LSB updates business lending code to provide stronger SME protections on personal guarantees

The LSB has updated its Standards of Lending Practice for business customers to strengthen provisions for SMEs using personal guarantees.

The standards provide the only lending protections available to many SMEs, given that many personal guarantees are linked to limited companies which fall outside of the FCA’s perimeter for SME lending. The LSB identified the need for updated guidance on guarantees in its review of its business standards, which found that lenders’ processes for reviewing guarantees could more effectively ensure that information remained current, particularly where lending had been repaid or where there had been changes at director level.

Key changes made by the LSB include:

• A requirement for lenders to provider guarantors with annual reminders that a personal guarantee is in place, to ensure lenders maintain current records on who is liable and help guarantors track any liability. The LSB hopes that these communications will prompt guarantors to speak with lenders if they are no longer associated with a borrowing business, or if they believe the lending is no longer outstanding.
• Updates to requirements for lender on advising potential guarantors of the need to seek independent legal advice about whether becoming a guarantor is appropriate for them.
• Improved guidance for lenders on providing information to a guarantor about how the personal guarantee will function, and their obligations under it.

Updates to existing provisions and accompanying guidance will apply from 12 September 2024. Lenders will have until 8 September 2025 to implement new requirements relating to annual reminders.