Guarantor loans and debt advice
A short form article on guarantor loans and debt advice
Guarantor loan queries can be difficult to deal with. Where there’s an issue for the borrower, there’s an issue for the guarantor, and it’s the guarantor we’re focussing on here. What rights do they have?
Rights under the Consumer Credit Act
Guarantors must receive a copy of the credit agreement under section 105 of the Consumer Credit Act 1974. Usually this is after the guarantee is signed. Unless the guarantor receives the credit agreement within 7 days of the agreement being signed by the borrower, the guarantee isn’t properly executed. Likewise, the guarantee must be in writing (although being attached to email will be fine).
If either of these rules are breached, then the guarantee can only be enforced at the court’s discretion. If you’re faced with defending a court claim these issues might be part of the defence. If a defence based on section 105 succeeds, then section 106 means a refund of anything paid, and the guarantee being void, but remember to ask for this.
Under section 111, a copy of a default notice must be sent to the guarantor and section 107 allows a guarantor to request a copy of the agreement, guarantee and related documents for £1. If the default notice is not sent, then the court might not allow enforcement. If the copy docs are not sent within 12 working days, then the guarantee cannot be enforced until they are sent.
FCA rules and principles
There are some good rules in CONC 4, 5 and 7 that protect guarantors and should be used in complaints about affordability, suitability and debt collection. Here are the key rules and guidance but do read them in full:
CONC 4.2.22R ensures a guarantor receives an explanation on the risks and when the guarantee will be called in by the lender, and what the guarantor is liable for.
CONC 5.2A.31R onwards requires an affordability assessment of the guarantor, which must be detailed, considering the whole lifetime of the loan and foreseeable changes in circumstances. Each complaint is assessed on its merits of course, but the rules are there. You could also ask for the lender’s policy on assessing guarantors, as they’re required to have one under CONC 5.2A.33R. See if it’s fair, and if so, have they followed it?
Read our article on affordability complaints on Adviser Online.
CONC 7 is biiiig, and all about debt collection. It applies almost entirely to collecting from guarantors too, so do use it.
The principles for business are effective, especially principle 6 but there are others. Principle 11 is useful if you spot serious and repeated rule breaches by lenders. Effectively lenders are required to report their own significant breaches to the FCA, and it’s worth highlighting this to them in the most serious cases, especially involving vulnerable clients.
From 31st July 2023 the FCA’s new Consumer Duty will apply to guarantors. Alongside new FCA rules, there will be a new principle 12 that will apply instead of principles 6 and 7. Principle 12 states:
A firm must act to deliver good outcomes for retail customers
Transaction set off defence
Although the case of Brown-Forman Beverages Europe v Bacardi UK Ltd [2021] EWHC 1259 (Comm) is not a consumer credit case, it could be helpful where a client has an affordability complaint in process. This is especially the case if FOS has already upheld a client’s case and the client is owed money.
A loan is not enforceable until the set off has been ‘netted off’ — i.e. the amount owed to the client is deducted from the debt. This could help prevent court action or provide a partial defence (cross-claim) if the creditor does start a claim. Indeed, in ‘Brown-Forman’ the debt was to be treated as not in default until the set off was dealt with. Where it is the original borrower who has the affordability cross-claim, the debt should not be enforced against the guarantor until the complaint is settled. The FCA says ‘enforcement’ includes;
- demanding payment from a guarantor or
2. taking payment from a guarantor by direct debit or card payment without notice
Read the FCA’s Finalised Guidance 17/1 Guarantor loans: default notices on the FCA website.
If you are considering helping a client with a set off defence, check the loan agreement to see if there is a ‘no set off’ clause, and get help from Shelter’s Specialist Debt Advice Service.
If you’re already in court
If the lender has already started a claim then the client will need to apply to stay the claim in order to access the Financial Ombudsman Service (FOS). The N9B defence form is effective for this, or if the time for responding to the claim has gone, an N244 application might be needed, citing Civil Procedure Rules 3.1(f) asking for a stay to use FOS.
FOS is far more suitable as they will consider the fairness of any assessment without cost risks to the client. Unfair Relationships in court are less useful for guarantors as it’s the relationship between the borrower and lender that has to be unfair under s140A of the Consumer Credit Act 1974.
If there’s already a judgment, the usual hurdles are there in terms of setting aside a judgment. Unless there are issues to raise under the Consumer Credit Act (see above) that might lead to a set aside, then any application would be based on breach of FCA rules, which don’t usually affect the enforceability of the agreement.
Undue influence
With guarantor loans, the guarantor gains nothing. The lender should ensure the guarantor has taken and understood legal advice before agreeing to stand as guarantor, or they’ll risk a defence based on undue influence. This defence shouldn’t be raised without consulting Shelter’s Specialist Debt Advice Service, and it’ll be important to establish the relationship between the guarantor and borrower, and what pressure has been put on the guarantor.
Get the ‘pay out call’ recording
Gathering evidence is key to any complaint, whether it be to the lender, FOS or as a defence in court. Most guarantor lending involves a call recording that you can get hold of and listen to. Your client can request this alongside any other important information under s45 of the Data Protection Act 2018 for free, and receive it within one month. Give this a good listen as it’s a key bit of evidence when considering complaints over affordability assessments.
More than just finances, it’s personal too
Guarantor lending effects two lives at once, and has the capacity to come between families and friends. Even where there’s no pressure put on the guarantor in an obvious way, the moral pressure to help a child, sibling, parent or friend is always there. They also prevent clients from accessing debt relief as borrowers are reluctant to remove personal liability as this leads to enforcement against the guarantor. Guarantors considering a DRO might not yet have a liability under the guarantor loan, so do they deal with the debts they have, or do they wait and see what happens with the guarantor loan? Do they forget a DRO as the borrower hasn’t defaulted so the debt isn’t a qualifying debt yet, or go for bankruptcy where it’d be included anyway?
Graham O’Malley is a Senior Debt Expert in the Expert Advice Team
This article was updated on 7th February 2023
