FCA to probe banks requiring personal guarantees for small business loans

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The UK’s main financial regulator has said it will investigate banks’ practice of requiring personal guarantees from directors of some small businesses when they borrow money.

The Financial Conduct Authority made the statement in response to a “super-complaint” by the Federation of Small Businesses in November, in which the lobby group accused lenders of “harsh” demands that forced entrepreneurs to put their homes at risk unnecessarily.

The FSB claimed that excessive requirements for personal guarantees were a “straitjacket” on business growth, forcing entrepreneurs to put their homes or other assets on the line when taking out finance. 

These guarantees were sometimes required even if a business had limited liability and were a deterrent to businesses borrowing in order to expand, the FSB said. 

The FCA said on Tuesday that it would take a range of actions, including collecting data between April and June 2024 on the number of personal guarantees required for loans of less than £25,000 and which fall under its regulatory perimeter. 

The regulator said it would also review firms’ policies on when personal guarantees are required and work with the Financial Ombudsman Service to monitor complaints. 

“Small businesses are vital to the UK economy, and it is important that they can access lending to help them grow,” said Sheldon Mills, FCA executive director of consumers and competition. 

“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,” he added.

The FCA regulates loans of less than £25,000 made to sole traders or partnerships but it said that overseeing lending to limited companies was outside its remit.  

“If we identify issues outside our remit, we will make these public so that parliament and policymakers can consider whether greater protection should be available to small businesses,” said Mills. 

Martin McTague, FSB national chair, said the regulator’s response was “not good enough”. 

“For the FCA to refuse to gather evidence from regulated lenders, which would illustrate the scale of the problem affecting limited companies is illogical,” he said.

McTague called for the FCA to broaden its data-gathering exercise and said the Treasury should consider expanding the FCA’s remit to include more business loans. 

The FCA’s investigation comes after a parliamentary committee raised concerns last week over a separate finding that more than 140,000 businesses had their accounts closed by the UK’s biggest banks last year.

Banks frequently require personal guarantees from directors of small businesses to ensure repayment.

Banking lobby group UK Finance said previously that personal guarantees reduce risk to lenders, allowing for greater availability of loans at lower interest rates. Most personal guarantees are never called upon by banks, it added. 

The FSB’s super-complaint was the first made to the FCA since the watchdog was included in the regime in 2012. 

In the past super complaints, a fast-track procedure allowing designated consumer groups to raise issues they believe are damaging to customers, have proven a powerful mechanism.

The UK Competition and Markets Authority was given more powers to stop consumer rip-offs following a 2018 complaint by charity Citizens Advice, over the “loyalty penalty” faced by customers who were hit with higher charges if they did not switch telecoms or financial services provider.

The FCA later banned price discrimination against loyal motor and home insurance customers.