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The Financial Conduct Authority (FCA) has today committed to investigate the use of personal guarantees by lenders to support loans to certain small businesses. The steps come in response to a super complaint from the Federation of Small Businesses (FSB) raised in December 2023.

The FSB raised concerns that a growing demand for personal guarantees by lenders has a detrimental impact on small businesses, which they believe dissuades them from borrowing funds to grow. It has particular concerns about small limited companies.

Whilst the FCA’s remit does not include lending to limited companies, the FCA has noted that the work announced by them today reflects its commitment to do what it can to support small businesses within its defined remit.

Simon Goldie, Director of Business Finance at the Finance & Leasing Association (FLA) said: “We welcome the FCA’s measured approach as they seek more information on the operation of personal guarantees in the market. We will work closely with them to ensure that the context of these guarantees is understood, not least the fact that our latest research suggested an enforcement rate of only 2% in 2023.”

The FCA said that it will share any relevant information identified during this process with appropriate government departments – in particular the Treasury as it considers reforming the Consumer Credit Act.

In a statement released today, the FCA has agreed to:

  • Collect data (from April-June 2024) to understand the number of personal guarantees in place for sole traders and small partnerships borrowing less than £25,000.
  • Review a sample of firms’ policies and procedures to understand when personal guarantees are required for loans that come under the FCA’s regulation.
  • Work with the Financial Ombudsman Service (FOS) to monitor the levels of complaints about this issue.
  • Consider whether lenders need further guidance on applying the FCA’s rules and guidance within the Consumer Credit Sourcebook to situations where a personal guarantee is in place. If required, the FCA will consult on and publish guidance in the normal manner.

Sheldon Mills (pictured), Executive Director of Consumers and Competition at the FCA, said: “Small businesses are vital to the UK economy, and it is important that they can access lending to help them grow – so we welcome the FSB raising these issues. We will play our part to better understand whether lenders’ practices are causing unnecessary barriers to growth and, if necessary, act to remove any within our remit.

“That remit, set by Parliament, is limited when it comes to small businesses. If we identify issues outside our remit, we will make these public so that Parliament and policy makers can consider whether greater protection should be available to small businesses.”

Commenting on today’s response from the FCA, Martin McTague, FSB’s National Chair, said: “The FCA’s response is just not good enough. Our super-complaint outlined why there is a potentially systemic problem when it comes to personal guarantees, and the chilling effect they have on growth and investment. For the FCA to refuse to gather evidence from regulated lenders, which would illustrate the scale of the problem affecting limited companies, is illogical.

“The fact that the FCA has failed to even gather any evidence on lending to limited companies, only increases the urgency for Treasury to consider an expansion of the regulatory perimeter.

“We are not at all calling for personal guarantees to be banned – we recognise their role in lending to SMEs, but it is the excessive imposition of them which we wanted to highlight.

“Anecdotally, we hear that requesting personal guarantees is almost a blanket policy for some lenders, which cannot be right if the loan value is relatively small, and there’s no evidence that the business will struggle to repay.

“Personal guarantees sit in a twilight zone in terms of regulation, as they turn a loan to a limited company into a personal liability, yet the individual borrowers aren’t covered by consumer protections that exist for other kinds of lending.

“We strongly believe the FCA ought to have gathered data on the extent to which personal guarantees are being requested by regulated lenders, and to assess the economic damage caused as a result. Data is also needed to assess whether particular groups or types of would-be borrowers are affected by the issue more than others. Individual borrowers have very little recourse when set against the power held by the banks.

“Since sending the super-complaint, our first since being granted super-complainant status ten years ago, we have heard from numerous businesses about the negative consequences a personal guarantee has had on them.

“The FCA has committed to gather some limited data on personal guarantees over the coming months. We would now urge FCA to broaden this exercise to gather as much evidence as they can on lending to limited companies by regulated lenders, which is where the real problem lies.

“The market is not simply going to sort this out, and our anecdotal evidence suggests there is a strong case for expanding FCA’s regulatory remit to include personal guarantees requested when lending to limited companies. We will be keen to discuss this with the Treasury in due course – whoever is in power.”

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