Financial Conduct Authority  

FCA pushes ahead with CMC fee cap to curb 'excessive charges'

FCA pushes ahead with CMC fee cap to curb 'excessive charges'

The Financial Conduct Authority has confirmed it will go ahead with a proposed cap on claims management companies' (CMC) fees come March 2022 in an effort to curb “excessive charging”.

Aiming to save consumers around £9.6m a year, the financial watchdog has decided to introduce a cap on the fees a company can charge when processing a consumers’ claim against a certain provider - be that on behalf of a pension, investment or other financial service.

Following a consultation period which began in January and ended in April this year, the regulator found the only way it could secure "an appropriate degree of protection against excessive charging" was by introducing a cap, dubbing disclosure remedies "insufficient" to fix the problem.

“In the CMC market, we identified that excessive charging occurred when fees were compared with value to the individual customer," the FCA said in new rules for CMCs published today (November 29).

"We found that the nature and extent of the failures in this particular market meant that remedies other than a cap, such as disclosure remedies on their own, would be insufficient to meet our statutory duty to make rules with a view to securing an appropriate degree of protection against excessive charging.”

The regulator surmised some of the information consumers need to understand in this market was "not easily delivered" by firms, making disclosure rules "difficult" to supervise for customers on a large scale.

The fee cap starts at £420, and goes up to £10,000, depending on the amount of redress a customer is seeking.

Redress bandConsumer redress obtained (lower)Consumer redress obtained (upper)Max % rate of chargeMax total fee
1£1,000£1,49930%£420
2£1,500£9,99928%£2,500
3£10,000£24,99925%£5,000
4£25,000£49,99920%£7,500
5£50,000n/a15%£10,000

The FCA's consultation found respondents were worried the introduction of a cap could prompt fewer options for consumers in the long run.

It said: "Several respondents said the restrictiveness of the cap would drive CMCs out of the market.

"These respondents showed particular concern over pensions and investment claims which they said required more complex and costly work than other claim types, and which generally include claims in the higher redress bands where the cap is most restrictive in percentage terms.

"Other comments included that the CMC market had already contracted rapidly in recent years, and some firms had considered or tried charging lower fees but found it unviable."

One CMC told the regulator its segment of the market "would close if it exited", because it was responsible for a very large share of the marketing budget in its segment.

But the FCA concluded: "If firms choose to exit, it will not mean FCA-regulated claims management is not a viable business."

It continued: "We estimate that a large number of CMCs will remain viable and most of these will make a long-term margin above 10 per cent, showing that the cap is sufficiently above costs.

"At least 16 firms for pension claims and savings and investment claims are expected to remain and make a margin of 10 per cent or more."

The financial watchdog argued "in practice", firms might choose to adjust their business models or marketing budgets. It added that if some chose to exit, "others will not be prevented from entering or remaining".