On 8 December 2023, the FCA received a ‘super-complaint’ from the Federation of Small Business (the FSB). This focused on lender practices of requiring personal guarantees (PGs) to support lending to small and medium sized enterprises (SMEs). It was the first of its kind since the super-complaint regime was introduced in 2013. On 5 March 2024, the FCA published its response, which can be found here.

What is a super-complaint?

A super-complaint can be made by a consumer body where they consider there is a feature of a market in the UK for financial services that is or appears to be significantly damaging the interest of consumers. The FCA is required to publish a response to a super-complaint within ninety days of it being made.

What was the super-complaint?

The super-complaint’s primary concern was that ‘a growing demand for PGs by lenders has a detrimental impact on small businesses’.

It argued that the widespread use of PGs disproportionately impacted SMEs and their directors who could lack the resources or bargaining power to negotiate more favourable terms. Further, that the need for PGs stifled entrepreneurship and underscored an asymmetry between the parties, with directors often accepting terms without fully understanding the implications.

The FSB requested that the FCA gather data to understand the scale of the issue and requested that it invite the Treasury to amend its regulatory perimeter to provide those giving PGs up to £25,000 the same consumer protection provided by the FCA’s CONC and MCOB rules.

What do lenders say?

Lenders argue that PGs are a necessary tool to manage risk effectively, particularly in the context of SMEs with limited financial histories. Without such assurances, lenders could be less willing to extend credit which would, in turn, hinder access to funding for growth and investment.

What was the FCA’s response?

For unregulated lenders, it is important to note that the FSB acknowledged in the super-complaint that much of the lending complained of fell outside of the FCA’s remit (lending to limited companies where directors are required to provide PGs is not a regulated activity).

Likewise, in its response, the FCA recognised that its remit related to consumers by addressing lending which fell within its regulatory perimeter and lending which fell outside of it.

For lending falling within its regulatory perimeter, the FCA plans to collect data from lender firms to understand the number of PGs vis-à-vis SME lending and to sample lenders’ policies and compliance. It will provide updates as its work progresses.

For lending outside of its regulatory perimeter, the FCA has simply said that if its work on lending within the perimeter identifies areas of potential harm outside of its perimeter, it will share any relevant information with the Government and those parliamentary committees with an interest in SME finance and business banking. The FCA felt that any findings may be of use to the Government when it considers reforming the Consumer Credit Act 1974 (which it announced its intention to do in June 2022).

What now?

Understandably, the super-complaint has ignited a contentious discussion. Pivotal to the discussion at hand is the tension between access to finance for SMEs and protecting lenders from default risks. PGs, which hold individuals (usually directors) personally liable for business debts have traditionally been a common feature in loan agreements. They provide assurance to lenders. However, borrowers argue that by placing individual liability on the line, they inhibit innovation and growth.

Despite bringing an apparent issue to the fore, there is no change for unregulated lending, nor can there be one without regulatory and/or legislative change. Unregulated lenders will likely already have policies in place polices for when a PG is required and their justification for this, which would avoid any current criticism of applying blanket policies against their lending books.

Paul Luukas, Associate Director