More than 900 claims management companies have registered to continue trading while they go through the authorisation process under the industry's new regulator, the Financial Conduct Authority.
Effective from today (April 1) the FCA will regulate the claims management industry in England, Wales and Scotland in an effort to "drive up standards" in the sector and bolster consumer protection.
Previously the Claims Management Regulator, part of the Ministry of Justice, was responsible for the regulation of CMCs but following an independent review of the industry in 2016 the decision was made to transfer this authority to the FCA.
The Claims Management Ombudsman, a new service run by the Financial Ombudsman Service, will now take on responsibility for resolving complaints about CMCs from the Legal Ombudsman.
All existing and new CMCs will need to apply to the FCA for authorisation, with the regulator confirming more than 900 companies have applied for temporary permission to continue trading until the process is complete.
The City watchdog warned it will use a range of powers if authorised CMCs do not comply with its rules, including penalties and refusing to authorise a company in cases of serious misconduct.
A FCA spokesperson said the regulator wants CMCs to be "trusted providers of high quality, good value services that help consumers pursue legitimate claims for redress".
New requirements introduced by the FCA include rules to prevent firms encouraging customers to make "fraudulent, frivolous or vexatious claims or claims which have no good basis".
The regulator will also require CMCs to provide "clear, upfront" information to customers about fees and services, including a summary document before the customer signs a contract.
CMCs will also be expected to tell customers about free redress alternatives such as the Financial Ombudsman Service and the Financial Services Compensation Scheme.
The FCA confirmed it will expect CMCs to record and retain customer telephone calls for a year after their final contract, a requirement the regulator hopes will reduce the chances of high pressure sales techniques.
Jonathan Davidson, executive director of supervision, retail and authorisations, at the FCA, said: "Today brings a new regime and rules for regulating the claims management industry.
"Many CMCs play an important role in helping to secure compensation for customers, including for those who otherwise might not make a claim.
"The new regime has consumer protection and CMC professionalism at its heart. It will mean that customers will be protected from claims management cowboys and get a better deal."