An employers’ association is urging government action to shield small businesses from the potential misuse of personal guarantees required by banks for loans. The Federation of Small Businesses (FSB) voiced concerns following a recent investigation by the City regulator that, according to them, overlooked crucial issues.

The FSB criticized the Financial Conduct Authority (FCA) for its decision to exclude inquiries into loans involving limited company directors from the investigation. Personal guarantees often force directors to pledge their homes or personal assets as collateral for business financing.

Last year, the federation submitted a “super-complaint” to the regulator, advocating for a probe into what they describe as the banks’ severe lending practices that pressure businesses into providing personal guarantees.

The group emphasized that the prevalence of such guarantees is causing many companies to hesitate or avoid applying for loans, resulting in significant distress if loans default and granting lenders excessive control over struggling businesses.

While the FCA did examine the issue, its focus remained primarily on the smallest operators, a strategy the federation labeled as illogical and insufficient. “Lenders generally seek personal guarantees when financing a limited company, often implementing this as a standard practice without consideration of the context. The FCA has completely overlooked this area of the lending market,” noted Martin McTague, the national chairman of the FSB.

McTague highlighted the detrimental effects of requiring personal guarantees, stating that the pressure to risk one’s family home discourages prudent risk-taking and investment by company directors. Furthermore, the repercussions for directors’ personal finances if a guarantee is invoked can be dire.

The federation is now calling on the government to enact legislation that ensures personal guarantees are included under the FCA’s ‘consumer duty’ standards, which mandate financial service providers to deliver comprehensive care to retail customers.

The FCA acknowledged that the demand for personal guarantees tends to be higher in unregulated business lending markets, which fall outside their purview. However, they mentioned that in regulated lending scenarios—typically involving loans of £25,000 or less for sole traders and small partnerships—the prevalence of personal guarantees is minimal, with no significant compliance concerns detected.

Despite its focus being on what they termed a “very limited segment of the SME lending market,” the FCA found room for lenders to improve practices, such as enhancing communication with guarantors to reduce misunderstandings and establishing a minimum loan threshold under which guarantees would not be required.

McTague concluded by warning that the existence of personal guarantees significantly influences many small businesses and entrepreneurs when considering taking on debt, emphasizing that action is essential to “empower small business owners to invest and expand.”