The FCA’s review of second charge mortgage advice, fees and affordability assessments, published on 12 March, could be easy to dismiss by wider industry as a niche document about a market that accounts for a small fraction of total mortgage lending. That would be a mistake. The findings from this review were published on the same day as the FCA’s first Regulatory Priorities for Retail Mortgages report, a new annual publication replacing more than 40 portfolio letters, intended to set out the regulator’s expectations for the entire mortgage market in a single document. The timing seems deliberate, as does the message that lenders and intermediaries across the wider mortgage market should consider the second charge findings and ask whether improvements can be made in their own firms.
For compliance professionals and senior leaders operating in any advised or intermediated financial services market, the findings deserve close attention. Not because second charge lending is central to your business, but because the conduct failures identified here are consistent to those the FCA is finding elsewhere. They also point to much more than isolated process failures. They present a combined view of a conduct or cultural issues which hits directly at the core of Consumer Duty. If you recognise the patterns, the prompt to act is aimed at you too.
So what can we learn from the review?
The findings from the review raise concerns around a number of key areas which concentrate around key customer outcomes. The issues identified included:
- The eligibility vs suitability issue: The FCA found that advisers were assessing whether customers were eligible for a second charge mortgage, but not whether the product was genuinely suitable for them. Those are not the same thing, and conflating them may amount to a conduct failure, not solely a process gap. The findings outlined examples where advice process was structured in a way which risked a funnel towards a product outcome rather than a genuine assessment of customer needs and product suitability. This included some advisers recommending consolidation into a secured loan without sufficiently testing whether this was affordable or failing to explore obvious alternatives to consolidation, which may have been cheaper and more suitable for customer need
- Affordability or a data integrity problem? The FCA findings in this area were not simply that some lenders failed to collect enough expenditure data but rather that the data flowing through the distribution chain was incomplete before it even reached the lender’s affordability model. The review found that some intermediaries did not pass on the full details of a customer’s expenditure to lenders, leading lenders to underestimate costs. Meanwhile, some lenders were applying expenditure assumptions (and failed to challenge or verify under declared spending) that did not appear realistic for the average customer of that firm. The result are systems where the model is technically compliant but operationally misleading and reflecting the old truth that the output can only ever be as good as the data used up front.
- Outcomes monitoring and ‘point of sale’ bias: The review revealed that for many firms, outcomes testing was narrow and focused primarily on customer satisfaction at loan origination, therefore the moment when customers naturally are the most positive about their experience. This ‘point in time’ testing failed to consider long term outcomes and impacts of the lending decisions across the end-to-end customer journey. That is not outcomes monitoring as expected under Consumer Duty and points to lack of proportionate and effective oversight and outcomes testing (on both lender and intermediary side), comparing to the inherent risks in the distribution model.
- Fair value and the transparency gap: The FCA pointed to a number of significant issues relating to the price and value outcome (such as firms’ inability to explain how they set the value of fees, utilising benchmarking as assumptions for fair value, recovering costs through high fees for small volumes of customers based on inherently low conversion rates in the market and lack of transparency in publication of fees) which mirrors findings previously made in other sectors.
- Insufficient Record keeping: The FCA found incomplete and inconsistent customer records across firms in its review, that made it difficult to assess either the suitability of advice given or the basis on which lending decisions were made. Poor record keeping is rarely the direct cause of consumer harm. But it is consistently the reason firms cannot demonstrate they did not cause harm and should be treated as one of the mechanisms through which firms defend their conduct when it is challenged.
The vulnerability context
The second charge market, through high levels of debt consolidation loans, inherently serves consumers with characteristics of vulnerability. Its target market includes people already carrying significant debt, people with limited financial resilience, people for whom an unaffordable recommendation carries serious consequences.
And while the FCA do call out several examples of good practice across both lenders and intermediaries, they also found that the standards of advice, affordability assessment, and outcomes monitoring are not systematically proportionate to the level of potential harm these customers could experience as a result. Since 2021, the FCA have been clear that the higher the consumer risk (particularly where consumers display characteristics of vulnerability), the higher the conduct standard required. According to the FCA, that principle does not seem to be consistently reflected in the second charge market, based on the review findings.
The FCA’s 2025 multi-firm review on vulnerable customer treatment also found that firms continue to struggle with consumers presenting multiple characteristics of vulnerability simultaneously. The second charge review reinforces that finding as not only are vulnerable customers being underserved in terms of outcome quality, but the monitoring frameworks intended to catch this may not be functioning effectively.
What should firms do now?
The FCA has set a clear expectation for the second charge firms to review the findings and take appropriate actions to address issues called out. But whether you operate in the mortgage market or not, the second charge review provides a useful checklist. Ask yourself:
- Does your advice process genuinely distinguish between eligibility and suitability?
- Are your affordability inputs realistic, not merely validated?
- Is your outcomes monitoring covering the full end-to-end customer lifecycle, or just the point of sale or a ‘point in time’?
- Is your oversight of the distribution chain effective in identifying areas of harm?
- Can your fair value assessments withstand scrutiny of how fee levels were set?
- And if your conduct were questioned tomorrow, do your records tell a coherent and complete story?
The FCA stated it will work with firms over the coming year to drive improvements in the second charge market and will begin considering mortgage policy changes to support good outcomes for consumers consolidating debt. The firms best placed to navigate that scrutiny will be those that treat this review not as a second charge issue, but as the cross-market conduct prompt.
How Square 4 can help
Square 4 works with firms across all sectors to translate regulatory findings into practical and proportionate action. We can support clients in carrying out gap analyses against the findings or general market standards, review of their Consumer Duty outcomes monitoring frameworks, fair value assessment methodology or provide assurance over firms’ advice and lending frameworks. We can help firms assess their current position, identify priorities, remediation areas and approach frameworks or support through the regulatory engagement process.
If you would like to discuss any aspect of the FCA’s second charge mortgage review, please contact us at hello@square4.com.
