The Financial Conduct Authority (FCA) released its findings on the market and reported examples of good practice and evidence of poor practices.
It found that intermediaries and lenders were collecting and assessing detailed customer information, considering retirement and the use of technology to improve customer outcomes.
However, it also found that the standards for second charge mortgage advice could be improved, particularly when it came to debt consolidation.
The FCA said advisers should consider whether a second charge mortgage was genuinely suitable for customers, not just that they were eligible for the loan.
It also found that some advisers recommended debt consolidation when an assessment did not make it clear that this was affordable or appropriate for the client. Further, the regulator found that some advisers did not adequately consider other potential options, such as suggesting that clients with payment difficulties should engage with existing creditors to renegotiate monthly payments.
How brokers can shape the future of shared ownership
Sponsored by Halifax Intermediaries
The FCA said affordability assessments could be more robust, as some lenders’ expenditure assessments were based on assumptions about expenditure that did not seem realistic for the average client of that firm. It found that the consideration of childcare costs, household goods and repairs was sometimes “inadequate”.
The regulator said some advisers did not pass on all relevant information to lenders, such as the full details of a client’s expenditure, leading some lenders to underestimate this. It found that outcomes testing was “narrow” and focused more on how satisfied a customer was when the funds were released. The FCA said firms should consider how they monitor and assess good outcomes across the customer journey.
Additionally, the FCA found that some firms had incomplete or inconsistent client records, which made it hard to assess how suitable the advice was or how lending decisions were made.
The FCA also noted that the fees charged to second charge mortgage clients were higher than those for first charge mortgages, and typically more than 10% of the loan value. It said firms did not give enough information in their fair-value assessments to show how they set the level of their fees.
It also said it could be hard for clients to compare intermediary fees before engaging with firms, as these were not always published on the website.
The FCA said all second charge firms should consider the findings and take action, adding that brokers for the wider mortgage market should also take note of its findings and whether they can make improvements.
Over the next year, the regulator will work with firms to drive improvements and keep monitoring second charge firms. It will also begin to consider mortgage policy changes to support good outcomes for consumers consolidating debt.
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 must use its enforcement powers
James Daley, managing director of consumer group Fairer Finance, said it was “encouraging” to see the FCA shine a light on a sector that “often deals with financially vulnerable customers”.
Daley added: “It’s clear that many firms are not living up to the high standards set by the Consumer Duty, and it’s vital that the FCA’s work in this sector does not end with today’s announcement. It’s nearly three years since the Consumer Duty came into force – and where it identifies poor conduct, it’s vital that the regulator makes use of its enforcement powers.
“Over the past year, we’ve seen the regulator talking much more about deregulation than consumer protection, and it runs the risk that firms will perceive this message to mean that the pressure is off. There are still many areas of financial services where firms are falling well short of the Consumer Duty – and the FCA needs to show that there are consequences for bad practice.”
Damien Burke, head of regulatory practice at Broadstone, said second charges were traditionally used by borrowers to manage existing debt without refinancing their primary mortgage, but the market had changed and people were likely to use the loan for home improvements and school fees.
However, he said the FCA’s findings showed it was still used by people with “limited financial resilience”, and although more people were using open banking and open finance, not all brokers or lenders offered that capability.
Burke added: “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.”
