Claims
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.”
Under the current framework, CMCs are regulated in the following sectors: personal injury, financial products and services, employment, criminal injuries compensation, industrial injuries disablement benefit and housing disrepair.
Regulated conduct
Where CMCs have a single permission covering all regulated conduct across any combination of activities and sectors, under the new regime, the government proposes plans to introduce seven different permissions relating to each specific activity.
Key points
- CMCs will be regulated by the FCA from spring/summer 2019
- Many expect CMC firms to move to interest-only mortgages after the PPI deadline
- It is expected that claims regulation will roll out across other sectors
Darren Cooke, a director at Red Circle Financial Planning, has been an avid campaigner for more robust regulation of CMCs. He believes the regulation needs to go further to deter CMCs from bringing unnecessary claims. He also added that advisers need to improve on the quality of advice they give to reduce the number of claims being made against them.
The rise of the claims management industry has been driven by payment protection insurance (PPI) and personal injury claims.
Complaints about mis-sold PPI continue to represent the vast majority of activity in the financial claims sector with around £27bn having been paid in redress since January 2011, according to data from the CMRU.
As the PPI deadline approaches the government is keen to ensure that other spurious claims do not pop up elsewhere.
Advisers like Mr Cooke and Mr Lakey are already warning about the increase in the number of adverts appearing asking people if they feel they have been mis-sold a Sipp.
There are also concerns that CMCs will start targeting advisers over ‘mis-sold’ interest-only mortgages where borrowers were not advised about a repayment plan, defined benefit transfers, investments and pensions.
Mr Ibrahim said: “It is already evident that CMCs are responding to the inevitable end of the PPI claims era by trying to identify new areas of attack and income streams, especially against financial institutions. However, it is clear financial institutions have materially improved their practices since the financial crash, so the opportunities to find valid claims is in fact pretty limited. So, in reality, all we are currently seeing are increases in speculative claims, as CMCs try to test out new areas to explore.”
Mr Lakey believes some CMCs will also try to capitalise on critical illness, if adviser processes are not robust enough when it comes to switching a client from one provider to another.
These worries have not escaped the notice of the CMRU, which has said that one of its commitments for the 2017-18 business year will be to maintain an overview of the financial claims sector to address any issues in growth claims areas such as pension products, mortgage related claims and other complex areas.
Data from the CMRU showed that turnover in the financial claims sector increased slightly by 2 per cent to £541m in 2017 despite a reported reduction in PPI redress.
This small increase in CMC turnover is likely to be a result of growth in non-PPI claims areas during the same period.
Despite the growth of non-PPI claims, the CMRU said significant reforms will impact the market further.
Applications to operate in the financial products and services sector were already down by 43 per cent in 2017.
Fee cap
One of those reforms will see CMCs hit with a cap on the fees they charge for working on PPI claims.
It is expected that after the FCA takes control of the regulation of CMCs it will roll this out across all financial claims sectors.
The CMRU added: “A small number of businesses hold a dominant market share in the two main sectors: financial claims and personal injury. With many of the small-to-medium-sized businesses also now well-established in the market, the industry has stabilised and is maturing, despite an increase in the number of CMCs exiting the industry.
“Proposed and imminent reforms in both the financial claims and personal injury sectors are likely to be making it less attractive for new businesses to enter the industry due to the future uncertainty and difficulties in business planning.”
The regulator is also expected to look into complaints from people who are unhappy with the service they have received from a claims management company. Currently the Legal Ombudsman handles these concerns.
Ima Jackson-Obot is a features writer at Financial Adviser
