Debt consolidation and second charge advice: what the FCA review means for advisers

01

What the FCA found

The FCA published its review of second charge mortgages on 12 March 2026. Most lenders sell through intermediaries, and the regulator described their role as crucial to meeting customer needs and gathering accurate income and expenditure information.¹

The weakest area was debt consolidation. Advisers sometimes recommended it without clear evidence it was appropriate or affordable, and sometimes overlooked alternatives such as renegotiating with creditors. Records were often incomplete or inconsistent, which made it hard to judge whether advice was suitable. Fees were frequently added to the loan, and intermediary fees ranged from 2.5% to 15% of the loan, mostly 10% to 12.5%, and were rarely published online.¹

The review also named good practice: detailed collection of customer information, advisers challenging customer assumptions, evidence of discussions about planned retirement age, and innovative use of technology aimed at improving customer outcomes.¹

None of this came without warning. The FCA's portfolio letter to mortgage intermediaries of 30 January 2025 said it had seen some second charge firms fail to consider whether a secured loan was appropriate for customers in financial difficulty, and that recommending products without considering the cost of a longer repayment period, or whether the customer should secure those debts, could cause harm under the Consumer Duty.²

02

The three things the rules require you to weigh

MCOB 4.7A.15R applies when the main purpose of the borrowing is consolidating existing debts. On top of the general suitability factors, the adviser must take account of these, where relevant.³

The next provision, MCOB 4.7A.16E, adds a warning: misdescribing the customer's purpose, or encouraging them to tailor the amount they borrow so that the debt consolidation rule does not apply, may be relied on as tending to show a breach of the customer's best interests rule.³

03

The £12,000 that became £24,000

The FCA's case study describes a customer who asked for £12,000 over six years for home improvements. They were sold a £24,000 second charge over 15 years. It included £3,000 of charges and £12,500 of debt consolidation, which left only £8,500 for the purpose they came in for. The file gave no clear rationale.¹

Nothing in the rules stops a loan being larger than the first request. The problem is a larger loan, a longer term and added debts with no recorded reason. If the amount, the term or the purpose changes, write down why, in terms the client would recognise.

04

The break-even term: where consolidation stops paying

Consolidation usually lowers the monthly payment, but stretching the debt over more years adds interest. For any case there is a term beyond which the client repays more in total than if they had simply carried on paying their existing debts. That point is the break-even term.

In the illustration below, a client owes £24,700 across two credit cards and a car loan and pays £812 a month. Left alone, the debts cost £35,271 in total to clear. Consolidating adds a £280 early repayment charge, a £495 lender fee and a £2,470 broker fee to the loan, making it £27,945 at 9.5% APR.

Consolidating is cheaper overall up to a term of about 5 years 3 months. From about 3 years 5 months it is also cheaper each month, so between those two points the client wins on both. Beyond 5 years 3 months, every extra year lowers the payment but raises the total. At 10 years the client saves £456 a month and pays £7,408 more overall.

05

Retirement and payment difficulties

A long consolidation term can run past the client's planned retirement. The FCA highlighted evidence of discussions about planned retirement age as good practice. If the term goes beyond it, record how the payments will be met from income in later life.¹

Where the client is already struggling with payments, the rule asks whether negotiating with creditors would be more appropriate. Signposting free, independent debt advice is a sensible step before securing debt on their home, and the reason for proceeding should be on the file.³⁴

06

What a defensible file contains

This is a practical checklist drawn from the rule and the review, not an FCA template. It is the record that answers the question asked years later: why was this right for the client at the time?

• Every debt with its balance, APR, monthly payment and early repayment charge
• The total cost of doing nothing against the total cost of consolidating, at the proposed term
• Every fee, and whether it is paid upfront or added to the loan
• The break-even term, and why the proposed term was chosen
• What the client originally asked for, and why the loan differs if it does
• Why each debt was included or left out
• The client's planned retirement age where the term runs close to or past it
• Alternatives considered, including creditor arrangements and free debt advice where relevant

07

If you refer the case rather than advise on it

Many IFAs and introducers pass second charge cases to a specialist master broker, who then gives the regulated advice. The specialist's advice still has to meet these rules, so the information you pass on matters: accurate balances, rates, early repayment charges and the client's original request.

Keep your own short note of why you referred and what you passed on. Charles Frank Finance captures every debt on the case, records consent and keeps a full audit trail of who did what and when, so that record exists from the moment a case is submitted.