On 08 December 2023, we received a super-complaint from the Federation of Small Businesses (FSB). This is the first super-complaint we have received since the super-complaint regime was applied to the FCA in 2013.
Summary of the Super-Complaint
The super-complaint centres on the practices of lenders, specifically the requirement for personal guarantees (PGs) to support lending to small and medium-sized enterprises (SMEs).
Small businesses are a vital part of the UK economy. FSB has an important role to play in supporting smaller businesses to succeed and grow and we welcome FSB raising these concerns with us.
We have carefully considered FSB’s concerns and have met with other relevant stakeholders to better understand the issues (listed in Acknowledgements).
As FSB acknowledged in their complaint, much of the lending they are concerned about sits outside the FCA’s regulatory perimeter. Consequently, our ability to investigate and act is restricted.
Government and Parliament set the limit of our perimeter through legislation and have regularly reviewed issues in the legislative framework as it relates to the regulatory perimeter for SME lending. This can result both in bringing additional activities within the perimeter or removing some from it, such as the Bounce Back Loan Scheme (BBLS) during the pandemic.
In June 2022 the Government announced its intention to reform the Consumer Credit Act (CCA). The review extends to questions involving the scope of the act, including business lending. The work that the FCA and others are undertaking in response to this super-complaint may be useful to the Treasury (HMT) as they continue their review.
In this report we set out further details of the super-complaint process and FSB’s complaint. We also set out further details of the FCA’s regulatory perimeter and the protections in place for those providing personal guarantees.
What is a Super-Complaint?
Section 234C of the Financial Services and Markets Act 2000 (FSMA) gives designated consumer bodies the right to make a ‘super-complaint’ to the FCA where they consider there is a feature or a combination of features of a market in the UK for financial services that is or appears to be significantly damaging the interests of consumers. This could be, for example, the market structure or the conduct of firms operating within it. This mechanism in FSMA aims to give consumer bodies designated by Government a mechanism to raise issues with us about features of a market that may affect consumer interests.
To decide whether we could investigate the FSB’s concerns further under this process, we needed to assess whether its submission met the criteria for a super complaint under FSMA. Considering the criteria above in summary:
- FSB is designated by HMT as a consumer body under section 234C FSMA, so can send super complaints to us through this mechanism.
- FSB’s concerns about lending that fall within our regulatory perimeter involve a feature or combination of features of a market for financial services in the UK and can affect ‘consumers’ as defined in FSMA. We considered that FSB provided us with enough information to allow us to investigate their concerns further, particularly whether this is or appears to be significantly damaging to consumers. This was helped by engagement with several stakeholders.
Therefore, we are responding to parts of the FSB’s concerns under the super-complaint process in section 234C FSMA. In the rest of this report we set out how we propose to deal with the matters raised in the complaint. We also explain where we have decided to take any action, what that action is, and the reasons for our decision.
Our website contains guidance[1] on the super-complaint process.
At the end of this report, we have also set out comments on the parts of the FSB’s submission that fall outside the scope of the super-complaint process.
Our response to the Super-Complaint
Under s234E of FSMA we are required to publish a response to a super-complaint within 90 days. This publication sets out our response to the super complaint and the actions we will take as a result.
For lending which falls within our regulatory perimeter and is in scope of the super-complaint mechanism in the Financial Services and Markets Act 2000 (FSMA):
- During the period April-June 2024 we will collect data from a representative group of lender firms to help us understand the number of personal guarantees in place as a proportion of total SME lending. We plan to share this information on an anonymised, consolidated basis with FSB.
- We will also review a representative sample of firms’ policies and procedures to better understand when lenders will require personal guarantees for loans provided under our regulatory remit (the regulatory perimeter).
- We will also test how firms’ policies and procedures comply with the obligations for firms carrying out credit regulated activities, as set out in our Consumer Credit sourcebook.
- Once this work is complete, we will consider whether it is appropriate to undertake further supervisory work and engage with the Treasury where necessary.
- We will assess the volume of complaints to the Financial Ombudsman Service (FOS) about guarantees for business borrowing and the proportion of these that are upheld. If there is a material rise, we will consider whether to undertake specific supervisory work with the relevant firms. Additionally, we will further engage with FOS on the range of SME complaints that are eligible for referral.
- In light of our findings, we may also consider if lenders require additional guidance for situations where a personal guarantee is in place. If required, we will consult on and publish additional guidance.
We published an update on our follow-up work[2] in December 2024.
For lending outside the FCA perimeter and outside the scope of the super complaint process:
FSB has drawn attention to lending to limited companies where directors provide personal guarantees. This falls outside our regulatory perimeter, and outside the scope of the super-complaint process.
However, if our work on lending within the perimeter identifies areas of potential harm outside our perimeter, we will share any relevant information with the Government and parliamentary committees that have an interest in SME finance and business banking.
Our findings may be of use to the Treasury as they consider reforming the Consumer Credit Act and to other public bodies who have an interest in SME lending and business banking more widely.
What are FSB’s concerns?
FSB submitted a super-complaint to the FCA on 08 December 2023. This is the first super-complaint we have validly received since the super-complaint regime was applied to the FCA in 2013.
The primary concern of FSB is that a ‘growing demand for personal guarantees (PGs) by lenders has a detrimental impact on small businesses.’
FSB cites that the potential adverse impacts on SMEs include business owners being put off proceeding with lending applications and therefore foregoing opportunities to grow. The requirement for personal guarantees may also lead to business owners adopting a more risk averse approach, which in turn may lead to future opportunities to grow the business being turned down.
FSB believes the wider UK economy may be affected if the growing demand for PGs leads to weakening demand for credit. They highlight that there may be distortions in the market if lenders’ approaches to PGs vary across business sectors. Business owners looking to sell limited companies may encounter difficulty progressing sales when PGs are in place. The complaint also highlights evidence of the financial and emotional impact on guarantors and their families when PGs are called up.
FSB is concerned that if the requirement to provide guarantees for limited company lending is as extensive as they perceive it to be, the concept of limited liability is eroded. They also believe that if a director or shareholder of a small, limited company has no alternative other than to provide a personal guarantee for borrowings that the company requests, then they should receive the same protections that individual consumers would have under the FCA’s Consumer Credit (CONC) and Mortgages and Home Finance: Conduct of Business (MCOB) sourcebooks.
FSB therefore requests that the FCA:
- Gather data to understand the scale of the issues to the extent to which lenders require provision of PGs.
- Consider asking HMT to amend the regulatory perimeter and provide directors and shareholders of limited companies borrowing sums up to £25,000 the same consumer protection as provided by the FCA’s CONC and MCOB rules. (Most PGs are required to secure lending to limited companies, but such lending falls outside the FCA’s regulatory perimeter. If we find that the industry-wide approach to taking guarantees for limited companies has effectively removed the ability of a limited company shareholder/director to achieve limited liability, causing harm to individuals and the wider economy as a result, the FSB view is that changes to the regulatory perimeter may be appropriate).
FSB also believe there may be a need to review existing rules in CONC relating to guarantees. Their main points of concern highlighted for investigation are:
- Information provided during the lifetime of the guarantee obligation
- The guarantor’s understanding of their ongoing obligation, particularly in the following circumstances:
- When a guarantor leaves a company (ceases to be a director/shareholder)
- When a guarantor ceases to have a relationship with the borrower, most likely in a situation where a spouse is providing a PG in relation to a sole trader or partnership loan
- When a business is sold, whether that be sale of a limited company, a sole trader or partnership business.
Evidence of harm
FSB has not provided data to quantify the potential harm.
FSB would like the FCA to gather data to understand the scale of the issues raised in its complaint. FSB refers to correspondence with the Financial Ombudsman Service on a recent increase in complaints about personal guarantees on business loans. Complaints involving PGs provided for SME lending were brought within the remit of the Financial Ombudsman Service in 2019. As the table below shows, complaint volumes have increased significantly since 2019, but remain low.
Table 1: Complaints resolved by the Financial Ombudsman Service from guarantors of business lending
| 2019/20 | 2020/21 | 2021/22 | 2022/23 | |
|---|---|---|---|---|
| Cases resolved on merit | 9 | 14 | 30 | 42 |
| Uphold rate | 33% | 50% | 37% | 19% |
The super-complaint also highlights a reported rise in uptake of personal guarantee insurance (PGI), which some guarantors may take out to cover their guarantee obligation.
FSB has also confidentially shared with the FCA several case studies involving situations where the prospective borrower is unhappy with their lender’s lending policy which requires a PG to secure any borrowing requests made by a limited company borrower. The case studies also highlight circumstances appearing to show that poor communication between lender and guarantor has led to misunderstandings and potentially also harm.
Does the FSB complaint fall within scope of the super-complaint process?
The main activity that the complaint focuses on is lending to limited companies where directors are required to provide personal guarantees. This is not a regulated activity and does not otherwise come within the scope of the super-complaint process due to the relevant meaning of a consumer for these purposes. This activity is therefore not in scope of a section 234C complaint.
Lending within the regulatory perimeter is in scope of section 234C, so we treat the FSB’s points on these under the super complaint process.
The perimeter determines which activities we regulate, and the level of protection consumers can expect when they buy financial products.
Understanding our regulatory perimeter[4] is also important in assessing what actions we are required to take when we receive a super-complaint.
Lending to limited companies
Directors and other persons providing guarantees for limited company borrowing do not benefit from the consumer protection and the standards set out in CONC[5].
Lending to sole traders and small partnerships
The following issues that FSB raise are within the FCA’s perimeter:
- Some borrowers FSB is concerned about fall within the Consumer Credit Act definition of a 'relevant recipient of credit' (RRC). This means that the borrower is borrowing £25,000 or less and is a sole trader, small partnership or other RRC as defined in Article 60L[6] of the FSMA 2000 (Regulated Activities) Order 2001/544.
- FSB also refer to situations where family members provide a personal guarantee for small SME loans to sole traders and small partnerships (as described above). Any person providing a guarantee or indemnity under a regulated credit agreement is deemed to be the ‘borrower’ and falls within the relevant FSMA definition of a ‘consumer’ (sections 425A and 425B). The £25,000 threshold referred to above would apply.
- Some of the activity FSB are concerned about may also involve regulated mortgages, in particular security over homes for small business debts. Again, the SME would need to be borrowing as an individual consumer. Where an individual guarantees the loan to a limited company and supports that guarantee with a charge over their residential property, the guarantee itself will not be a regulated mortgage contract. Given the legislative limitations on borrower type and the various available exemptions (for example, depending on usage conditions, and whether this is a first, second or subsequent charge over the home), this is a more minor feature of the matters of concern to FSB.
Our rules applying to consumer credit and mortgage provision will apply to this type of lending.
What protections are there for individuals who provide PGs?
Lending within the FCA’s regulatory perimeter
Our existing rules in our CONC and MCOB sourcebooks are relevant and provide protection for those providing PGs.
Our existing rules in CONC
The purpose of CONC is to set out the detailed obligations specific to credit-related regulated activities. While we are not aware that personal guarantees are commonly used for regulated lending to sole traders and partnerships, our rules in CONC already offer protections to guarantors and do not distinguish between guarantees offered for consumer borrowing or business borrowing.
When looking at the provision of PGs, the following rules and guidance are likely to be relevant:
CONC 5.2A Creditworthiness assessment
A firm must undertake a reasonable assessment of the creditworthiness of a customer before entering into a regulated credit agreement (CONC 5.2A.4R).
Before entering into the regulated credit agreement, the firm must undertake a reasonable assessment of the potential for the guarantor’s commitments in respect of the agreement to have a significant adverse impact on the guarantor’s financial situation (CONC 5.2A.31R(2)).
CONC 4.2 Pre-contact disclosure and adequate explanations
Before making a regulated credit agreement the firm must give the guarantor an adequate explanation of the circumstances in which the guarantee might be called upon and the implications for the guarantor if this happens (CONC 4.2.22R).
The lender’s explanation should enable the customer to make a reasonable assessment as to whether the customer can afford the credit and to understand the key associated risks (CONC 4.2.6G).
CONC 7.3 Treatment of customers in default or arrears: lenders, owners and debt collectors
When dealing with customers (including guarantors) in default or in arrears difficulties, a firm should pay due regard to its obligations under Principle[7] 6 (Customers’ interests) to treat its customers fairly (CONC 7.3.2G).
Our existing rules in MCOB
The MCOB rules apply to every firm carrying on a home finance activity.
MCOB 11.6 Responsible lending and financing
Before entering into, or agreeing to vary, a regulated mortgage contract or home purchase plan, a firm must assess whether the customer (and any guarantor of the customer’s obligations under the regulated mortgage contract or home purchase plan) will be able to pay the sums due (MCOB 11.6.2R, assessment of affordability).
The firm must not enter into the transaction unless it can demonstrate that the new or varied regulated mortgage contract or home purchase plan is affordable for the customer.
Lending outside the FCA’s regulatory perimeter
Lending Standards Board (LSB)
The ‘LSB Standards of Lending Practice for business customers’ are industry standards recognised by the FCA. The standards provide protections for SMEs with a consolidated turnover of up to £25 million across loan, commercial mortgage, overdraft and credit card products.
The restrictions on legal entity type and amount of lending which apply to CONC do not apply to the LSB standards. The LSB's website gives further details of the standards[8], their application to PGs and a list of lender firms who are signatories to the standards.
The Standards of Lending Practice for business customers have been recently reviewed and a report[9] published. The report includes details of the next steps for the LSB in developing further their guidance on the use of PGs.
Acknowledgements
To gain an understanding of the issues raised in the complaint we undertook stakeholder engagement and research. Specifically, we engaged with FSB, HMT, UK Finance, The Lending Standards Board, The Finance & Leasing Association and The Financial Ombudsman Service.
We are grateful to all stakeholders that have provided input to help inform our response to the super-complaint.
Note referred to: