The Federation of Small Businesses (FSB) has issued a “super-complaint” to the Financial Conduct Authority (FCA) regarding the practice of banks demanding personal guarantees for business loans. The FSB is one of several designated consumer bodies which has the power to present a super-complaint to the FCA about a feature of the financial services market that may be damaging consumer interests (under section 234C of the Financial Services Act 2012).

Personal guarantees are often requested by lenders in relation to loans for small or start-up enterprises which have little in the way of assets over which the lender can take security. Directors are rightly cautious of giving such guarantees, as their own home and assets will be on the line if their business defaults on the loan. Personal guarantee insurance may be available to directors, but adds to the already high cost of obtaining finance.

In its letter to the FCA, the FSB notes that cost and availability of credit are a significant challenge for small businesses (with 30% of small businesses which applied for finance in Q2 2023 offered an interest rate of 11% or higher). The FSB's National Chair Martin McTague states that “Adding in personal guarantees on top of higher rates is clamping down on small firms’ appetite and ability to grow and invest.”

According to the FSB, the practice of requiring personal guarantees forms a “straightjacket” on business growth, undermining the protection of limited liability and therefore reducing risk-taking by business owners. The FSB is particularly concerned about lenders imposing a personal guarantee requirement in relation to relatively small loans, where it argues that the risk of serious consequences for the individual is disproportionate to the potential loss to the lender.

The FSB is requesting that FCA conducts its own investigation of this issue by obtaining detailed data from lenders. The outcome of such investigation would inform future action, but the FSB contends that an extension of the regulatory perimeter may be necessary, so that all business lending below a certain threshold is subject to FCA regulation. 

The FSB may hope that if the government can be persuaded to include personal guarantees of business loans within the regulatory perimeter – with all the hassle and red-tape which that implies for the lender – it will make lenders less “trigger-happy” about requesting a personal guarantee in the first place. Also, in a healthily competitive lending market, lenders may then regard requesting a personal guarantee as putting them at a competitive disadvantage, relative to less risk-averse lenders who are prepared to forego a personal guarantee if that makes it easier for them to win the mandate.

The FCA has 90 days to respond and set out how it proposes to deal with the complaint. The FCA has wide powers to act, but a change to the regulatory perimeter itself would be a matter for legislation. The progress of the complaint is certainly one to watch for any lenders in the small business market in particular, due to potential ramifications for lending practices in the future.