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FSB Urges FCA to Tackle Stringent Bank Practices Endangering SME's Personal Assets

The UK's Federation of Small Businesses (FSB) has escalated concerns to the Financial Conduct Authority (FCA) regarding stringent banking practices that are compelling small business owners to unnecessarily risk their personal assets, including their homes.

The FSB has lodged a 'super-complaint' with the FCA, marking the first instance of such an action taken against the financial watchdog. This complaint centres on the issue of banks frequently insisting on personal guarantees for business loans, a practice the FSB deems excessive and detrimental to the growth of small businesses.

A super-complaint enables consumer groups to rapidly bring to light issues that they believe are causing significant harm to customers. The FCA is obliged to respond within 90 days, outlining its approach to the complaint.

This development could potentially ignite fresh tensions between banks and small enterprises. The latter group has previously grappled with inappropriate financial products, such as unsuitable interest rate swaps, particularly during the lead-up to the financial crisis of 2008-09.

Personal guarantees, often required by banks from directors of small companies, place the personal assets of these individuals at risk, even in cases where the business itself has limited liability.

Martin McTague, the National Chair of the FSB, acknowledged that while such guarantees can be justifiable, especially for businesses with limited assets, a more balanced approach is necessary.

He emphasised the need for proportionality, particularly when the loan amounts might be minor for banks but potentially life-changing for small business owners.

The FSB has urged the FCA to scrutinise the prevalence of this practice among banks and to consider proposing an expansion of the regulator's authority to encompass personal guarantees associated with business loans.

Currently, business loans to limited companies or those exceeding £25,000 fall outside the FCA's regulatory scope, as defined by the government and parliament.

The FSB has expressed concern that the requirement of personal guarantees could dampen entrepreneurial spirit, leading businesses to shy away from borrowing for growth and instead adopt an overly cautious approach.

City Minister Bim Afolami recently highlighted the need for regulators to permit greater risk-taking by businesses to stimulate the UK's faltering economy.

This super-complaint is a first of its kind directed at the FCA since the regulator became part of the super-complaint regime in 2012. The FCA has acknowledged the complaint and has committed to a thorough consideration before responding.

David Raw, Managing Director at UK Finance, a trade association, defended the practice of personal guarantees. He argued that they reduce risk for lenders, potentially leading to more accessible loans and lower interest rates. He also noted that most personal guarantees are not enforced.

Previous super-complaints have led to significant regulatory changes. For instance, a 2018 complaint by Citizens Advice to the Competition and Markets Authority (CMA) addressed the 'loyalty penalty' in telecoms and financial services, leading to enhanced powers for the CMA to prevent consumer exploitation. Following this, the FCA, which supported the CMA's investigation, prohibited price discrimination against loyal motor and home insurance customers in 2021.

Another successful super-complaint by the consumer group Which? prompted banks and regulators to enhance support for victims of push-payment scams, where individuals are tricked into authorising money transfers.


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