The FCA has carried out a review of the second charge mortgage market and, although it found examples of good practice from lenders and intermediaries, it also found several weaknesses that it says may put borrowers at increased risk of financial harm as they typically have higher interest rates and are used by consumers who often have a high level of debt, making them likely to have characteristics of vulnerability. Although second charge mortgages comprise only around 4% of regulated mortgage sales, the potential for consumer harm is significant.
Its key criticisms were of:
- affordability assessments that did not seem to take into account key living expenses – the FCA particularly noted that some firms did not seem adequately to consider expenses like childcare costs and household goods and repairs;
- advising customers to consider debt consolidation when it was not clear this would be appropriate – the FCA said some advisers did not seem to consider what other potential options the customer might have;
- lenders and intermediaries working together – the FCA found that some intermediaries did not always pass on relevant information to lenders, and outcomes testing was sometimes narrow and considered only the point funds were released, not the whole customer journey;
- poor record keeping, which made it hard to assess whether advice has been suitable; and
- unclear fees that made comparisons difficult, especially when these were added to loans – given that fees for second charge mortgages are higher than for first-charge mortgages, intermediaries also did not always provide enough information to enable the value to be assessed.
The FCA expects all relevant firms to consider its findings and take appropriate action, while it communicates directly as needed with the firms involved in the survey. It is also considering rulebook changes that will further support good customer outcomes for customers consolidating debt.