Exploring new terrain in personal guarantees: potential updates to the Standards of Lending Practice

Briefing

A number of issues need to be considered by a lender who is advancing funding which is supported by a guarantee provided by an individual. Issues of capacity, potential undue influence and consumer credit legislation may need to be considered, together with the Standards of Lending Practice. The Standards of Lending Practice are issued by the Lending Standards Board (the LSB), the primary self-regulating body for the banking and lending industry and are divided into Standards of Lending Practice for personal customers, and for business customers. The standards are voluntary benchmarks rather than legal obligations.

In this article, we focus on the Standards of Lending Practice for Business Customers (the Standards for Business Customers) which apply where the guarantee is given by an individual to guarantee the obligations of a small business (in broad terms, a business or organisation which has an annual turnover of up to £25 million). The Standards for Business Customers apply to products offered for business lending purposes including mortgages, overdrafts and loans. They are an FCA-recognised industry code which undergoes regular reviews.

Recent developments in this area – Public Consultation dated June 2023

The most recent review of the Standards for Business Customers took place via a public consultation in June 2023 (the Public Consultation). The results of the Public Consultation were published recently, in February 2024 in a report published by the LSB (the LSB Report).

The aim of the review and Public Consultation was to ensure that:

changes in the regulatory, social and economic environment are taken into account within the Standards for Business Customers
the protections provided continue to reflect industry best practice
the products covered by the Standards for Business Customers remain appropriate in scope.

It is worth noting that at the time of the Public Consultation there were a number of regulatory activities yet to reach their conclusion, which were set to impact on business customers, such as the reform of consumer credit legislation and the embedding of the FCA's Consumer Duty for new products. Any issues arising out of these changes were therefore not directly addressed, however the LSB reported that it would continue to monitor regulatory developments to ensure the Standards for Business Customers continued to reflect wider regulatory requirements.

Overall, feedback received from the Public Consultation indicated that the existing framework and content of the Standards for Business Customers set appropriate levels of protection for business customers. However, there were some gaps in good practice identified, particularly focused around:

how firms can better support business customers to achieve their sustainability goals
ensuring all customers are able to access and use products in a way to suit their needs
the development of guidance to support the application of the Standards for Business Customers within the digital landscape
the development of new guidance, or enhancement of existing guidance, to support the application of the Standards for Business Customers in areas such as personal guarantees and declined applications.

Spotlight on personal guarantees

One of the gaps in good practice that was identified by the Public Consultation was the need to develop new guidance or enhance existing guidance to support the application of the Standards for Business Customers in areas such as personal guarantees.

The need to develop this area is reinforced by the Federation of Small Businesses (the FSB) filing of a "super-complaint" to the FCA (the first of its kind since the application of the regime to the FCA in 2013) claiming that lenders demanding personal guarantees as security for small and medium-sized enterprises may be causing harm to those businesses and individuals. The demanding of personal guarantees was suggested to cause the following issues for applicants:

deterring them from seeking loans due to the potential for personal liability
forcing them to take out costly insurance to cover the risks
driving them towards an overly risk-averse approach to running their businesses.

The aim of the super-complaint was for the FCA to consider extending its regulatory scope and to create specific rules to protect the interests of small business owners and guarantors, as most lending activity involving personal guarantees currently falls outside of the FCA's regulatory powers: the remit does not include lending to limited companies.

This super-complaint was made in December 2023, and so was addressed by the LSB in their recent report on the Public Consultation.

How are personal guarantees addressed in the existing Standards for Business Customers?

The following limited guidance is included in relation to individuals providing guarantees. Registered firms are required to ensure that:

customers are informed if any security, such as guarantees, is required to support liabilities and why

the amount of security is appropriate for the amount borrowed
individuals are made aware, if providing a guarantee, of their obligations under the agreement and that they have the option to seek legal advice should they wish
unlimited guarantees are not accepted unless to support a customer's liabilities under a merchant agreement
where an individual provides a guarantee, they are able to request information regarding their current level of liability at any point, as long as they provide their permission and there is no breach of confidentiality obligations.

How could the findings of the Public Consultation be used to improve the Standards for Business Customers?

While the existing guidance provides a helpful starting point, the Public Consultation found that the Standards for Business Customers would benefit from additional guidance in the following areas:

guidance should not only be provided at the time of entry into the guarantee, but also during its lifetime, and in relation to the ongoing maintenance of the guarantee.
processes for reviewing personal guarantees, and indeed other types of security, could be more effective to ensure that information held is kept up to date and that account is taken of where lending is repaid, or where there are changes at director level. It was revealed that the majority of complaints about personal guarantees typically arise after the guarantor has left the business, or the business has been dissolved. These could be avoided with more developed guidance on good practice when it comes to monitoring personal guarantees. More emphasis could be placed on the lenders to keep accurate records or put in place processes for better management of records of changes to directors or to company solvency.

The LSB Report also sets out that they plan to engage with the FCA's process in relation to the super-complaint and to work with key stakeholders, such as the FSB, to provide input on the issues raised as they develop their further guidance.

Next steps

The next stage, before we see any formally updated guidance, will be the output of the LSB's oversight work, which will run across 2024, and any further developments resulting from the super-complaint, also being investigated in 2024, with the FCA collecting data across April to June to assess the prevalence of personal guarantees for sole traders and small businesses.

On 5 March 2024, the FCA announced it would be investigating the use of personal guarantees by lenders to support loans provided to small businesses. This investigation will focus only on sole traders and small partnerships, with limited companies being outside of their remit. However, for issues falling outside of this scope, such as where directors of limited companies provide personal guarantees, the FCA stated that they would share these with the Government so that Parliament and policy makers can consider whether greater protections should be made available.

Concluding comments

The protection of personal guarantors is an important area and one in which positive change bringing in further protection for guarantors is likely to be welcome. It was noted in the FSB's complaint that excessive demands for personal guarantees from banks can leave business owners more likely to abandon business and growth plans. Were there greater emphasis on good practice in this area, it may assist borrowing by increasing the protections offered to individuals and their confidence in providing this type of quasi security. There is another aspect of this as well, which is that alternatives to personal guarantees could be increased, for example through increased Government support for small businesses, which may decrease the reliance on personal guarantees to support such lending.