Advisers, or even advice companies ‘phoenixing’ as claims management companies have been a problem within our industry for years, and it is something Pimfa has repeatedly called on the Financial Conduct Authority to take action over.
So, it was welcome to see the FCA recognise the issue last year at Pimfa’s First Virtual Fest and promise to take action.
Less than twelve months on and our industry regulator announced proposals to ban advice companies, or individuals, from managing Financial Services Compensation Scheme claims where they have a relevant connection to the claim.
This is an extremely welcome development, but we still have some, albeit minor, concerns that the reforms proposed by the FCA do not quite go far enough.
There are a number of different ways in which companies phoenix, but the most egregious example must surely be that of individuals from financial services companies that go out of business – or entire companies themselves – later reappearing in connection with CMCs, charging consumers for seeking compensation against the now bankrupt former company's poor conduct by bringing claims to the FSCS.
This can happen over a matter of months, but it has sometimes been only weeks, or even days as Megan Butler, the former executive director for supervision of investments, wholesale and specialist at the FCA, acknowledged at our Virtual Fest last year.
This malpractice is very damaging to our industry and clients alike. The FCA estimates there have been at least 1,319 claims over six years to the FSCS involving phoenixing, with in excess of £20m paid out over that period.
That might only represent a minority of claims on the FSCS, but the claims cost consumers an average of £11,000 in CMC fees and other costs, which adds insult to injury.
Such sharp practice also increases the burden on the wider industry by fuelling rises in the FSCS levy, which we have long raised concerns about. As we set out in our recent paper on FSCS reform, A roadmap to better outcomes, the mere existence of the FSCS in combination with a propensity for companies to phoenix as CMCs creates a market distortion, which takes advantage of consumers who have already suffered loss and allows individuals to benefit materially from their own misconduct.
That the FCA has identified claims management phoenixing as a harm in the market, which impacts on consumer and business confidence alike, is a very positive development, but the impact on the total FSCS bill companies face will be minimal. Nonetheless, targeted action in this area represents an extremely positive step towards addressing the underlying drivers of cost, and that is a good thing.
Pimfa however would like to see the FCA focus on preventing companies that undertake this practice from profiting in any way from their poor activity. To this end, while we support the vast majority of the proposals the regulator has set out, we are disappointed that the proposed prohibition on CMCs does not extend to claims made on the Financial Ombudsman Service.