The Financial Conduct Authority (FCA) has published a review into the second charge mortgage market and called on lenders to improve their practices.

Both lenders and brokers in the second charge mortgage sector need to consider “how they advise customers, assess affordability and charge fees”, the regulator said.

Second charge mortgages are often used by customers with high existing levels of debt and low financial resilience. From its review, the FCA said it had seen examples of good practice across the sector but also issues that raise concerns about whether mortgage firms are meeting expectations, including those under the Consumer Duty regulation.

The issues identified in the review included affordability assessments that appeared to overlook key living expenses, and advice that steered customers towards debt consolidation when it was not clear if it was appropriate. The regulator also raised concerns around inadequate record keeping and firms giving unclear fee structures as bad practices in the market.

Executive director of payments and digital finance at the FCA, David Geale, 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.”

Following its review, the regulator has called on all second charge firms to consider the findings carefully and take appropriate action. It suggested 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.

The FCA also confirmed it has continued its engagement with the firms included in the review to ensure the shortcomings are addressed.

Head of regulatory practice at consultancy group Broadstone, Damien Burke, commented: “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.”

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