The government should step in to provide protection for small businesses against the misuse of personal guarantees by banks, an employers group has said.
The Federation of Small Businesses said an investigation by the city regulator published on Monday had overlooked the most important aspect.
“The Financial Conduct Authority’s investigation was seriously undermined before it even began by the regulator’s decision not to examine loans to limited company directors,” the federation said. These personal guarantees involve directors using their homes or other assets as collateral when arranging finance.
The federation made a “super-complaint” to the regulator last year in which it called for an investigation into “the harsh lending practices of banks that excessively require personal guarantees for commercial loans.”
He The group has warned that its use was deterring companies from proceeding with loan applicationscausing “disproportionate” hardship when a loan was in default and giving lenders too much “influence over the decision-making processes of distressed businesses.”
The regulator has studied the issue, but has focused on how it affects only smaller traders, as most commercial lending is outside its purview. The federation called that approach illogical and “not good enough.”
“Lenders are more likely to require a personal guarantee when lending to a limited company, and some do so as a blanket and disproportionate policy. “The FCA has not looked at this segment of the lending market at all,” said Martin McTague, the group’s national chairman.
“The chilling effect of being asked to risk your family home “It undermines risk-taking and investment by company directors, while the consequences for a director’s personal finances if a personal guarantee is requested can be devastating.”
He said the government should now legislate to include personal guarantees in the FCA’s “consumer duty”, a set of standards requiring financial services firms to provide a good level of care to retail customers.
The FCA acknowledged that the requirement for personal guarantees to back loans is more common in unregulated business lending, which is outside its scope.
It said that on loans within its remit – generally loans of £25,000 or less to sole traders and small partnerships – the number of personal guarantees in place was low and there were “no material concerns about compliance” with the rules of the industry. He said the number of complaints related to the issue by such borrowers was also low.
Despite analyzing what he called “a very limited part of the SME lending market”, he identified improvements that lenders could make, including better communication with guarantors to avoid misunderstandings and setting a minimum loan amount below which no guarantee would be requested.
McTague warned that “the shadow of personal guarantees” was “a major factor in the decisions of countless small businesses and entrepreneurs” not to go into debt and that steps needed to be taken to “free up small business owners to invest and grow” .