UK’s FCA to Investigate Demands for Personal Guarantees on Business Loans

The United Kingdom’s Financial Conduct Authority will investigate the use of personal guarantees by lenders for small business loans.

The investigation was sparked by a “super complaint” from the Federation of Small Businesses, spotlighting a growing concern over the potential barriers these requirements pose for small enterprises looking to thrive and expand, the FCA said in a Tuesday (March 5) press release.

The FSB said the escalating demand for personal guarantees from lenders “has a detrimental impact on” small companies attempting to secure the funding they need to grow, according to the release.

The FCA said in the release that while its defined limits set by the U.K. Parliament exclude direct lending to limited companies from its jurisdiction, it will “do what it can to support small businesses.”

The inquiry by the FCA is designed to shed light on the prevalence and impact of personal guarantees, according to the release.

The FCA intends to collect data to determine the number of personal guarantees in place for sole traders and small partnerships borrowing amounts below 25,000 pounds (about $32,000), the release said.

A review of selected firms’ policies and procedures is also on the agenda, to better understand the circumstances under which personal guarantees are deemed necessary for loans falling under FCA regulation, per the release.

Additionally, the Financial Ombudsman Service will collaborate in monitoring complaint levels regarding this issue, according to the release.

Sheldon Mills, executive director of consumers and competition at the FCA, said in the release that the regulator understands the significance of small businesses to the U.K. economy, recognizes the importance of accessible lending to support their growth, and will remove any barriers to growth that are within 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,” Mills said in the release.

Responding to the FCA’s announcement, the FSB said in a Tuesday press release that these moves are “just not good enough.”

The FCA’s refusal to investigate lending to limited companies ignores “where the real problem lies,” FSB National Chair Martin McTague said in the release.

“The FCA has committed to gather some limited data on personal guarantees over the coming months,” McTague added. “We would now urge FCA to broaden this exercise to gather as much evidence as they can on lending to limited companies by regulated lenders, which is where the real problem lies.”

The news comes a week after the U.K. Parliament’s Treasury Committee reported that more than 140,000 business accounts — 2.7% of all accounts held by small businesses — in the country were closed by major banks in the last year.

These “de-banking” figures were released as part of the committee’s inquiry into whether small businesses have adequate access to financing.