FCA tells second charge lenders and brokers to raise standards

Lenders and brokers in the second charge mortgage market need to consider how they advise customers, assess affordability and charge fees, according to a new report by the FCA.

The regulator's review, published today, found that weaknesses in some firms’ practices could put borrowers, particularly those consolidating debt, at increased risk of financial harm. 

The review found examples of good practice across the sector but also issues that raise concerns about whether firms are meeting expectations, including under the Consumer Duty. 

It found that affordability assessments that appeared to overlook key living expenses and advice steered customers towards debt consolidation when it was not clear if it was appropriate.

The review also uncovered inadequate record keeping and unclear fees, often added to loans.

The FCA says it will now consider any mortgage policy changes needed to support good outcomes for consumers consolidating debt.

The regulator noted that brokers for the wider mortgage market should also consider the findings, especially on record keeping and quality assurance, and whether they can make improvements. 

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.” 

Damien Burke, head of regulatory practice at Broadstone, commented: “Second charge mortgages have been traditionally used to provide a practical option for borrowers who need to manage existing debt without refinancing their primary mortgage, particularly in a higher interest rate environment where remortgaging may not be viable. The market has changed somewhat in recent years with borrowers just as likely to be financing home improvements or paying for school fees. 

“However, as the FCA’s findings highlight, these products are still used by customers with limited financial resilience. Whatever the need, robust affordability assessments are essential to understanding individual’s affordability and a growing number of firms and individuals are turning to Open Banking and Open Finance data to fulfil that need, with an FCA research note released in March 2025 stating there are 13.3 million active Open Banking users in the UK. Not all lenders or brokers offer that capability though.

“The issues identified around affordability checks, debt consolidation advice and fee transparency go to the heart of the Consumer Duty and you cannot provide good advice unless you first understand the individual’s circumstances. Firms must be able to clearly demonstrate that the recommendations they make genuinely deliver good outcomes for customers, rather than simply increasing borrowing or extending debt burdens.

“This review should act as a prompt for lenders and brokers across the wider mortgage market to revisit their processes, affordability assessments, documentation and oversight. Ensuring that customers fully understand the benefits, costs, risks and alternatives to second charge borrowing will be essential if the market is to maintain trust while continuing to provide an important source of credit for households seeking alternative finance options.”