The Federation of Small Businesses (FSB) has urged government intervention to shield small enterprises from what they describe as banks’ misuse of personal guarantees in lending practices. This call to action follows what the FSB considers an inadequate investigation by the Financial Conduct Authority (FCA).
The FSB has criticised the regulatory body’s decision to exclude loans to limited company directors from their investigation scope, highlighting a significant oversight in addressing the core issues affecting small business financing. Personal guarantees, which require directors to pledge personal assets such as homes as collateral for business loans, have become a contentious issue in the UK’s business lending landscape.
Martin McTague, the FSB’s national chairman, emphasised the detrimental impact of these practices, stating that the requirement to risk personal assets, particularly family homes, severely undermines business investment and risk-taking among company directors. The organisation’s previous “super-complaint” to the FCA highlighted concerns about excessive demands for personal guarantees and their disproportionate impact on distressed businesses.
The FCA’s investigation, while acknowledging issues within its regulatory scope, primarily focused on loans under £25,000 to sole traders and small partnerships. This limited approach has drawn criticism for failing to address the broader implications for the small business sector.
The FSB is now advocating for legislative changes to bring personal guarantees under the FCA’s ‘consumer duty’ framework, which would ensure higher standards of care for business borrowers. Despite the FCA identifying potential improvements in lender communications and suggesting minimum loan thresholds for guarantees, the FSB maintains these measures fall short of addressing the fundamental challenges facing small business owners.
The impact of these lending practices continues to influence countless entrepreneurial decisions, with many business owners choosing to forgo debt financing rather than risk personal assets. This cautious approach potentially hampers business growth and investment across the UK’s small business sector.
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