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.
Article / 2 Oct 2024
Protections strengthened for guarantors of SMEs
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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.
What are the key changes?
1. Annual reminders for guarantors from lenders that a personal guarantee remains in place (effective from 8 September 2025)
This reminder will help lenders keep up-to-date records of the personal guarantor, as well as remind personal guarantors to contact the lender if there have been any changes to the circumstances surrounding the lending.
2. For personal guarantors to seek independent legal advice
Updates to the requirements for lenders to advise potential guarantors to seek independent legal advice to understand whether becoming a guarantor is the right option for them.
3. Enhanced guidance for lenders
Lenders are to follow further guidance on providing information to a guarantor about how the personal guarantee will function and their obligations.
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.