The UK small business group has asked the country’s main financial regulator to help stop “unfair” banking practices that are making entrepreneurs risk their homes unnecessarily.
The Federation of Small Businesses told it had filed a “super-complaint” — the first to be made to the Financial Conduct Authority — focused on “banks that excessively demand personal guarantees for business loans”.
A super-complaint is a fast-track procedure allowing designated consumer groups to raise issues they believe are significantly damaging to customers. The FCA has 90 days to set out how it will address the complaint.
The move threatens to open a new conflict between banks and small businesses, many of which were sold unsuitable interest rate swaps in the run-up to the 2008-09 financial crisis in a major mis-selling scandal.
Banks frequently require personal guarantees from directors of small businesses to ensure repayment.
The FSB criticized banks for insisting on guarantees too soon, claiming that these guarantees restrict business growth. Entrepreneurs are compelled to use their homes or other assets as collateral when borrowing money.
Guarantees put directors’ personal assets at risk even if their business has limited liability.
Martin McTague, FSB national chair, said these guarantees could be “perfectly reasonable” where a business did not have many assets of its own. He said that proportionality was necessary, especially when the amounts were small for banks but could make a big difference for small business owners.
The FSB asked the FCA to check how much banks require personal guarantees for business loans. They also suggested that the FCA should be able to regulate personal guarantees.
FCA regulations typically don’t apply to business loans for limited companies or those over £25,000, as determined by the government and parliament.
The FSB said that making businesses provide personal guarantees could stop them from borrowing money to grow their business, making them too cautious.
Minister Bim Afolami said last month that regulators should allow businesses to take more risks to boost the UK’s slow economy.
The FCA received its first complaint directly in 2012 through this super-complaint. The FCA said it would consider the complaint carefully and respond.
David Raw, the managing director of UK Finance, a trade group, stated that personal guarantees decrease the risk for lenders and make loans more accessible.The reduced risk could lead to lower interest rates and most personal guarantees were not called upon, he added.
Previous super-complaints have included a 2018 submission by charity Citizens Advice to the competition watchdog calling for an end to the “loyalty penalty” faced by consumers who were hit with higher charges if they did not switch telecoms or financial services provider.
The Competition and Markets Authority has been given more powers to prevent consumer exploitation. In 2021, the FCA prohibited price discrimination against loyal motor and home insurance customers.
An earlier super-complaint by consumer group Which? I successfully urged banks and regulators to increase their efforts to assist victims of push-payment scams, where victims are tricked into authorizing money transfers.