The FSB's super-complaint against the FCA centres on the prevalent use of personal guarantees (PGs) by lenders for business loans to small and medium-sized enterprises (SMEs). The FSB argues that this practice is detrimental to small businesses, imposing excessive financial risk on business owners and potentially stifling economic growth. Specifically, the FSB is concerned about the chilling effects these guarantees have on business owners' willingness to borrow, which could hinder their businesses' ability to grow and contribute to broader economic challenges.
The FCA's response to the super-complaint, published on March 5, 2024, outlines several steps it intends to take within its regulatory limits. These include collecting data from lenders about the prevalence and use of PGs, reviewing lenders' policies, and working with the Financial Ombudsman Service to monitor complaint levels about PGs. However, much of the lending activity involving PGs falls outside the FCA's regulatory perimeter, which limits the extent of direct intervention the FCA can undertake.
The FSB criticised the FCA's response as inadequate, arguing that the FCA's planned actions do not sufficiently address the systemic issues linked to personal guarantees. The FSB suggests that the FCA should expand its regulatory remit to include PGs used in lending to limited companies, which currently fall outside its scope. They argue that this would provide better protection for business owners, aligning their safeguards more closely with those available to individual consumers.
Recommendations for Regulatory Improvements
- Expanding Regulatory Perimeter: One of the primary recommendations would be for the FCA to expand its regulatory perimeter to include personal guarantees for limited company loans. This could provide protections similar to those existing for individual consumers, mitigating some of the financial risks that business owners face.
- Enhanced Transparency and Disclosure: Lenders should be required to provide clear, comprehensive disclosures about the terms and implications of personal guarantees. This would help ensure that business owners are fully informed about the risks and conditions before committing to such guarantees.
- Standardised Risk Assessment Protocols: Introduce standardised protocols for lenders to assess the necessity and proportionality of personal guarantees. This would help prevent the excessive and unwarranted use of PGs, especially for smaller loan amounts that might not justify such extensive collateral requirements.
- Improved Support and Remedies for Guarantors: Strengthen support mechanisms for guarantors, including better access to independent legal and financial advice. Additionally, the FCA could develop specific remedies for situations where PGs are found to be inappropriately applied or where they lead to disproportionate financial hardship.
- Monitoring and Enforcement: Increase monitoring of lenders' use of PGs and enforce compliance with any new regulations or guidelines regarding their use. This could include periodic reviews of lender practices and heavy penalties for non-compliance to deter unfair or harmful practices.
These recommendations aim to address the concerns raised by the FSB and improve the regulatory framework to better protect SMEs from the potentially harsh impacts of personal guarantees in business lending.
In our view, part of the problem is that banks do not have the appetite for SME lending unless there is a government guarantee, because it's not as profitable as other activities. The banks are global organisations which prefer to invest in faster-growing economies.
It would also help if there was a competitor to the government guarantee scheme the Financial Services Compensation Scheme. This expensive service protects consumers in the event of a bank failure. However, no such scheme exists for the protection of customers using peer-to-peer lending, where the industry has seen insolvency practitioners apply substantial fees for undertaking the Wind Down of a platform. The regulator's work on Wind Down Plans has improved things, but customers are still not protected from losses arising from a platform failure, in the same way as they are with banks.
rebuildingsociety.com has reached out to the FSB offering to assist with lobbying activity to the British Business Bank. We hope that future government guarantees are more accessible to SMEs who we believe should be able to access the scheme, agnostic of the lender.
