FCA probes personal guarantees in small business lending

The Financial Conduct Authority (FCA) is investigating the use of personal guarantees (PGs) in small business lending, due to concerns that they are dissuading firms from accessing finance.

The City watchdog said its investigation comes in response to a “super complaint” from the Federation of Small Businesses (FSB).

The trade body raised concerns that business owners are being put off proceeding with lending applications and are therefore foregoing opportunities to grow.

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It also warned that the wider UK economy may be affected if the growing demand for PGs leads to weakening demand for credit, and business owners looking to sell limited companies may encounter difficulty progressing sales when PGs are in place.

Additionally, the FSB argued that if a small business owner has no alternative to providing a PG for a loan, they should receive the same protections that individual consumers would have under the FCA’s consumer credit and mortgage rules.

Sheldon Mills, executive director of consumers and competition at the FCA, said that the regulator welcomes the FSB raising these issues.

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“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 said.

However, he highlighted that the FCA’s 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,” he said.

The FCA said it has particular concerns about small limited companies, although these sit outside its remit.

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The regulator said it will collect data on the number of PGs in place for sole traders and small partnerships borrowing less than £25,000.

It will also work with the Financial Ombudsman Service (FOS) to monitor the levels of complaints about this issue, and consider whether lenders need further guidance on PGs.

It also plans to review lenders’ policies and procedures when PGs are required for loans.

“If the FCA’s work identifies relevant information, it will share these with appropriate government departments – in particular the Treasury as it considers reforming the Consumer Credit Act,” the FCA said.