Protections strengthened for guarantors of SMEs

The Lending Standards Board has released an update of its Standards of Lending Practice for business customers designed to strengthen protections for guarantors of SMEs.

The Lending Standards Board (LSB) released an update of its Standards of Lending Practice for business customers (SLPs) on 12 September 2024 after a review of the SLPs was published in February 2024.

The LSB felt that lenders’ processes for reviewing guarantees could be improved to ensure that their information was current. They felt there was a need to improve how lenders communicate with guarantors about how guarantees work and the impact of personal guarantees.

The LSB are the primary self-regulatory body for the banking and lending industry. They identify areas of risk and adapt their standards and codes to provide increased consumer protection.

The SLPs are voluntary, setting the example for good lending practice in the UK. The standards provide protection for SMEs with a consolidated turnover of up to £25 million, which are recognised by the Financial Conduct Authority (FCA). The LSB’s work in 2024 was carried out alongside the FCA’s work relating to a super-complaint by the Federation of Small Businesses concerning the use of personal guarantees by lenders to support loans to small businesses.

These updates are important for lenders who subscribe to the SLPs. If lenders are subscribers to the SLPs (as most banks are) they should ensure that an individual providing a guarantee has regular access to financial information on their current level of liability.

These changes will remind lenders to be clear with their guarantors about what they are signing up to and help with any problems that may arise later down the line such as guarantors being unaware that they are personally liable for lending to a business, for example where they have left or sold a business.

On a positive note, when conducting its review, the LSB found that issues with guarantees among their registered firms were rare, and that guarantees are only typically called on as a last resort.