Claims management companies (CMCs) will face a more robust regulatory regime when the Financial Conduct Authority (FCA) acquires regulatory responsibility for them on 1 April next year.
The transfer of the claims management regulation from the Claims Management Regulator (CMR) to the FCA is a result of the findings of a number of reviews of the claims management sector, which have highlighted the harm caused to customers due to factors such as poor service and lack of clarity.
In particular, an independent review commissioned by the government in 2015, known as the Brady Review, examined the nature and the extent of the problems in the claims management sector and made recommendations to improve the way in which it was regulated.
One of the recommendations was to transfer regulation of CMCs from the CMR to the FCA. The review concluded that the CMR lacked sufficient powers and resources to regulate the claims management sector and that the FCA would be better placed to deliver a step change in regulation of these firms.
The government accepted this and the Financial Guidance and Claims Act 2018, which will enable the transfer of regulation to the FCA, completed its parliamentary process and received Royal Assent on 10 May. Draft implementing legislation is currently awaiting Parliamentary approval. The Act will also extend the CMC regulation to Scotland for the first time.
Key points
- The FCA published its consultation on regulation of Claims Management Companies early in June.
- The FCA plans to carry over many of the existing regulations especially on information disclosure and marketing.
- Customers do not always relaise they have to pay fees to CMCs.
The FCA published a consultation paper (CP18/15) on 5 June 2018 setting out the draft rules and guidance the FCA is proposing to make in relation to conduct of claims management activities and the standards CMCs it regulates should meet. The consultation is open until 3 August 2018.
Upon publishing the consultation, 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.”
In order to meet its objective, the FCA is focusing on three main areas:
• Empowering customers to be confident they have chosen a value-for-money service that is appropriate for their needs.
• Ensuring that CMCs get redress for their customers in a way that complies with the FCA’s rules and ensuring that CMCs are properly authorised so they meet a common set of standards.
• Regulation to promote high standards of conduct and that will improve public confidence in the sector.
While the FCA is creating some new rules, it plans to carry over many of the existing regulations, particularly those on information disclosure to customers and rules on marketing.
One issue that the claims management sector faces is a lack of pre and post disclosure, in that customers are not always aware of, for example, the charges to be paid, what the CMCs will do for them and how they can make a claim without being charged.
CMCs will need to give customers a short summary of important information before agreeing a contract with them, and explain the circumstances in which the customer can pursue the claim themselves, free. The FCA will also mandate regular updates from CMCs to customers.
On marketing, research showed that customers do not always understand that they will have to pay fees or a proportion of any redress to the CMC to handle their claim. CMCs will have to prominently show the basis on which they will charge, including if it is in a no-win, no-fee scenario.
Much of the harm in the market has occurred where claims management business is conducted by telephone. This is a large portion of the way in which CMCs do business. To combat allegations of poor service, and misleading and aggressive marketing, the FCA is proposing that CMCs will have to keep recordings of all telephone calls and electronic communications such as text messages and emails with all their customers and potential customers.
Later, the FCA will introduce prudential regulatory requirements for the sector. The requirements would relate to the type of business they do, their income, expenditure and whether they hold client money. Those that do hold client money will need to segregate it from their own money and hold it on trust.
The consultation also covers miscellaneous other issues, including requiring CMCs that buy lead lists to do sufficient due diligence to determine whether the lead generator is authorised and has systems and controls in place to comply with data protection legislation; and the basis on which CMCs will be subject to the FCA’s complaints handling rules. Also, whether the voluntary jurisdiction of the Financial Ombudsman Service (Fos) will extend to them (the Fos is consulting on this).
There will be changes to many parts of the FCA’s Handbook, including new definitions of “controlled claims management activity” following the necessary legislative changes, a new chapter in the Client Assets Sourcebook, new reporting requirements and a new sourcebook, the Claims Management: Conduct of Business Sourcebook, which will also include the new prudential requirements.
In addition, all CMCs currently regulated by the CMR will need to obtain a temporary permission from the FCA prior to next year's 1 April deadline, after which all CMCs will need to re-apply for authorisation.
The FCA has also confirmed in its consultation that it plans to apply the senior management and certification regime to CMCs and will consult on this in a separate consultation paper.
By applying tougher measures, the FCA hopes that CMCs will function in a well-balanced market; and consumers will be provided with greater protection and treated fairly. We anticipate that the FCA's proposals will be welcomed by consumers and will bring much-needed reform to the claims management sector.
Angie Bamboulis is a solicitor at Womble Bond Dickinson
