FCA initiates investigation into personal guarantees in small business lending

In response to a super complaint by the Federation of Small Businesses (FSB), the Financial Conduct Authority (FCA) has committed to investigating the use of personal guarantees in lending to small businesses.

The FSB has highlighted the negative impact that the growing requirement for personal guarantees is having on small businesses, especially on small limited companies, potentially hindering their ability to borrow and grow due to the increased risks associated with these guarantees.

The FCA’s jurisdiction, as defined by Parliament, does not typically extend to lending for limited companies. Nevertheless, the regulator has resolved to do everything within its power to support small businesses.

As part of this commitment, from April to June 2024, the FCA will gather data to evaluate the prevalence of personal guarantees among sole traders and small partnerships with borrowings under £25,000. It will also review the policies and procedures of certain firms to comprehend the circumstances that necessitate personal guarantees for loans under the FCA’s purview.

Furthermore, the FCA will work closely with the Financial Ombudsman Service to monitor complaint levels concerning this issue and will evaluate if lenders require more detailed guidance on how to apply the FCA’s rules, particularly those in the Consumer Credit Sourcebook when personal guarantees are used. If deemed necessary, the FCA is prepared to consult on and issue new guidance.

Sheldon Mills, the FCA’s executive director of consumers and competition, 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.”

This investigation could also provide critical information for Parliament and its committees as they evaluate business banking and related issues in the future.