In a groundbreaking move, the Federation of Small Businesses (FSB) has submitted a “super-complaint” to the Financial Conduct Authority (FCA), marking the first of its kind directed at the regulatory body.

The complaint zeroes in on the alleged practice of “banks excessively demanding personal guarantees for business loans.”

Under the provisions of the Enterprise Act 2002, a super-complaint allows designated consumer groups to expedite concerns believed to significantly harm customers. The FCA is now mandated to outline its plan to address the FSB’s complaint within a 90-day window.

Banks frequently require personal guarantees from directors of small businesses to ensure repayment. The FSB told the Financial Times that banks were too quick to demand the guarantees, which it said were a “straitjacket” on business growth, forcing entrepreneurs to put their homes or other assets on the line when taking out finance.

Todd Davison, Managing Director of Purbeck Personal Guarantee Insurance, responded to the FSB’s super-complaint, shedding light on concerns regarding the impact of personal guarantees on small and medium-sized enterprises (SMEs).

Davison said: “Around 45% of firms back off from a finance deal if they find out there is a personal guarantee attached. Personal guarantees must be proportionate to the loan being advanced and appropriate for each case. We support a full investigation by the FCA into lending practices and whether personal guarantees are being overused by lenders, particularly in low-value loans.”

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Purbeck’s latest Personal Guarantee Monitor reveals that working capital emerges as the primary reason for new personal guarantee-backed loans, constituting 47% of applications for personal guarantee insurance (PGI) in Q3 2023.

Notably, unsecured loans, often provided by alternative lenders, constitute the primary source of funding. Q3 2023 witnessed a historic surge in applications for PGI related to unsecured loans, marking the highest volume in the past six years.

Davison emphasised the importance of a balanced approach, he said: “Personal guarantees are a core element of the commercial finance market, especially among alternative lenders. While we advocate for a thorough investigation by the FCA, any measures to discourage personal guarantees should not result in lenders failing or withdrawing from the market. This would limit options for small businesses seeking new loans.”

He continued, “Education on risk mitigation is crucial, and commercial finance brokers play a commendable role in the process. Our research shows that 64% of small business owners would be more inclined to sign a personal guarantee if they had insurance to protect against associated risks. Alongside a review of lending practices, we call for greater awareness of risk mitigation strategies that small business owners can consider before committing to a personal guarantee.”

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