The Financial Conduct Authority said when claims management companies (CMCs) offer unregulated claims services, they should be clear with consumers about which of their products are regulated and which are not.
The regulator said it was concerned that consumers may mistakenly assume that all the services CMCs offer are regulated by the FCA.
It said this assumption can mislead consumers about the level of protection they have and give unregulated activities extra credibility.
In a portfolio strategy letter last January, the FCA provided an update on its strategy and gave a view of what it sees as the risks CMCs pose to consumers.
It issued substantive information requests to 26 CMCs offering unregulated claims services for matters such as tax, timeshare, diesel emissions and flight delay claims.
This sample of firms included all the FCA authorised CMCs that were submitting tax claims and the regulator said it used additional scrutiny where unregulated claims activity accounted for a significant portion of the business.
In some instances, the FCA visited the business premises.
It found some of the sample of firms had undertaken very little, or no regulated claims management activity.
Some firms have applied to cancel their FCA permissions following its contact, and around 70 per cent have stopped unregulated claims activity.
Additionally, it also found inadequate systems and controls in place to differentiate between regulated and unregulated claims activity and that some firms charged significantly higher fees for unregulated claims.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Since taking over the regulation of CMCs, we have been worked assertively to raise standards, so CMCs are considered trusted providers of high quality, good value services that help people pursue legitimate claims for redress.
“We are disappointed to find that some firms have inadequate systems and controls in place to differentiate between regulated and unregulated claims activity and some are charging significantly higher for unregulated claims.
“Although we don’t have regulatory oversight of the unregulated activities, we consider that firms will want to satisfy themselves on whether this is appropriate.”
The FCA said the vision is for CMCs to be “trusted providers of high quality, good value services” that help people pursue legitimate claims for redress.
“We expect all firms in this market to take account of the findings we’ve published today and make any necessary changes,” Mills said.
“We will take tough action if we find firms aren't complying.”
FCA expectations
The FCA said firms must regularly review their regulatory permissions to ensure these are up to date, and apply to remove them if they are not needed.
The regulator has the power to cancel a firm’s Part 4A permission if it has not carried out regulated activity for at least 12 months.
Where CMCs offer unregulated claims services, the FCA expects them to be clear with consumers about which of their products and services are regulated and which are not.
The consumer duty has rules about consumer understanding under which firms must ensure that communications are likely to be understood by the consumers they are intended for.
Also that these communications equip consumers to make decisions that are effective, timely and properly informed.
Firms must also ensure that their products and services provide fair value with a reasonable relationship between the price consumers pay and the benefit they receive.
Where fees for the unregulated claims exceed those charged for the regulated claims services, the FCA said it strongly urges CMCs to keep in mind the spirit of the consumer duty, and whether the services they are providing represent fair value for the consumer.
This latest update follows on from the two year strategy set out by the FCA on CMCs.
In the letter last January, the FCA said it had seen some improvements but noted that risks of harm remain while new risks have emerged.
Since taking control of CMC regulation in 2019 the FCA has implemented a number of broad changes to how the sector is regulated, focusing on fees and instances of phoenixing.
In 2021, the FCA announced proposals to ban CMCs from managing FSCS claims where they have a relevant connection to the claim in a bid to halt cases of phoenixing.
The regulator also confirmed in 2021 that it would go ahead with a proposed cap on CMC fees come March 2022 in an effort to curb “excessive charging”.
More recently, in June 2022, the FCA pledged to eradicate phoenixing within two years.
At the time, advisers told FTAdviser that a crackdown was a nice idea but “wouldn’t happen”.
sonia.rach@ft.com
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