Regulatory Risk and Rectification – July newsletter

FCA supervisory strategy

The FCA’s two-year strategy for mortgage intermediaries, published in January 2025, confirms that Consumer Duty remains central to supervision. The FCA wants to see a market where clients receive suitable advice, are matched to products that meet their needs, and are able to make informed decisions, supported by robust governance and controls.

The strategy was issued against a backdrop of affordability pressures, higher borrowing costs and increasing customer vulnerability. The FCA highlighted the challenges facing consumers as interest rates and living costs have affected mortgage affordability, creating a greater risk of unsuitable outcomes where firms do not fully understand customers’ circumstances.

The FCA has indicated that supervisory work, thematic reviews and firm assessments are likely to focus on whether firms can demonstrate:

• Effective fact finding and the quality of information collected
• Robust processes for delivering suitable recommendations that are tailored to client needs, objectives and circumstances
• Firms’ assessment of customer understanding under the Consumer Duty
• Quality assurance and the effectiveness of systems and controls to assess, monitor and mitigate risks
• Remuneration and incentive arrangements that do not drive product bias or poor behaviours

FCA supervision findings – Second Charge mortgages

The FCA’s recent multi-firm review of second charge mortgages sends a clear message to the wider mortgage advice market: eligibility is not the same as suitability, and poor records will not evidence good client outcomes. Whilst the review focused on second charge lending, many of the findings are relevant across the wider mortgage market.

Firms should use the findings as a prompt to test whether their advice processes and record keeping would stand up to FCA scrutiny.

Key points include:

• Advisers should not treat lender eligibility as sufficient to recommend a product. They must consider the client’s needs, circumstances and suitability.
• Debt consolidation remains a key area of regulatory focus. Advisers should consider all options and clearly evidence why consolidation is appropriate and in the client’s best interests.
• The FCA found poor record keeping at some firms, with some files lacking sufficient evidence to support advice recommendations and suitability.
• The FCA also raised concerns about firms’ own file checking, particularly where poor documentation was not identified through the checking process.

These are not new issues, but the regulatory risk continues to grow. Where failings are systemic, firms are likely to face FCA intervention, including remediation cost and potential past business reviews.

Future direction of Mortgage Regulation

FCA Regulatory Priorities

In March, the FCA published its updated priorities for the mortgage market, covering both lenders and intermediaries. These priorities point to a more flexible mortgage market.

Key points for firms include:

Simplified rules: The FCA Mortgage Rule Review will look to simplify rules, broaden access, improve later life mortgage provision and support innovation while protecting vulnerable customers.

Less prescriptive: Rules will become less prescriptive, but expectations for good consumer outcomes will be maintained. The FCA reiterated its focus on suitability, record keeping, testing of consumer outcomes and effective QA. Debt consolidation and later-life lending are likely areas of they will focus supervisory attention.

Later-life lending: Later-life lending will be a key focus because risks for vulnerable customers are higher. A market study started in March to examine the need for change to lifetime and Retirement Interest Only (RIO) mortgages as more customers repay mortgages later in life or access property value to meet living costs.

The Mortgage Rule Review DP25/2 and Feedback CP26/18

The FCA is considering how its move to a more principles-based approach to regulation will apply to the mortgage market. The FCA recognises that changes in the economic environment and the tightening of mortgage market regulation following the financial crisis have made access to mortgages more challenging, especially for first time buyers.

Regulation has contributed to a risk averse mortgage market. The FCA is now considering how this can be rebalanced to improve access while ensuring risks are properly managed and vulnerable clients protected.

Over 2026/27, policy changes will be considered for responsible lending rules, affordability assessments for RIO mortgages, holistic later life mortgage advice and specific rules for debt consolidation. As part of this the FCA launched a consultation in June on the proposed changes to mortgage lending rules.

The consultation sets out areas where current prescriptive mortgage rules can be relaxed to improve access for credit-worthy consumers. This could see a widening of the mortgage market with more products becoming accessible to more individuals. These targeted changes aim to balance responsible lending with offering more people a better chance of securing an affordable mortgage. Whilst firms will welcome the flexibilities introduced, they should not view this as a weakening of standards and should continue to ensure advice continues to be appropriate and documented.

Actions to consider

While the FCA’s recent focus has been the second charge market, many of the findings are relevant for the first charge market. There is an opportunity now for all mortgage advisory firms to reassess their advice processes and controls and consider any risks relating to past business.

The FCA has made clear that where firms cannot demonstrate suitable advice and good customer outcomes, the consequences can include remediation activity, past business reviews and significant operational costs.

Significant regulatory change is also on the horizon. While the detail of future reforms is still being developed, the FCA has set out a clear direction of travel through its Mortgage Rule Review. Firms may have opportunities to broaden access to mortgage advice and revisit elements of their business model, but greater flexibility is likely to be accompanied by increased responsibility to exercise sound judgement, manage risks effectively and evidence good customer outcomes in an increasingly outcomes-focused regulatory environment.

How can Isio help?

Isio can help firms turn regulatory change into a practical action plan. We provide independent, commercially focused support to assess risk, strengthen controls and evidence good outcomes.