The Lending Code and Guarantees
- The Lending Code and Guarantees
- Individual Guarantees: the requirement for independent legal advice
- Regulated Mortgages Briefing paper
- HMRC consults on significant extensions to withholding tax on interest
- A Guide to Financing "Shadow Yachts"
By way of background, the Code is intended to set minimum standards of good practice for banks, building societies and credit card providers on dealing with consumers, small charities and micro-enterprises (businesses with less than ten employees and with a turnover or annual balance sheet not exceeding €2 million). The Code is self-regulatory and voluntary, but most of the UK's clearing banks, or at least their consumer divisions, subscribe to it. Compliance is monitored and enforced by the Lending Standards Board (LSB), whose powers derive from its contract with each subscribing firm.
In part what the Code says about guarantees reflects issues that are well known. Regardless of the Code a guarantee may be vulnerable to challenge on grounds such as undue influence (see the other article on guarantees in this edition) or misrepresentation. Various steps can be taken by lenders to deal with this, such as requiring the guarantor to take independent legal advice. This is sometimes also done in the case of guarantees given by directors for a company's obligations, although the reasons for doing so are less compelling.
The Code states that lenders should not take unlimited guarantees from individuals (other than to support liabilities under a merchant services agreement which, broadly speaking, would cover credit and debit card services provided to businesses). This applies to the capital amount, not interest or charges which can be uncapped. Other forms of unlimited third party security may be taken from an individual in order to avoid having to take a series of security documents each time a facility changes, so long as the limit of the individual's liabilities is explained in a side letter issued by the lender.
Regular financial information about the borrower should be made available to guarantors, with the borrower's prior agreement. Lenders are reminded that it is important that guarantors receive independent legal advice and, as far as possible, should encourage them to take it. This recommendation should appear clearly in the guarantee or security. Guarantors must be warned that they may be liable instead of or as well as the borrower, and told the extent of their possible liability, including interest and charges after demand has been made. Lenders may assume, however, that if independent legal advice has been given to the guarantor, then the nature of all monies and continuing security will have been explained, if applicable. Subscribers to the Code may choose to explain these features to a guarantor who has refused independent legal advice.
It is only in the heading to the relevant section of the Code, however, that it is spelt out that it is concerned with "Guarantees for personal and micro-enterprise lending" (emphasis added), and so, by implication, not with guarantees given by individuals, other than for such lending. On that basis, the Code has no application to a guarantee given by, for example, a high-net worth individual in respect of a special purpose vehicle which does not qualify as a micro-enterprise, although lenders will still be mindful of general issues relating to guarantees regardless of the Code.
When the Code applies, micro-enterprise borrowers should be advised to take independent advice before accepting a facility, and should receive a written explanation of why any security is required and when it will be released. Such security should be released when a facility is repaid, unless the customer expressly agrees otherwise. Subscribers to the Code may continue to take unlimited guarantees from companies in support of borrowing by other companies in the same group.
The LSB lists a number of sanctions available to it if the Code is breached. It expects identified breaches to be immediately remedied. There is, however, no indication in it that the Code confers any legal rights on customers against subscribing lenders, or could render a guarantee unenforceable. The LSB states on its website that although it investigates serious breaches of the Code, it is the role of the Financial Ombudsman Service to investigate individual complaints on behalf of customers.
There are, however, possible grounds on which the Code might give customers rights, although any decision doing so might be heavily dependent on the relevant facts. Since subscribers advertise the fact that they adhere to the Code, and must make it available to customers, the courts might treat its provisions as implied terms of their contracts with customers. Having said that, implied terms will generally yield to any express terms that are inconsistent with them, and the courts have on occasion rejected arguments that voluntary industry codes have been incorporated into contracts. It is also conceivable that rights might arise under the Contracts (Rights of Third Parties) Act 1999, but unlikely. The Code does, however, require subscribers to meet all the commitments and standards in it and it is hard to imagine circumstances in which a subscriber would try to enforce a guarantee clearly taken in breach of the Code. A suggestion that the Code gives rise to fiduciary duties from subscribers to consumers is probably a non-starter.
Could the Code also apply to non-subscribers, perhaps on the basis that consumers are entitled to expect lenders to follow good practice? Since subscription to the Code is voluntary, the answer is almost certainly "no" and, we suggest, clearly so if the borrower is not a consumer or micro-enterprise.
This note does not address any potential issues arising under the Consumer Credit Act 1974 for credit subject to that regime.