The FCA has ordered claims management companies to stop being vague about how much they charge and point towards free compensation chasing alternatives from 1 April 2019.
In a 264-page consultation paper, the FCA proposes requiring claims management companies to provide a potential customer with a short summary document containing important information such as an illustration of fees charged and an overview of the services it will provide.
This document will need to be provided before any contract is agreed.
Claims managers will also need to highlight any free alternatives to using their service, such as ombudsmen schemes, in marketing material and pre-contract disclosures.
Claims management companies that buy so-called ‘lead lists’ from third parties will be required to carry out due diligence to ensure that the leads have been obtained legally and to keep records of this.
The FCA is also proposing that claims management companies will have to record and keep all calls with customers for at least 12 months.
Other requirements on firms mean they must hold capital linked to the type of business they undertake and protect any money firms hold on behalf of clients.
The FCA has also set out its approach to authorising both existing and new claims management companies.
Firms will need to notify their intention to register for temporary permission and pay the relevant fee to the FCA before 1 April 2019.
Firms will then need to go through the FCA’s authorisation process.
New firms will need to decide whether to begin their authorisation process with the current Claims Management Regulator or wait and submit an application to the FCA after April 2019.
Andrew Bailey, chief executive of the FCA, said: "A well-functioning claims management sector can help to provide justice and redress to people who have suffered harm. But the market doesn’t always work as it should and poor conduct persists across the sector.
"We want CMCs to be trusted providers of high quality, good value services that can truly help consumers.
"A key element of our approach to regulation will be ensuring that consumers are both protected and treated fairly. The proposals we have outlined today are integral to achieving that aim."
Garry Bottriell, managing partner of Bottriell Adams, said he welcomed the crackdown on so-called ambulance chasers.
He said: "I think the job should have gone to the FSA when the Compensation Act originally brought regulation to the sector; the Ministry of Justice had no experience, resources or knowledge on how to regulate a large and diverse community of small to large firms at a time when the FSA had it in spades having assimilated mortgage and general insurance brokers, and the surprisingly large community of payment services firms.
"I think that the outcome has been weaker than it otherwise might have been, and that as a result consumer detriment possible higher.
"Having said that there must be a robust and transparent process to ensure there is no cross subsidisation of the sector. Claims management companies should be expected to meet the cost of being brought into and their ongoing regulation, supervision and were necessary enforcement."