The Financial Conduct Authority has announced proposals to ban claims management companies from managing Financial Services Compensation Scheme claims where they have a relevant connection to the claim.
This comes after the FCA received data from the FSCS on 1,319 claims where phoenixing appeared to have occurred. The cases are over a period of about 6 years, representing an average of 220 claims per year, with a total of £3.7m paid out per year.
It estimates that the 1,319 claims to the FSCS that involved phoenixing cost consumers on average £11,000 per claim in CMC fees.
In November last year, one vulnerable client ended up paying this amount to his CMC, which was a third of his compensation payout.
Claims management phoenixing occurs when individuals from financial services firms go out of business, but later reappear in connection with CMCs and charge consumers for seeking compensation against their former firm’s poor conduct by bringing a claim to the FSCS.
The FCA said it has taken action where it has been possible to do so to prevent this practice and while it was able to stop claims management phoenixing by refusing authorisation in some cases, the new rules being proposed would put a stop to claims management phoenixing across the market.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Consumers should be able to choose to use a CMC to help them claim compensation from the FSCS. But paying someone to provide help who is connected with the firm that caused the consumer's loss is wrong, particularly where the firm had a responsibility before winding up to help its customers to obtain compensation.
“Our proposals are designed to put an end to this practice and to increase consumer trust and confidence in financial services firms, CMCs and the redress system.”
The FCA became responsible for the regulation of CMCs in April 2019, following a government review, and has since been trying to implement measures.
Earlier this year (January 21), the City watchdog published a proposal to cap CMC fees at between 15-30 per cent of the compensation paid for most claims against financial products and services, depending on the size of the pay out.
This move is estimated to save consumers £9.6m a year.
In an update today (May 17), the FCA said it was introducing the additional ban to stop the practice of ‘claims management phoenixing’.
Mills added: “By stopping CMCs from managing FSCS claims with which they have a relevant connection, the FCA will ensure CMCs are not seeking to profit from past misconduct of individuals connected with the CMC.
“The FCA wants to ensure that firms have customers’ best interests at heart and are not incentivised to treat customers poorly, that they will take due care in the provision of financial products and services and, when things go wrong, will take responsibility and put things right for their customers.”
The consultation is open for comment until June 21, 2021.
Pimfa has called for the practice of phoenixing to be banned for some time.
Simon Harrington, senior policy adviser at Pimfa, said: “This is an extremely welcome intervention from the FCA. As we set out in our paper on FSCS reform last year, it is of the utmost importance that the ways in which firms are able to transfer risk onto the FSCS and exploit for their own potential gain should be reviewed.
“This consultation and, we hope, the forthcoming policy statement, is a significant step in addressing this market distortion. While it is step in a much longer journey towards lower levies, it is still extremely welcome and a credit to the FCA that they have listened.”
sonia.rach@ft.com
