The Financial Conduct Authority has said it will not extend Financial Services Compensation Scheme (FSCS) coverage to claims management companies (CMCs) when they come under its scope next year.
CMCs will be regulated by the FCA from Monday 1 April 2019 and will come under the jurisdiction of the Financial Ombudsman Service (Fos), but the FCA has said they will not be covered by the FSCS and so will not contribute towards its costs.
The FCA said: "Our proposed new rules for CMCs will help protect client money if it is held by CMCs and introduce new requirements to help ensure a smooth wind down if a CMC closes.
"We do not propose to extend FSCS cover to consumers of CMCs at present, but we may review the position in the future if there is evidence of significant consumer harm."
HM Treasury decided CMCs would fall under the remit of the FCA after concluding their current regulator lacked the powers and resources to regulate the market, making the announcement in the 2016 Budget.
With regards to calculating the fees CMCs will pay towards the FCA and the Fos, the regulator said it would be creating new fee blocks exclusively for this type of firm.
The FCA has predicted that CMCs will pay between £2.70 and £4.50 per £1,000 of annual income towards the Fos, with a minimum fee of £50, but it has said it will confirm this later in 2018.
Meanwhile, CMCs will contribute to the FCA's running costs based on their annual turnover, in the same way as they contribute towards their current regulator.
It will cost £16.8m, up to and including 2020/21, to set up the CMC regulatory regime which the FCA will recover from firms themselves.
But the FCA said because these costs will be recovered over multiple years there was a "strong risk" some CMCs might leave the industry after the first year, meaning those which continue to be regulated into 2020/21 will have to pay an increased proportion of these costs.
The regulator said: "It would be unfair for firms which take advantage of the regulatory gateway, but which leave within the first year, to pass their share of the project costs to those firms which continue to be authorised by us.
"For this reason, we have decided to collect a substantial proportion of our project costs in the first year."
The FCA will recover £7.1m in 2019/20, nearly half of the total, with the rest spread out over following years.