Second charge mortgages are set to face further scrutiny from the Financial Conduct Authority (FCA) after the regulatory body revealed they would be monitoring the quality of recommendations and the fees charged in the sector.
The FCA are looking to assess whether or not customers are receiving a product that meets their needs meaning they will be reviewing the advice given out by second charge mortgage brokers.
The regulatory body has said they will look to see if “customers have understood the product and if they have been treated fairly throughout the process” as well as examining the fees and charges that the customers face, assessing whether or not they are fair and how brokers decide them.
A sample of firms will be monitored in 2021 but the FCA have been keeping a close eye on the second charge market since 2017 and just last year revealed they were investigating the market for potentially targeting unaffordable borrowers. Fees for brokers and advisors in the second charge market have also come under scrutiny in recent years with some prominent firms even calling for a cap to be introduced.
The announcement, made in a ‘Dear CEO’ letter to mortgage intermediaries, laid out the key risks that advisors can pose to consumers and the wider market in a move that follows the Mortgages Market Study undertaken by the FCA.
The study found that overall, the mortgage market is generally working well but that there are “potential harms” which were picked out within a number of areas for extra focus. Second charge and lifetime mortgages were highlighted as key areas of focus for supervision work.
The industry regulator said: “Second charge brokers generally serve customers who may be less able to access mortgages from their existing lender or the mainstream market.”
“Many require second charge mortgages to raise funds for debt consolidation and/or home improvements.”
Following its recent work on later life lending, the FCA revealed it’s still concerned over the level of personalisation of advice in the lifetime mortgage sector and that there seemed to be ongoing lack of evidence to support suitability decisions and inadequate challenging of customer assumptions.
The regulator will also assess how suitable the advice is that’s given to consumers and potential borrowers in the second charge mortgage market as a way of ensuring consumers are treated fairly and have enough knowledge of the product.
A second charge mortgage is where a consumer can raise funds using any equity they have in their property as security against a loan, rather than having to remortgage the property. This leads to the consumer having two mortgages on the property rather than initial single charge policy or a remortgage plan.