LSB introduces enhanced safeguards for individuals who have provided personal guarantees

Key updates to the standards of lending practice

• 1. Annual Reminders for Guarantors: A significant addition to the standards is the requirement for lenders to send annual reminders to guarantors confirming the continued existence of their personal guarantee. This step ensures that both lenders and guarantors maintain up-to-date records on outstanding liabilities. Guarantors, particularly those who may no longer be involved with the business, will benefit from these reminders, as they act as prompts to review their obligations or seek clarification if circumstances have changed.
• 2. Encouragement to Seek Independent Legal Advice: The updated standards also reinforce the need for lenders to advise guarantors to seek independent legal advice before signing a guarantee. This requirement is designed to ensure that guarantors fully understand the financial and legal implications of their commitment. It is particularly important for guarantors who might not be well-versed in the complexities of financial agreements or are unaware of their ongoing liability, especially after they’ve left the business.
• 3. Enhanced Guidance on Guarantor Obligations: Lenders are now required to provide detailed explanations about how a personal guarantee functions. This includes information on when and how the lender may call upon the guarantee, and the specific obligations that the guarantor will face in such an event. This provision is intended to reduce situations where guarantors are taken by surprise when their assets are at risk.

Impact on enforcement

Although personal guarantees continue to be enforceable, the LSB’s measures could influence how and when enforcement actions are pursued. Historically, lenders have only called on personal guarantees as a last resort, and these updates are expected to reinforce this cautious approach. The LSB’s data shows that only about 2% of personal guarantees are called on annually, with some lenders even restructuring debt instead of enforcing the guarantee directly​. The strengthened measures, particularly the annual reminders and the requirement for legal advice, are likely to reduce instances where guarantors face unexpected enforcement, thereby mitigating potential legal disputes.

LSB recommendations, although voluntary, influence enforcement decisions indirectly by establishing best practices that lenders are expected to follow. While the LSB does not have the power to enforce the law, lenders that adhere to the FCA recognised Standards of Lending Practice are likely to factor these recommendations into their processes. Compliance with LSB standards helps lenders demonstrate good faith and responsible lending practices whilst aiming to prevent overly aggressive enforcement actions, which can be advantageous in disputes or when facing regulatory scrutiny.

The revisions to the current provisions within the Standards will take effect starting on 12 September 2024. The newly introduced obligations concerning annual reminders for guarantors will be enforced from 8 September 2025, providing lenders with sufficient time to implement the required processes.

Summary of safeguards for personal guarantees

The LSB’s strengthened provisions around personal guarantees aim to enhance protections for guarantors while maintaining access to vital financing for SMEs without undue barriers. The changes aim to ensure that both parties — lenders and guarantors — are better informed and more accountable, reducing the risk of unforeseen liabilities and fostering a healthier lending environment.