Personal Guarantees – What’s Changed
For a while now the FCA have been introducing regulation into the commercial lending sector. This has all been about ensuring fairness for the borrower and getting the right level of qualified advice.
Personal Guarantees are a bit of an enigma when it comes to regulation. Partnership and sole trader borrowing is regulated, the theory being that where the risk is personal then the FCA wants the sector regulated. At the moment limited company borrowing is unregulated as the borrowing is not personal.
The problem is that nearly every lender that lends to a limited company will take a personal guarantee from the directors. This means personal liability returns, so should it be regulated? The FCA are starting to think it should.
It may all sound technical, but if you have ever signed a personal guarantee you need to know what the FCA is changing as it will affect you.
What It Means
It is common that when a limited company facility exceeds the it’s limit or when a limited company loan goes into arrears then the lender will ask the guarantors to correct the position.
The guarantee is not being enforced, it is just a call or suggestion being made by the lender but not any more.In the FCA guidance note, released this week note GC16/7 confirms that in the FCA’s view a guarantee is enforced if, following a breach of the agreement by the borrower
- the lender demands payment by the guarantor, or
- the lender takes payment from the guarantor by using a continuous payment authority (CPA) or direct debit mandate that was previously provided and without at least appropriate prior notification to the guarantor
The definition of ‘demand’ is uncertain but human nature says that if you ask for the same thing a few times you start to demand. A demand is a strongly worded request, or in this case a reminder that you have provided a personal guarantee and should be putting things right.
What this means is that lenders will need to be formal about asking for payment or using the provision of a personal guarantee to encourage a response. Formally requesting action requires the lender to provide notice to the guarantor.
The importance of the guarantor receiving notification is to give a reasonable opportunity to act if they wish to avoid the payment being taken. The FCA would expect the lender to inform the guarantor clearly of the following before any payment is taken:
- that the borrower has defaulted on his or her obligations under the agreement, and the nature and extent of the default
- the amount of the overdue payment or payments and the lender’s intention to take payment from the guarantor using the CPA or direct debit
- the likely timing of the payment or payments to be taken, and
- the guarantor’s right to cancel the authority (but making clear that cancellation will not extinguish the guarantor’s obligations under the terms of the guarantee)
What Will Happen
It is all very technical but the bottom line for borrowers is that they are unlikely to be aware of the changes and will continue to think that a lender can enforce or encourage action because a guarantee has been given.
Because limited company borrowing is unregulated then borrowers will not be made aware of the changes and not aware of the protection the FCA affords them because the majority of brokers and advisors in this sector are also unregulated.
In my view this is a first step toward the FCA considering that company borrowing backed by a personal guarantee will become regulated. Ultimately this will lead to lenders changing practices and unregulated brokers ceasing to operate or operating illegally.
No action is needed by guarantors now, just be aware that there is a little more process and protection for you than you may realise.
By Dave Farmer
Lime Consultancy are an FCA regulated commercial finance broker. Because we do things properly we are better positioned to advise and inform our clients of what is really going on.
Any questions then please get in touch or add your comments to the post.
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