The Financial Conduct Authority has warned that some lenders and brokers in the second charge mortgage market must raise standards after a review found practices that could put already indebted borrowers at risk of financial harm.

The regulator said firms need to review how they advise customers, assess affordability and structure fees following findings that highlighted weaknesses across parts of the sector.

ISSUES

While the review identified examples of good practice, it also uncovered several issues that raise concerns about whether some firms are meeting regulatory expectations, including under the Consumer Duty.

The FCA said some affordability assessments appeared to overlook key living expenses, potentially leading to decisions that did not fully reflect a borrower’s financial position.

The review also found instances where advice appeared to steer customers towards debt consolidation without clear evidence that it was the most appropriate option.

Record keeping was another area of concern, with the regulator identifying cases where documentation was insufficient. The FCA said this made it difficult to demonstrate that advice provided to customers had been suitable.

FEES

In addition, some firms were found to be applying fees in ways that were not clearly presented to borrowers. Charges were often added to the loan itself, which the FCA said could make it harder for customers to compare costs across different products.

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 has called on firms operating in the second charge market to review the findings and take action where needed.

It also said brokers working in the wider mortgage market should consider the review’s conclusions, particularly around record keeping and quality assurance, and assess whether improvements could be made within their own processes.

The regulator confirmed it will continue engaging with firms included in the review to ensure that shortcomings are addressed.

Over the next year, the FCA said it will continue working with firms to drive improvements across the second charge mortgage market while maintaining oversight of the sector.

Where concerns persist, the regulator said it will use the full range of its regulatory powers. It will also begin considering whether changes to mortgage policy may be required to support better outcomes for borrowers who are consolidating debt.