that we don’t learn from history,” Hollinrake said. “I could see this going wrong again.”

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