FOS and small business guarantors

The Financial Ombudsman Service (FOS) has published its Approach to disputes lodged by by guarantors who have guaranteed the debts of small business borrowers.

Although guarantee disputes are a small percentage of the total disputes handled by FOS, it saw a large (64%) increase in business guarantee disputes with Financial Service Providers (FSPs) in 2012-2013.

FOS can review most disputes lodged by guarantors, as long as they fall within its Terms of Reference:

  • the business must satisfy the definition of ‘small business’: it must have had fewer than 20 employees (or fewer than 100 employees if the business involves the manufacture of goods) at the time of the act or omission that gave rise to the dispute;
  • if the guarantor is also a company then it must also satisfy the small business definition;
  • a guarantor can lodge a dispute about the circumstances of entering the guarantee even if the small business borrower is insolvent;
  • if the guarantor is seeking to have a guarantee set aside, then the guaranteed debt must be less than $280,000;
  • however, if an FSP is seeking to recover a final amount to extinguish the debt that is less than $280,000, FOS will consider the dispute even though the full guarantee limit may be for more than $280,000;
  • if the guarantor’s dispute is about a request for financial difficulty assistance, FOS will consider the dispute regardless of the guarantee amount.

Even if an FSP is not a subscriber to the Code of Banking Practice, FOS still expects them to generally follow the Code’s guidelines which relate to taking guarantees.

In some limited circumstances, a guarantor may lodge a dispute that would normally be brought by the borrower.

If a guarantor lodges a dispute with FOS, the FSP cannot take action to recover the debt from the guarantor while the FOS dispute remains open.

Bright Law advises FSPs on disputes with guarantors (and how to avoid them).

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