The response to news that the Financial Conduct Authority (FCA) is to investigate banks’ use of personal guarantees in small business lending has been criticised as “illogical” and inadequate by the Federation of Small Businesses (FSB), which initially raised the issue.

In December, the FSB made a “super-complaint” to the FCA, calling for an investigation into what it termed “harsh lending practices” where banks excessively demand personal guarantees for business loans. Personal guarantees often require directors to pledge their homes or other assets as collateral for business finance, causing significant distress and hindering loan applications for small businesses.

However, the FCA’s inquiry is limited to how personal guarantees impact the smallest traders due to regulatory constraints. Business lending outside certain parameters, including loans over £25,000 and lending to limited companies with personal guarantees, falls beyond the FCA’s regulatory scope.

Martin McTague, national chairman of the FSB, criticized the FCA’s response, stating that it fails to address the systemic issues highlighted in the super-complaint. He emphasized the need for greater regulation of personal guarantees in small business lending to protect borrowers and foster growth and investment.

The FSB’s super-complaint mechanism allows groups to raise concerns about market practices significantly harming consumers. Despite calls from various quarters, including the Bank of England governor and Treasury committee, for increased regulation of small business lending, the government has so far resisted such measures.

McTague argued for expanding the FCA’s regulatory authority to include personal guarantees in lending to limited companies, a move that would afford borrowers greater protection. The FSB intends to engage with the Treasury on this matter in the future.

In the meantime, the Lending Standards Board, a self-regulatory body, is conducting a review of lenders’ practices regarding personal guarantees, aiming to address concerns raised by the FSB and other stakeholders.