The Financial Conduct Authority will require ambulance chasers to increase the amount of information they disclose to consumers.
From April, claims management companies will be regulated by the FCA and the regulator has published details of how it will regulate these companies.
Following a consultation, the FCA has decided to increase the amount of information which CMCs must disclose.
For example they will be required to clarify whether their fee is based on the gross or net amount of the compensation award and they must ask the customer if they know of other methods to pursue their claim, such as legal expense cover.
Jonathan Davidson, executive director of supervision at the FCA, said: "The new regime aims to drive up standards in a sector whose reputation has been tarnished by some companies engaging in high pressure selling and by failing to provide clear information on the fees they charge.
"The new rules will ensure firms are transparent about their estimated fees before the customer signs on the dotted line, and notify customers of free statutory ombudsmen or compensation schemes.
"It’s vital that customers have the information they need to make informed decisions. We will take action against those that break the rules."
CMCs must also get a customer’s consent before charging costs that were not disclosed upfront and, where the customer has outstanding liabilities which the compensation may be offset against, or is bankrupt or in an IVA or similar arrangement, make them aware that some or all of the compensation award may go towards paying off the debt and the customer will still have to pay the CMC's fee from their own funds.
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.
This means clients of CMCs will have access to the Financial Ombudsman Service but not the Financial Services Compensation Scheme.
The Fos has told the FCA it is confident it will be able to handle any complaints coming its way about CMCs.
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.