The FSB’s super-complaint to the FCA in relation to personal guarantees

In December 2023, the Federation of Small Businesses (the ‘FSB’) lodged a super-complaint with the Financial Conduct Authority (the ‘FCA’). This is the first super-complaint the FCA has received since it was brought under the regime in 2013.

What is a super-complaint? 

A super-complaint, as outlined in section 234C of the Financial Services and Markets Act 2000 (‘FSMA 2000’), allows designated consumer bodies to raise concerns with the FCA regarding aspects of a financial services market in the UK that significantly affect consumer interests.  

To be able to make a super-complaint, the submitting organisation must satisfy the following criteria:  

1. It must be designated by the Treasury as a consumer body under the FSMA 2000.  

2. The complaint must concern a feature or a combination of features of a market for financial services in the UK that are or may be significantly damaging the interests of consumers.  

This mechanism enables organisations like the FSB to address issues concerning market structure or firm conduct within the financial services sector, with the aim of promoting fairer outcomes for consumers. 

The FSB’s super-complaint 

The FSB lodged a super-complaint with the FCA concerning lending practices, particularly regarding the onerous requirement by many lenders of personal guarantees from individuals to support loans to small and medium-sized enterprises (‘SMEs’). According to the FSB, the growing demand for personal guarantees by lenders has detrimental impacts on SMEs. In requiring such, lenders are piercing the corporate veil and potentially deterring business owners from pursuing lending opportunities and adopting risk-averse approaches, which may hinder future business growth.  

The FSB not only emphasised the financial and emotional impacts on guarantors and their families when personal guarantees are called upon, but also noted the potential for lenders to use the presence of the personal guarantee to gain influence over the decision-making processes of distressed businesses to their own advantage. Moreover, the FSB cautioned that the broader UK economy could suffer if the increasing reliance on personal guarantees results in a decline in credit demand. On a wider scale, the super-complaint noted that depending on the approach of individual lenders, market distortions in small business lending and the wider economy may arise if certain sectors receive less favourable treatment regarding demands for personal guarantees. 

The FCA’s response 

The FCA is required to publish a response to a super-complaint within 90 days. Although much of the lending practices in question fall outside the FCA’s regulatory perimeter, the FCA acknowledged the significance of the issues raised by the FSB and set out the actions it plans to take for lending that does fall within the regulatory perimeter. The FCA plans to: 

1. collect data on the number of personal guarantees in place for SMEs borrowing less than £25,000; 

2. review lender policies and procedures within its regulatory scope; 

3. assess complaints to the Financial Ombudsman Service regarding personal guarantees; and 

4. consider providing additional guidance to lenders if deemed necessary.  

Regarding lending activities outside its regulatory perimeter, such as lending to limited companies, the FCA aims to share relevant findings with governmental bodies like the Treasury, particularly in light of ongoing Consumer Credit Act reforms.

The Birketts view 

While the FSB suggests that the regulatory perimeter be expanded to allow the FCA to make specific rules regarding loans to SMEs requiring personal guarantees, it fails to acknowledge the difficulty of establishing such rules. It would not, for example, be realistic to suggest that lenders should not require personal guarantees from SMEs because lenders would not want to grant unsecured loans. While an alternative would be for SMEs to grant security over their assets, this would also not be realistic because it is unlikely that the SME will have sufficient assets to cover the value of the loan.  

This being said, the super-complaint process initiated by the FSB prompts a thorough examination of lending practices affecting SMEs. By engaging with stakeholders and conducting comprehensive reviews, the FCA aims to address concerns regarding personal guarantees and their impact on small businesses. The FCA’s response demonstrates the importance of consumer protection and regulatory oversight in fostering a fair and transparent financial services environment.  

As the FCA continues its investigations and potential regulatory actions, SMEs and lenders should remain vigilant for further developments that could shape lending practices in the future. The collaborative effort between consumer bodies, regulatory authorities, and industry stakeholders demonstrates a commitment to fostering a more equitable and supportive environment for SMEs in the UK economy.