Second charge mortgages are a relatively small part of the regulated mortgage market, but they carry a concentration of risks that make them a clear FCA supervisory priority. Customers often use them to consolidate existing debts, can have lower financial resilience and may pay higher interest rates and intermediary fees than customers in the mainstream first charge market. The compliance framework therefore needs to do more than show that a customer qualified for the loan.
The FCA's March 2026 review of second charge intermediaries and lenders is now the most important current benchmark. The regulator found examples of good practice, but also weaknesses in advice, affordability, record keeping and fees that could create poor customer outcomes. Its Mortgage Regulatory Priorities published the same day tell second charge lenders to review those findings and ensure their affordability assessments are robust and their expenditure assumptions realistic.
For management, the practical question is whether the firm can demonstrate why the second charge was appropriate for the individual customer, whether the borrowing remained affordable alongside the first charge, whether the total cost and fees represented fair value and whether the file is strong enough for another competent reviewer to reconstruct the decision.
Debt consolidation needs more than a lower monthly payment
Debt consolidation is a central second charge risk because extending the repayment period can reduce the immediate monthly payment while increasing the total amount repaid and converting unsecured debt into borrowing secured on the customer's home. An advice process that concentrates only on monthly affordability can therefore produce an apparently attractive result without addressing the longer-term consequence.
MCOB 4.7A contains specific factors that advisers must consider where the main purpose of the mortgage is debt consolidation. These include the cost of extending the repayment period, whether it is appropriate to secure previously unsecured borrowing and, where the customer is known to have payment difficulties, whether negotiating with creditors may be more appropriate than taking out a mortgage.
The FCA's 2026 review found examples where advisers lacked important information about debts being consolidated, including balances, interest rates and early repayment charges. Without that information, it can be difficult to demonstrate why consolidation was suitable or to compare the real cost of the proposed arrangement with the customer's existing position.
A strong file should therefore show what debts are being repaid, their current cost and remaining term, what the second charge changes, why securing them is appropriate and what material alternatives were considered. Where the customer's original purpose was something else, such as home improvements, the adviser should also be able to explain why additional consolidation borrowing serves the customer's needs rather than simply helping the case fit lender criteria.
Suitability and eligibility must remain separate
One of the clearest findings from the FCA's second charge work was that some advice processes appeared to focus on whether customers met lender criteria rather than whether the recommendation was suitable. That distinction is fundamental.
A lender's willingness to accept a customer does not establish that a second charge is the right recommendation. MCOB 4.7A requires the adviser to take reasonable steps to ensure that the mortgage is suitable for the customer's needs and circumstances. The file should therefore explain the customer's objectives, foreseeable changes, product features and relevant alternatives rather than treating eligibility as the conclusion.
The comparison with a remortgage can be particularly important. A customer may wish to preserve an attractive first charge rate, avoid an early repayment charge or keep the first mortgage unchanged for another reason. Those factors can support a second charge recommendation, but they should be evidenced. The adviser should not assume that keeping the first charge is automatically preferable simply because the customer initially asked for a second charge.
Cost also matters where more than one suitable product is available within the firm's range. The adviser should be able to explain why the recommended mortgage is appropriate and, where the rules require it, why a more expensive suitable option is being selected over a cheaper one. The reasoning should be customer-specific rather than standard text inserted into every suitability letter.
Lender affordability needs realistic income and expenditure assumptions
The formal affordability obligation under MCOB 11.6 sits with the lender. Before entering into a regulated mortgage contract, subject to the current exceptions, the lender must assess whether the customer will be able to pay the sums due and must not enter into the transaction unless it can demonstrate that the mortgage is affordable.
For a second charge lender, the assessment needs to reflect the customer's full secured borrowing position. The existing first charge remains in place, so the affordability analysis cannot consider the second charge repayment in isolation. The FCA's 2026 work found weaknesses where expenditure assumptions did not appear realistic for the customer population and where some costs were not adequately captured.
Model governance is therefore important. A lender should understand the source of its expenditure assumptions, when they were last validated and whether they remain appropriate for the customers it actually serves. Generic statistical values can be useful, but they need to be applied in a way consistent with the current MCOB framework and the firm's real borrower population.
Manual overrides and exceptions also deserve attention. If an underwriter can depart from model assumptions, the reason should be clear, appropriately authorised and capable of later review. Repeated overrides can indicate that the model no longer reflects the business or that commercial pressure is weakening the control.
Information must move accurately between broker and lender
The second charge journey often involves substantial reliance on intermediary information. The broker gathers customer circumstances, debts, income, expenditure and the purpose of borrowing, while the lender uses relevant information in its underwriting and affordability assessment.
The FCA identified cases where information collected by intermediaries was not fully passed to lenders. That can create two different problems. The lender may make its affordability decision on an incomplete picture, while the broker's own advice file may show a customer risk that never reaches the party responsible for the lending assessment.
Firms should therefore test information flow rather than assume it works because standard application fields exist. Material customer facts should be transferred accurately, and the broker should understand which information the lender needs rather than rely on free-text notes that may not be reviewed.
Where the lender identifies an inconsistency, the referral process should return the question to the adviser or customer rather than make an assumption simply to progress the application. A strong distribution chain allows each firm to perform its own regulatory role using consistent customer information.
Intermediary fees need a defensible fair value assessment
The FCA's review placed particular emphasis on second charge intermediary fees because they can be significant relative to the size of the loan and can materially affect the customer's total cost. The regulator reviewed fair value assessments and found that some firms did not have enough evidence to demonstrate how fee levels had been set.
High fees are not automatically poor value. Second charge advice can involve specialist lender knowledge, detailed debt analysis, extensive packaging and more manual work than a straightforward mainstream mortgage. The firm should nevertheless be able to explain the service and benefit the customer receives in exchange for the fee.
The fair value analysis should consider different customer groups and fee structures where these are material. A flat fee can create very different economic outcomes on a small loan and a large loan, while percentage-based charging can produce large monetary differences for substantially similar work. Management should understand those effects rather than assume that a standard tariff is inherently fair.
The timing and presentation of fees also matter. Customers should understand what they will pay, when the liability arises and what happens if the application does not complete. Introducer or packager remuneration should be considered where it affects the overall customer proposition or creates a conflict.
Vulnerability and low financial resilience should influence the process
The FCA notes that second charge borrowers frequently have high levels of debt and that a significant proportion may have characteristics of vulnerability, including low financial resilience. Firms should not assume vulnerability merely because a customer seeks a second charge, but their processes need to be capable of identifying when the customer's circumstances create a greater risk of harm.
Financial resilience is particularly relevant where the customer is consolidating debts because the second charge may create temporary monthly relief without addressing the underlying financial position. The adviser and lender should understand whether the customer can sustain the new arrangement and whether there are signs of existing payment difficulty that require additional consideration.
Vulnerability can also affect how information is communicated. A customer under significant financial pressure may focus heavily on the immediate monthly saving and give less attention to the longer repayment period or increased secured debt. Advisers should therefore ensure that important trade-offs are explained clearly and checked for understanding.
The Consumer Duty reinforces this. The objective is not simply to record a vulnerability flag, but to show that relevant needs changed the advice, support or communication where appropriate.
Record keeping must show the decision, not just the application
The FCA's 2026 review found record-keeping weaknesses that made it difficult to establish why advice was suitable. In some cases, firms could provide additional information after further FCA questions, but the original file did not make the reasoning clear.
That creates obvious supervisory risk. A file should allow another competent reviewer to understand the customer's objectives, debts, affordability context, alternatives and reasons for recommending the second charge without relying on the adviser's memory.
Call recordings can support the evidence where material discussions took place orally, but they should not become a routine substitute for a coherent written record. Important facts and reasoning should be captured in a form that allows effective QA and later complaint investigation.
Lenders should apply the same discipline to affordability and underwriting records. Model outputs, evidence, exceptions and overrides should be retained consistently with the applicable MCOB requirements so the firm can demonstrate how the decision was reached.
QA and monitoring should focus on the highest-risk cases
The FCA has told the wider mortgage advice market to review its findings on record keeping and QA. Second charge firms should go further and make those findings central to the compliance monitoring plan.
Sampling should deliberately include debt consolidation, vulnerable customers, high fees, large fee-to-loan ratios, adviser exceptions, affordability overrides and complaints. A random sample dominated by straightforward cases can create a high pass rate while avoiding the files most likely to reveal poor outcomes.
Monitoring should also compare advisers, introducers and lenders where useful. If one adviser produces materially more consolidation recommendations or one distribution channel generates higher fees and complaints, management should understand why.
Findings should feed training, system changes, fee governance and customer remediation where appropriate. A recurring second charge weakness should not be treated as a sequence of isolated file errors when the evidence points to a structural problem.
What should second charge firms do now?
The FCA has already published the issues it expects firms to consider, so the 2026 priority should be evidence-based self-assessment. Intermediaries should test suitability, debt consolidation reasoning, records and fees. Lenders should test affordability models, expenditure assumptions, information received from brokers and overrides. Both sides should examine whether customer vulnerability and Consumer Duty outcomes are visible in the data.
Management should also distinguish current rules from future mortgage reform. The FCA consulted in June 2026 on further responsible lending changes, but those proposals should not be treated as final law. The current MCOB requirements remain the basis for today's decisions unless and until further rules take effect.
The strongest response is not another policy update. It is a set of tested controls showing that the firm's actual customer journeys meet the current rules and that weaknesses identified by the FCA have been considered against the firm's own book.
How Regulatory Counsel can support
Regulatory Counsel supports second charge mortgage lenders, brokers and networks with MCOB advice reviews, affordability framework testing, fair value, Consumer Duty, file QA and regulatory remediation. We can review a representative sample, a specific high-risk theme or the full second charge framework.
Speak to Regulatory Counsel to discuss a second charge mortgage compliance review.
Frequently Asked Questions
The FCA identified weaknesses in areas including advice, affordability assessments, record keeping and intermediary fees. It expects second charge firms to review the findings against their own practices and improve where necessary.
No. The advice should consider the wider consequences, including the cost of extending repayment, whether unsecured debt is being secured and relevant alternatives where the customer has payment difficulties.
The formal MCOB 11.6 affordability assessment is principally a lender obligation. Intermediaries still need appropriate customer information for suitable advice and should pass relevant information accurately to the lender.
A high fee is not automatically non-compliant, but the firm should be able to demonstrate fair value by explaining the service and benefits provided relative to the price paid by the customer.
Yes. The FCA expects firms in the relevant market to consider its published findings against their own arrangements and address comparable weaknesses.