FCA calls on second charge mortgage firms to improve standards

The Financial Conduct Authority (FCA) has issued a clear warning to lenders and brokers operating in the second charge mortgage market, urging them to improve the way they advise customers, assess affordability and explain fees. Following a recent review, the FCA identified a number of weaknesses that raise concerns about whether some firms are meeting their obligations under the Consumer Duty.

In particular, the regulator found examples where:

• Affordability assessments failed to take full account of customers’ everyday living costs
• Clients were advised to consolidate debt without sufficient evidence that this was the right solution for them
• Record keeping was poor or incomplete
• Fees, often added to the loan itself, were not clearly explained or easy to understand

While second charge mortgages make up only a small part of the overall mortgage market, they are often used by individuals who already have significant levels of debt and limited financial resilience. This means the potential impact of poor advice or weak affordability checks can be particularly severe.

Commenting on the findings, David Geale, Executive Director of Payments and Digital Finance at the FCA, said:

“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 is continuing to engage directly with the firms involved in its review to drive improvements, but it has also made clear that all lenders and brokers active in this market should take note of the findings and review their own practices carefully.

Our view – points for borrowers to consider

From our perspective as advisers, this review is a timely reminder that second charge borrowing should never be treated as a “quick fix”. If you are considering this type of finance, we recommend taking a step back and thinking about the following:

• Affordability beyond the numbers

Make sure any assessment looks realistically at your full household spending, not just headline income figures. A loan should still be affordable if interest rates rise or circumstances change.

• Is debt consolidation genuinely the right answer?

Consolidating debt can simplify repayments, but it does not reduce the underlying cost unless the terms are clearly better. In some cases, alternative options may be more appropriate.

• Understand the true cost

Fees added to a loan can significantly increase what you repay over time. Ask for a clear breakdown of all charges and how they affect the total cost.

• Consider independent advice

Given the long‑term implications and the risks involved, taking independent, professional advice can help ensure decisions are made with a full understanding of the consequences. As always, careful planning and transparency are key. The FCA’s findings reinforce the importance of robust advice and clear communication, particularly where customers may already be under financial pressure

Read more information here.