LSB announces stronger protections for personal guarantors

The Lending Standards Board (LSB), the primary self-regulating body overseeing the banking and lending industry, has updated its Standards of Lending Practice for Business Customers to provide stronger protections for small and medium-sized enterprises (SMEs) where personal guarantees are required by lenders.

What are the Standards of Lending Practice for Business Customers?

Recognised by the Financial Conduct Authority, these are voluntary, best practice standards which apply to UK lenders which are registered with the LSB and lending to SMEs with an annual turnover of up to £25 million.

Why have they been updated?

The updates have been made following a review and public consultation carried out by the LSB in 2023, which included an analysis of the use of personal guarantees across its registered firm base.

Positively, the LSB found that only approximately 2% of personal guarantees are called on in a twelve-month period. However, it determined that the Standards would benefit from additional guidance in certain areas, including the advice provided to guarantors (both prior to and during the lifetime of the guarantee) and lenders’ processes for reviewing guarantees.

What changes have been made?

The updates to the Standards include the following key changes:

• Updated requirements for lenders to advise potential guarantors of the need to seek independent legal advice on the implications of becoming a guarantor and whether it is the right choice for them.
• Enhanced guidance for lenders on the provision of information to a guarantor about how the personal guarantee will function and their obligations under it.

These changes have taken effect from 12 September 2024.

In addition, with effect from 8 September 2025, there will be a new requirement for lenders to provide personal guarantors with annual reminders that a guarantee remains in place. The LSB hopes that this will help lenders to maintain up-to-date records and guarantors to keep track of their liability, with the reminders also serving as a prompt for guarantors to speak to a lender if they are no longer associated with the business, or if they believe the lending is no longer outstanding.

Ultimately, the hope is that the changes will deter lenders from requesting unnecessary guarantees, whilst “avoiding adding friction to the lending journey” and ensuring that SMEs are still able to access the finance they need, when they need it.

What does this mean for lenders?

Going forward, lenders will need to ensure that they have the necessary processes in place to comply with the revised Standards.

In particular, although the requirement to provide annual reminders to guarantors will not come into force until September 2025, lenders should start making the relevant changes as early as possible to ensure that the deadline can be met.

If you would like further information, please contact Rachel Lewis or another member of the Banking & Finance team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.