The Financial Conduct Authority (FCA) has called on mortgage providers to raise standards for consumers.
An FCA study says lenders and brokers in the second mortgage market should consider how they advise customers, assess affordability and charge fees.
The watchdog’s investigation found that weaknesses in some companies’ practices could leave borrowers, especially those consolidating debt, at risk of financial harm.
The FCA’s research found examples of good practice across the sector, as well as issues raising concerns about whether firms are meeting expectations, including on consumer tax grounds.
Issues highlighted in the survey include affordability assessments that appeared to overlook key living costs, and advice that steered customers towards debt consolidation when it was not clear whether this was appropriate.
Other problems included poor record keeping and unclear fees, which were often added to loans, making comparisons difficult.
The FCA has called on all second-filing firms to carefully consider the findings and take appropriate action.
The regulator said it has continued its engagement with the companies included in the investigation to ensure shortcomings are addressed.
While the FCA has already seen changes taking place, it says it will continue to work with businesses over the coming year to drive improvements in the second charging sector.
In addition, it will continue to monitor second-tier businesses and take action where necessary, and consider any changes to mortgage policies necessary to support good outcomes for consumers consolidating their debts.
FCA Executive director of payments and digital finance David Geale says: “People who are often already heavily in debt rely on the second market. It’s crucial that it works well, but we’ve found that the standards are not always in the right place. This needs to change.”
James Daley, director of Fairer Finance, also said: “It is encouraging to see the FCA shining a spotlight on a sector that often deals with financially vulnerable customers.”
“It is clear that many companies are not meeting the high standards of Consumer Duty, and it is vital that the FCA’s work in this sector does not end with today’s announcement.”
“It’s almost three years since the Consumer Tax came into force – and where there is bad behavior within it, it is crucial that the regulator uses its enforcement powers.”
“Over the past year we have seen the regulator talk much more about deregulation than about consumer protection, and there is a risk that companies will interpret this message as a signal that the pressure is off.”
“There are still many areas of the financial services industry where firms are falling far short of consumer duty – and the FCA must show that there are consequences for bad practice.”
Meanwhile, Damien Burke, head of Broadstone’s regulatory practice, added: “Second amortization mortgages have traditionally been used to provide a practical option for borrowers who need to manage their existing debt without refinancing their primary mortgage, especially in a higher interest rate environment where refinancing is not feasible.”
“The market has changed somewhat in recent years, with borrowers equally likely to finance home improvements or pay school fees.”
“However, as the FCA’s findings highlight, these products are still being used by customers with limited financial resilience.”
“Whatever the need, robust affordability assessments are essential for understanding individuals’ affordability and a growing number of businesses and individuals are turning to Open Banking and Open Finance data to meet that need, with an FCA Research Note from March 2025 stating that there are 13.3 million active Open Banking users in the UK. However, not all lenders or brokers offer that option.
“The issues identified around affordability checks, debt consolidation advice and fee transparency go to the heart of consumer duty and you cannot provide good advice unless you first understand the individual’s circumstances.”
“Companies must be able to clearly demonstrate that the recommendations they make actually deliver good results for customers, rather than simply increasing loans or increasing debt burdens.”
“This review should act as an impetus for lenders and brokers in the wider mortgage market to re-examine their processes, affordability assessments, documentation and supervision.”
“Ensuring that customers fully understand the benefits, costs, risks and alternatives to secondary lending will be essential if the market is to maintain confidence while continuing to provide an important source of credit to households seeking alternative financing options.”