UK small businesses call on regulator to intervene over ‘harsh’ banking practices

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The UK’s small business lobby has asked the country’s top financial regulator to intervene over “harsh” banking practices that it says are forcing entrepreneurs to put their homes at risk unnecessarily.

The Federation of Small Businesses told the Financial Times 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 said banks were too quick to demand the guarantees, which it said were a “straitjacket” on business growth, forcing entrepreneurs to put their homes or other assets on the line when taking out finance. 

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. But proportionality was needed, he added, particularly where the sums were small for banks but potentially transformational for small business owners. 

The FSB called on the FCA to review the extent of banks’ practice of requiring the guarantees and to consider asking ministers to expand the regulator’s remit so that it can cover personal guarantees of business loans.

Loans to limited companies for more than £25,000 are outside the FCA’s regulatory “perimeter”, set by the government and parliament. 

The FSB said requiring personal guarantees could stifle enterprise by discouraging businesses from borrowing to fuel growth, instead making them “over-cautious”. 

City minister Bim Afolami said last month that regulators needed to allow more risk-taking by businesses as the government seeks to kick-start the UK’s stagnating economy. 

This super-complaint is the first to be made directly to the FCA since the regulator was included in the regime in 2012. The FCA said it would consider the complaint carefully and respond.

David Raw, managing director at trade group UK Finance, said personal guarantees reduced risk to lenders, increasing the availability of loans. 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 was later handed more powers to stop consumer rip-offs while the FCA, which supported the regulator’s investigation of the complaint, banned price discrimination against loyal motor and home insurance customers in 2021. 

An earlier super-complaint by consumer group Which? successfully pushed banks and regulators to do more to help victims of so-called push-payment scams, when victims are conned into authorising money transfers. 

Additional reporting by Laura Noonan