The Lending Standards Board (LSB) has tightened rules on personal guarantees in business lending to provide clarity and prevent unexpected liabilities.
There are three major updates to the Standards, along with new requirements for lenders and enhanced protections and guidance. Recognised by the Financial Conduct Authority (FCA), these business Standards are the sole lending protections available to many UK SMEs.
Laura Mahoney, Head of Policy at the LSB, stated: “Personal guarantees have the potential to have a significant impact on guarantors, so it’s really important that their interests are protected when a guarantee is in use.”
The key updates include a new requirement for lenders to provide guarantors with annual reminders that a personal guarantee is still active. This measure aims to ensure that lenders maintain accurate records of liability and helps guarantors remain aware of any ongoing responsibilities. The reminders also seek to encourage guarantors to contact the lender if they are no longer connected to the business or believe the debt has been settled.
Additionally, there are stricter rules for lenders to advise potential guarantors to seek independent legal advice, ensuring they make informed decisions about whether becoming a guarantor is the right choice for them.
Finally, there is enhanced guidance for lenders on clearly explaining to guarantors how the personal guarantee works and what their obligations are under it.
LSB identified a need for updated guidance on guarantees through its ongoing compliance work, which was highlighted in its review of the business Standards published in early 2024. It found that lenders’ processes for managing and reviewing guarantees could be more effective in ensuring information remains current.
“Positively, we’ve found that issues with guarantees among the LSB’s registered firms are rare. Lenders typically only call on these guarantees as a last resort, and there are very few complaints about their use,” Mahoney added.
“But, we still felt there was scope to improve how lenders communicate with guarantors about how guarantees work and their potential impact, and to ensure lenders keep up-to-date information about a personal guarantee.
“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.”
The LSB’s updated business Standards now protect SME customers of registered firms with a turnover of up to £25m. This is in contrast to FCA protections, which do not cover business lending above £25,000 or loans to limited companies due to the regulator’s statutory limits.
These updates are part of the LSB’s efforts alongside the FCA’s response to the FSB’s super-complaint. The LSB’s review found that most personal guarantees are tied to lending for limited companies, falling outside the FCA’s SME lending perimeter. Consequently, FCA measures will impact only a small portion of SMEs.
Mahoney concluded: “While updating the Standards, we’ve also considered the important role that guarantees can play in helping SMEs access the finance they need, quickly. We’ve sought 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.”
In February, the LSB released the results of a broad consultation on UK banking standards. They announced plans to improve digital processes, focusing on enhancing how SMEs apply for and access financial products online.
