LSB announces stronger protections for SMEs using personal guarantees

The Lending Standards Board (LSB) has strengthened provisions on personal guarantees within the Standards of Lending Practice for business customers (‘the business Standards’). The changes will help ensure lenders are clear with guarantors about what they are signing up to, and help avoid situations where a guarantor is surprised to find out they are personally liable for lending to a business.

The updates to the Standards include important new requirements for lenders as well as improvements to existing protections and guidance. The business Standards are recognised by the Financial Conduct Authority (FCA) and are the only lending protections available to many UK SMEs.

Personal guarantees see a guarantor – typically, but not always, a company’s director – agree to be held personally liable for lending to a business.

A need for updated guidance on guarantees was identified by the LSB’s ongoing compliance work and was highlighted in the LSB’s review of the business Standards, published in early 2024. The LSB found that lenders’ processes for reviewing guarantees could be working more effectively to ensure information remained current, particularly where lending had been repaid or where there had been changes at director level.

The key changes to the Standards and accompanying guidance on personal guarantees include:

• A new requirement for lenders to provide guarantors with annual reminders that a personal guarantee remains in place. This will ensure lenders can maintain up-to-date records on who is liable for a guarantee and will help guarantors keep track of any liability. These reminders will serve as prompts for guarantors to speak to a lender if they are no longer associated with a business in receipt of lending, or if they believe the lending is no longer outstanding.
• Updates to the requirements for lenders on advising potential guarantors of the need to seek independent legal advice about whether becoming a guarantor is the right choice for them.
• Enhanced guidance for lenders on providing information to a guarantor about how the personal guarantee will function and their obligations under it.

Laura Mahoney, head of policy at the LSB, says: “Personal guarantees have the potential to have a significant impact on guarantors, so it’s really important that their interests are protected when a guarantee is in use.”

“Positively, we’ve found that issues with guarantees among the LSB’s registered firms are rare. Lenders typically only call on these guarantees as a last resort, and there are very few complaints about their use. But, we still felt there was scope to improve how lenders communicate with guarantors about how guarantees work and their potential impact, and to ensure lenders keep up-to-date information about a personal guarantee. Where there are issues, it’s typically where a guarantor doesn’t realise they are still liable for a guarantee after they’ve left or sold a business – we’ve updated the Standards to reduce the chances of this happening.”

“While updating the Standards, we’ve also considered the important role that guarantees can play in helping SMEs access the finance they need, quickly. We’ve sought to add protections for SMEs and guarantors at the same time as avoiding adding friction to the lending journey that could leave SMEs facing worse outcomes because they can’t access crucial funding.”

The updates to existing provisions in the Standards and accompanying guidance will apply from 12 September 2024. The new requirements on annual reminders regarding guarantees will apply from 8 September 2025 to allow lenders the time to put the necessary processes in place.

Use of Personal Guarantees Varies from Lender to Lender – And They’re Called on Rarely

The LSB’s review of its requirements on personal guarantees included an analysis of their use across the LSB’s registered firm base. The prior lack of information about personal guarantees was an issue highlighted in the Federation of Small Businesses’ (FSB) December 2023 ‘super-complaint’ to the Financial Conduct Authority (FCA) about the use of guarantees.

Using data provided by the LSB’s registered firms who responded to the LSB’s request for information, the LSB found that:

• Personal guarantees are used by lenders across the LSB’s registered firms, but the situations in which they are used varies considerably from lender to lender – they are not a default requirement among registered firms as a whole and, approximately, just one-third of registered firms’ current lending to limited companies is supported by a personal guarantee.
• Registered firms have their own thresholds and criteria for when they will request a personal guarantee. Requests for personal guarantees can depend on factors including the type of lending product a business has applied for.
• Approximately 2% of personal guarantees are called on in a twelve-month period, with some firms calling on under 1% of guarantees. Calling on a guarantee does not always result in enforcement action (with some lenders restructuring or writing off lending instead).
• Complaints regarding personal guarantees are in single figures for most firms, rising to tens of complaints for larger firms.

Scope of the Standards & Further Changes

Given the limited statutory regulation for SME lending, the LSB’s business Standards are the only lending protections for many UK SMEs. These Standards provide lending protections to registered firms’ SME customers with a turnover up to £25m. By contrast, FCA protections are limited by the regulator’s statutory perimeter, which excludes business lending above £25,000 and lending to limited companies.

The LSB’s work to update the business Standards has been carried out alongside a separate project by the FCA as it responds to the FSB’s super-complaint. As the LSB’s review has found, the overwhelming majority of personal guarantees are linked to lending to limited companies – and these companies sit outside the FCA’s perimeter for SME lending. As such, any action the FCA takes will only apply to a small minority of SMEs.