Use of guarantor loans has seen dramatic increase, says FCA boss

There has been a “dramatic increase” in the use of guarantor loans by consumers and there is evidence that some people acting as guarantors may not understand the likelihood of them having to stump up a payment themselves, a boss at the City regulator has said.

Balances on guarantor loans are “fast approaching £1 billion” and these have more than doubled since 2016, said Jonathan Davidson, executive director of supervision – retail and authorisations, at the Financial Conduct Authority (FCA).

Guarantors act as a back-up for someone who wants to take out a loan, meaning they could be called upon to pay up if the main borrower fails to do so.

The main borrower may have taken out little credit in the past or have a poor credit history, but using a guarantor with a more reliable history gives lenders a way of getting their money back one way or another.

Mr Davidson said: “Over the last few years we have seen a dramatic increase in the use of guarantor loans by consumers.”

He added that, while these products provide an opportunity for those with thin credit files – a poor or limited credit history – there are concerns.

“Recent work we have done in this area showed that many guarantors are making at least one payment and the proportion of guarantors making these payments is growing,” he said.

Mr Davidson was making the comments in a speech at the Credit Summit in London on what the sector can expect from the FCA over the next year.

He said: “There is also growing anecdotal evidence that guarantors may not understand how likely it is that they will be called upon to make a payment.

“Our work will therefore focus on affordability and on understanding whether potential guarantors have enough information to understand the likelihood and implications of the guarantee being enforced.

“We have already amended certain rules to ensure that the protections they provide to borrowers also extend to guarantors; for example, rules requiring forbearance, pre-contractual explanations and fair treatment.

“In assessing creditworthiness, we have clarified that firms must undertake a reasonable assessment of the potential for the guarantor’s commitment to have a significant adverse impact on their financial situation.”

He said if the guarantor is called upon, the FCA expects firms to provide guarantors with adequate notice before taking payments known as a continuous payment authority (CPA).

Mr Davidson continued: “There are also questions over the level of interest rates charged on these products considering that these guarantors are deemed to be creditworthy; we will therefore be considering this and the business models of these firms.”

Mr Davidson also said a “healthy purposeful culture” is the best way for consumer credit firms to deliver value for themselves, their clients and their business.

He said: “Culture is the key to a healthy business…

“A tick-box cultural approach to compliance will be expensive and will likely not be enough to ensure that customers receive the right outcomes.”