Second Charge Mortgages Under the Consumer Duty: What Lenders and Intermediaries Must Do Now

The FCA has reviewed the second charge mortgage market, highlighting both good practices and ongoing weaknesses that may lead to poor outcomes for vulnerable customers, especially for those using these mortgages for debt consolidation. Thistle Initiatives Manager, James Callinan, looks into the review and what firms are expected to demonstrate.  

The Financial Conduct Authority's (FCA) recent review of the second charge mortgage market highlights a mix of both good practice and persistent weakness that risks poor outcomes for predominantly debt-consolidating and often vulnerable customers. The regulator reiterates that Consumer Duty standards apply end‑to‑end across the distribution chain and expects firms to evidence robust advice, affordability, record‑keeping, value and oversight.  

Why This Matters Now

The FCA are ever more conscious of the use of mortgages for debt consolidation. Both first and second charge mortgages can be used for this purpose, and so the below applies to all those involved in the provision of regulated mortgage contracts. 

Second charge mortgages are a smaller part of the market but often carry higher rates and are commonly used for debt consolidation. A meaningful proportion of customers show vulnerability characteristics, including low financial resilience. That combination elevates foreseeable harm risks and the FCA’s scrutiny.

The FCA’s latest review covered c.40–50% market share across advice firms and lenders operating in the second charge market and examined advice quality, affordability, costs to consumers, and how intermediaries and lenders interact along the full customer journey. Following the review, the FCA identified 5 ‘pressure points’, including:    

Five Pressure Points the FCA Highlighted

1. Advice Quality - especially where debt is consolidated

• Files often lacked clear suitability rationales and complete debt data (rates, balances, ERCs).
• Trade-offs were not always explained (e.g. lower monthly payments vs higher total cost over a longer term). 
• Alternatives were inconsistently explored or signposted, where unsuitable, a second charge should not be recommended. 

2. Affordability Assessments

• Over-reliance on statistical expenditure is not reflective of heavily indebted applicants. 
• Missing cost lines (e.g. childcare, household goods/repairs) and insufficient challenge of self-declared figures.
• Inadequate bank statement coverage to evidence realistic expenditure levels.

3. Information Hand-offs Between Intermediaries and Lenders

• Material gaps in transmitted information, especially around expenditure and vulnerability indicators.
• Outcomes gesting is often fixated on disbursement-point satisfaction rather than outcomes across product life.

4. Record-Keeping and QA

• Thin or inconsistent records hinder the reconstruction of advice suitability or lending decisions.
• QA focused on documentation completeness rather than suitability and customer outcomes.

5. Intermediary Fees and Fair Value

• Fees typically fall in the 10–12.5% band (2.5–15% observed), often higher than the first charge.
• Weak linkage between fees and benefits/limitations for the target market; limited early‑journey transparency.

What "Good" Looks Like

• Personalised, challenging advice with documented reasoning and open discussion of alternatives, plus time and support for customer decisions.
• Affordability triangulated across sources (e.g., bank statements) with realistic baseline costs and explicit treatment of hard‑to‑reduce items.
• Lender oversight of intermediaries using outcome‑linked management information (“MI”), not just application completeness or accept rates.
• Comprehensive records: full fact‑finds, unsecured debt details, call notes/recordings, and lender decision rationales, including policy exceptions.
• Fair Value Assessments (“FVA”) that evidence a reasonable relationship between benefits/limitations and total price for the target market, including vulnerability.

Immediate Actions for Lenders

• Tighten affordability policy and models: include mandatory childcare and household goods/repairs lines with challenge triggers and sensible minimums.
• Require multi‑source expenditure validation (e.g., meaningful bank‑statement windows) and prohibit “one‑off” exclusions without a rationale.
• Codify common‑sense challenge: train underwriters to question incongruent data; log all challenges/adjustments in decision notes.
• Strengthen intermediary oversight: risk‑rate firms on outcome‑linked MI (arrears, forbearance, complaints, root causes, data‑quality re‑work, vulnerability capture accuracy).
• Evidence decisions and exceptions with a structured underwriter note capturing income/expenditure basis and any policy exceptions.
• Broaden outcomes testing beyond “funds released” to include early arrears, payment‑stress indicators, forbearance usage, and sustainability of consolidations.

Immediate Actions for Intermediaries

• Re‑set consolidation advice standards: document root causes of unsecured debt; capture complete debt data; explain trade‑offs transparently; do not recommend if unsuitable.
• Openly discuss alternatives: signpost creditor negotiations or non‑mortgage options where payment difficulty is known; keep scripts flexible and interactive.
• Transmit complete information to lenders: pass full expenditure and vulnerability information with an audit trail.
• Elevate QA from “file complete” to “suitable and outcomes‑based”: assess suitability rationale, alternatives considered, and customer understanding (e.g., call reviews).
• Rebuild FVAs: evidence fee‑to‑benefit linkage for the target market, publish fee models earlier in the journey, and justify any hourly‑rate metrics with activity‑based costing.

The Importance of Data and MI

The regulator has stated that it will use information submitted by firms within their regulatory returns to make quicker, targeted interventions and identify harm. The regulator has also signalled the importance of being able to evidence Consumer Duty adherence and good customer outcomes through MI.  

Taken together, firms should be mindful of the risks of a lack of oversight in the data and MI that they are collecting and sharing, both internally and externally. Trends should be identified and actioned internally, enabling the firm to provide a strong rebuttal to any FCA intervention that may follow.  

What is Thistle Seeing in the Market?

Thistle has seen a significant increase in supervisory activity and Financial Ombudsman Service (“FOS”) outcomes across the financial services sector in recent months. Working closely with a wide range of regulated firms, including those operating in the second charge market, we are observing a clear regulatory shift towards earlier intervention and more assertive supervisory tools.

In particular, there has been a noticeable rise in the number of Voluntary Requirements (“VREQs”) issued by FCA Supervision teams. These requirements invite firms to agree to specific restrictions—often relating to the cessation of new business, enhanced oversight, or targeted remediation where the FCA identifies concerns. As VREQs are publicly displayed on the FCA Register, they carry not only operational constraints but also material reputational and market impacts, which can affect partner relationships, funding lines and customer confidence.

Alongside this supervisory trend, recent decisions published by the FOS indicate a strengthening approach to consumer redress. Where firms cannot demonstrate that lending or product recommendations were affordable, suitable, or delivered in line with regulatory expectations, the Ombudsman is directing substantial consumer remedies. These frequently include full refunds of interest and charges, as well as broader reviews of lending or advice practices where systemic issues appear evident. The tone of these decisions highlights that where firms fail to evidence robust assessment, oversight, and customer-focused outcomes, financial and operational consequences can be significant.

How Thistle Initiatives Can Help

• Targeted file reviews of consolidation cases with Duty‑ready findings and remedial actions.
• Affordability model challenge and uplift, including expenditure baselines, evidence rules, and exception governance.
• Intermediary oversight frameworks for lenders—risk‑based scorecards, MI packs, and outcomes testing design.
• Record‑keeping and QA upgrades, including suitability rationale standards and call review protocols.
• Fair Value Assessments and fee transparency, with activity‑based costing models and consumer understanding tests.
• Training for advisers and underwriters on consolidation advice, vulnerability, and challenge culture under the Duty.
• External, third-line assurance work on firm controls and infrastructure.

Final Thought

For second charge lending, good outcomes depend on uncompromising advice standards, realistic affordability, clean information hand‑offs, strong records, and defensible value. Firms that hard‑wire these into day‑to‑day processes will be best placed for Consumer Duty scrutiny—and, more importantly, for delivering sustainable customer results in a high‑risk segment.  

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