The Financial Conduct Authority (FCA) has told lenders and brokers active in the second charge mortgage sector to raise their standards when advising customers, carrying out affordability assessments and presenting fees. The regulator's review identified weaknesses in certain firms' practices that may expose borrowers to increased financial harm, with particular concern for customers pursuing debt consolidation.
Second charge mortgages are typically used by homeowners who borrow against the equity in their property while keeping their original mortgage in place. The FCA noted that customers using these products often have high existing levels of debt and limited financial resilience. Second charge products account for less than 4% of regulated mortgage sales.
Review findings and examples
While the FCA observed instances of good practice within the sector, its review also uncovered a range of problems that raise questions about whether all firms are meeting regulatory expectations, including those set out in the Consumer Duty. Specific issues the regulator highlighted include:
- Affordability checks that appeared to omit or minimize important living costs when assessing a customer's capacity to repay;
- Advisory processes that steered customers towards debt consolidation without a clear basis for its suitability;
- Record keeping that in some cases fell short of what the regulator expects, undermining quality assurance and oversight;
- Fee structures that are opaque, with charges frequently added to loans in ways that make it hard for borrowers to compare products.
Regulatory response and next steps
David Geale, executive director of payments and digital finance at the FCA, summarized the regulator's concern: "The second charge market is relied on by people often already heavily in debt. It’s vital it works well, but we’ve found that standards are not always where they need to be. This needs to change." The FCA has called on all firms operating in the second charge market to review the findings and take appropriate remedial action.
In addition, the FCA has urged brokers across the wider mortgage market to consider the review's conclusions, especially around record keeping and quality assurance, and to assess whether improvements can be made to their processes. The regulator said it will continue its engagement with the firms included in the review to ensure identified shortcomings are addressed.
Over the next year, the FCA plans to work with firms to drive improvements across the second charge market, continue monitoring these firms and take action where concerns persist. The regulator also intends to begin considering any mortgage policy changes that may be needed to support good outcomes for consumers consolidating debt.
Sector context
The FCA's intervention focuses on a niche but consequential corner of the mortgage market. Given the profile of customers who use second charge lending - often those with higher indebtedness and lower financial resilience - the regulator's findings point to potential vulnerabilities that could affect consumer finance outcomes and the conduct of lenders and brokers handling higher-risk borrowers.