The Lending Code and guarantees – a refresher
Many UK banks subscribe to the Lending Code. The Lending Code (published by the Lending Standards Board (LSB)) is a voluntary code that, amongst other things, addresses how banks deal with individuals and small businesses and charities. It applies only to those financial institutions that subscribe to it and sets minimum standards of good practice for them.
Scope of the Lending Code
In the context of a guarantee, the Lending Code will apply if a guarantor is either:
a consumer (defined as an individual who is acting for purposes which are not linked to their trade, business or profession);
a micro-enterprise (business which employs fewer than 10 people and has a turnover or an annual balance sheet of no more than than €2 million); or
a charity which has an annual income of less than £1 million.
The Code covers matters beyond just guarantees however, in this post we’re just taking a look at the key points that apply to guarantees for personal and micro-enterprise lending.
Top 3 things to remember
Independent legal advice
Lenders should encourage guarantors to take independent advice before providing a guarantee so that they are fully aware of their commitment and the possible implications. Guarantees should contain clear wording recommending that all guarantors take independent legal advice. The full extent of their liability should be made clear including that the guarantor may liable instead of, or as well as, the borrower to repay the loan and any other money owing.
It is likely that a prudent lender will require this in any event owing to the legal risks of related to guarantors being unduly influenced to provide a guarantee. See our previous blog on the risks of undue influencefor more on this.
No unlimited guarantees
If complying with the Lending Code, lenders should not take unlimited guarantees from individuals (other than to support their obligations under a merchant agreement). If the Lending Code applies, it is possible to limit the cap which must be imposed to a cap only on the principal amount due from the borrower (i.e. so that interest and charges remain unlimited), but this should be made explicit to the guarantor.
Disclose financial information
Regular financial information about the borrower must be made available to the guarantor so that the guarantor can make an informed decision on how likely it is that the lender will make demand under the guarantee. This helps to ensure the guarantor is fully aware of the financial position of the borrower. Lenders will want to ensure that they do not breach any of their confidentiality obligations when releasing such financial information so a waiver of confidentiality will usually have to be obtained from the borrower beforehand.
Sanctions for non-compliance
Compliance with the Lending Code is monitored and enforced by the LSB. Although the LSB investigates serious breaches of the Code however, it is the role of the Financial Ombudsman Service to investigate individual complaints. The Lending Code does not have force of law, although some of its guidelines are rooted in law (such as the need for independent legal advice mentioned above).
Subscribers to the Code have to provide an annual statement of compliance and the LSB also carries out reviews and investigations. Enforcement action is taken as a last resort and includes:
the issue of directions as to future action;
warning or reprimand;
publication of details of the breach; and
cancellation or suspension of a firm’s registration.
The reputational risk is seen as a strong deterrent. Anything greater would usually depend on the findings of FOS and any referral to the Financial Conduct Authority.
For more information, email firstname.lastname@example.org.
Lending Standards Board: http://www.lendingstandardsboard.org.uk/thecode.html