In 2016, when the former chancellor George Osborne announced plans in the Budget to bring the regulation of claims management companies (CMCs) under the jurisdiction of the Financial Conduct Authority in 2018, this was widely welcomed by financial services companies.
This gives the Treasury powers to define claims management services ahead of the changeover, which is expected to take place by spring/summer 2019.
The new code will also extend FCA regulation of CMCs to Scotland where they are currently unregulated.
For the FCA to regulate CMCs requires secondary legislation, and the draft of this secondary regulation is the focus of a Treasury consultation, ending in June, which outlines what the regulation will look like.
But some advisers have raised concerns the pace of change will not be enough to curb dishonesty in the CMC sector.
For affected companies, the temporary permissions regime will be in place for 15 months from the date of transfer to the FCA, when all firms with a valid CMC licence under the current regime will be eligible to register for the new regime.
While under the temporary permissions, firms will be able to operate in the same way they operate under a single permission, as they do currently under the regulator – the claims management regulation unit (CMRU) – but will have to abide by all relevant FCA rules.
Alan Lakey, a director at Highclere Financial Services, said he was worried that unscrupulous CMCs would take advantage of this 15-month period, a time he fears the FCA scrutiny will not be as strong.
He added: “The document suggests they are grandfathered for a period of 15 months before there is any scrutiny of their activities. It is a charter for fraudsters and conmen to carry on doing damage for a period of time.”
Adam Ibrahim, banking and financial services litigator for DLA Piper, added: “Naturally there is a concern that although those CMCs with temporary permissions would be obliged to comply immediately with the new FCA regime, in reality there will be an extended period, both between now and when the transfer occurs, and then for 15 months thereafter, when little may change.
“The biggest issue has been insufficient resource to utilise the limited powers the current regulator has, and therefore the bigger question will be whether the transfer to the FCA will now provide sufficient resources so that this troubling area can be properly controlled – with dishonest CMCs being identified and appropriate action taken – as there is little confidence that this is occurring now.”
Firms that wish to obtain the temporary permission will need to notify the FCA of their intention to do so by the day before transfer to the FCA.
Firms that fail to do this will no longer be able to operate legally once the transfer has happened, although they could submit an application as a new market entrant after that date.
In the consultation document the Treasury said: “The transfer of claims management regulation to the FCA is important for strengthening regulation of the sector. However, the government is aware that this will be a significant change for firms, particularly for those being brought into the FCA regime that do not currently conduct a regulated activity. As such, the government has worked closely with the FCA to develop plans for a temporary permissions regime.”