The Lending Standards Board (LSB) announced on 12 September 2024 an update to the provisions of their Standards of Lending Practice for business customers (Standards) relating to personal guarantees. The Standards are recognised by the Financial Conduct Authority and are the only lending protections available to many UK SMEs. These changes place new requirements on lenders and provide additional clarity to guarantors on the extent of their obligations.
Under a personal guarantee the guarantor agrees to be personally liable for lending to a business where the principal debtor defaults on their obligations to the lender. The LSB's review has highlighted that there is room for improvement to the processes that lenders have in place for reviewing guarantees. The new protections include a requirement to be clearer to a guarantor as to what they are signing up to, and to avoid situations where the guarantor does not realise the consequences of the guarantee. The LSB reported that although guarantees are rarely called upon as a default requirement, and there are few complaints surrounding them, it was still an area where the Standards should be strengthened.
The key changes to the Standards are as follows:
- Lenders will be required to provide guarantors with annual reminders that a personal guarantee remains in place. This is to help lenders ensure that they hold up-to-date records on who is liable for a guarantee and will help guarantors keep track of any liability. The reminders should also act as a prompt for guarantors to speak to a lender if they are no longer associated with the business receiving the lending, or if the loan is no longer outstanding. The requirement to provide annual reminders comes into force on 8 September 2025 to allow lenders time to put new processes into place.
- There are updates to the requirements for lenders on advising potential guarantors of the need to seek independent legal advice as to whether becoming a guarantor is the right choice for them.
- The LSB has provided more detailed guidance for lenders on providing information to a guarantor about how the personal guarantee will function and their obligations under it. This should help guarantors understand the consequences of acting as a guarantor.
The updated guidance on becoming a guarantor and independent legal advice available to guarantor is already in force. Although the requirement to provide annual reminders has been delayed, lenders should be preparing the way now in time for the September 2025 deadline.
This article was written by Marnie Richmond, a Trainee Solicitor within the Banking and Finance team.
