A Financial Conduct Authority (FCA) review has found that weaknesses in some firms’ practices in the second charge mortgage market could put “borrowers, particularly those consolidating debt, at increased risk of financial harm”.
Lenders and brokers have been warned that they need to raise consumer standards and consider how they advise customers, assess affordability and charge fees.
The second charge mortgage market has grown rapidly in recent years as homeowners look to release equity without remortgaging onto higher interest rates, with the annual lend now reaching over £2.14 billion.
Although it still represents only a small proportion of the mortgage market at around 4%, second charge mortgages are often used by borrowers with high levels of existing debt and low financial resilience. These mortgages let homeowners borrow extra money using the equity in their home without changing their existing mortgage.
David Geale, executive director of payments and digital finance at the FCA, explained:
“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’s recent review, Second charge mortgages – improving outcomes for consumers, looked at a sample of firms, covering a market share of over 40% of second charge advice firms, and around 50% of second charge lenders. The FCA also reviewed the fair value assessments of mortgage intermediaries, covering firms with a market share of over 40%.
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, which requires firms to deliver good outcomes for customers.
The issues identified in the review include affordability assessments that appeared to overlook key living expenses, advice that steered customers towards debt consolidation when it was not clear if it was appropriate, inadequate record keeping, and unclear fees, often added to loans, making comparisons difficult.
The FCA said it will continue to engage with firms involved in the review and drive improvements across the second charge market to ensure the shortcomings identified are addressed. The organisation will keep monitoring second charge firms and take action where it has concerns – using the full range of regulatory powers where needed.
It will also begin to consider any mortgage policy changes needed to support good outcomes for consumers consolidating debt.
