Latest version of dungeons, as of 08/08/21. This issue seems similar to some others I have read, but not quite the same. In the others, the second player's character's were just not available in couch co-op, but available once loaded by them. For us, the second player's character has been reassigned to player 1.

We bought dungeons recently on the PS4, and have been playing 2 player couch/local co-op. We always logged in using my PSN account, and then the other PSN account joined with L3. We both had 1 character, and no others. 

However, I loaded the game up to play by myself and created a new character (I didn't do any levels, just created it). The next time I logged in, and the second PSN account joined, the second PSN account's character wasn't available, and could only create new characters. We soon realised his character was now an option for me to pick from my selection of characters. For some reason, it had been reassigned from his PSN account to mine.

We tried copying the character and uploading it, but none of it worked. Then we tried loading in Dungeons as the second PSN account (for the first time), but still his original character wasn't there - it had been permanently moved to my account.