LSB tightens rules on personal guarantees for SME lending

The Lending Standards Board (LSB), a voluntary self-regulatory body for the banking and lending industry, has strengthened provisions on personal guarantees within its Standards of Lending Practice for business customers, in a bid to ensure lenders are clear with guarantors about what they are signing up to and to help avoid situations where a guarantor is surprised to find out they are personally liable for lending to a business.

The LSB’s business Standards are recognised by the Financial Conduct Authority (FCA), and are designed to provide lending protections to registered firms’ SME customers with a turnover up to £25m. A need for updated guidance on guarantees was identified by the LSB’s ongoing compliance work and was highlighted in its review of the business standards, published in early 2024.

The updates 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.  

LSB’s review found that personal guarantees were not a default requirement for SME lending, with only one-third of registered firms’ current lending to limited companies supported by a personal guarantee, as registered firms have their own thresholds and criteria for when they will request a personal guarantee.

Approximately 2% of personal guarantees are called on in a twelve-month period, with some firms calling on under 1% of guarantees. LSB says 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.

“Lenders typically only call on these guarantees as a last resort, and there are very few complaints about their use. 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.”

Mahoney said the updates were also intended “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 Federation of Small Businesses’ (FSB) made a ‘super-complaint’ to the FCA about the use of guarantees in December 2023, but the regulator has indicated that it will be conducting only a limited review of the issues. The LSB pointed out that, as its own review confirmed, 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.

The updates to existing provisions in the LSB 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.

Access the updated Standards of Lending Practice for business customers here.

The FSB’s national chair, Martin McTeague, was a speaker at the AFC Summer conference, and discussed the use of personal guarantees in a session looking at how lenders can better serve SMEs.