Over the next two years the Financial Conduct Authority plans to abolish phoenixing by regulated claims management companies.
In a policy statement published today (June 7), the City regulator laid out a number of amendments to its rules and guidance for claims management companies which are due to come into force next month (July 7).
The FCA said that in two years time, the number of CMCs phoenixing would be "zero".
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 Financial Services Compensation Scheme.
At least 220 FSCS claims are submitted each year involving phoenixing connections between the firms submitting the claims and the former financial services firms they are made against, according to FCA estimates.
Our proposals will be successful if claims management phoenixing no longer occurs.FCA“Our proposed rules aim to reduce that number so that within two years of the rules coming into force the number of FCA-regulated CMCs submitting claims with which they have a relevant connection is zero,” the regulator said.
“We will monitor the number of cases of claims management phoenixing. Our proposals will be successful if claims management phoenixing no longer occurs.”
Scope of incoming rules
An extension to the rules and guidance set to be introduced next month includes the addition of relatives of controllers as a relevant connection.
As for other categories of relations or extending the prohibition to cover any employee who has a connection to a CMC or the financial services firm subject of the claim, the FCA said this would “risk making the prohibition too restrictive”.
Overall, we feel our rules strike the right balance between capturing the CMCs that are causing the most egregious harm and unfairly preventing CMCs from managing claims.FCA“We don’t want to prevent CMCs from managing claims they have no material connection to,” it explained.
“A rule that relies on connections that cannot easily be evidenced, such as ‘all known people’, would also be difficult to enforce.”
The FCA said it will also not be extending its rules to capture claims which are not covered by the FSCS, or where the connection was not involved in or had responsibility for managing a financial services activity.
The regulator argued this was not where the harm it is addressing has arisen.
“Extending the prohibition to the management of claims beyond those made to the FSCS would also significantly increase the regulatory burden of the rules,” it said.
“We are satisfied that applying the ban to FSCS claims and potential claims provides the appropriate degree of protection against the harms identified.”
Addressing the scenario where a CMC could submit a volume of complaints about a live firm which could lead to that firm exiting the market, the FCA said any redress sought from a live firm is from the firm itself and not from the FSCS, hence this would not come into the FCA’s remit.
As for FSCS funding and concerns raised that it is being used to pay any compensation costs for phoenixing activities, the regulator said this was outside the remit of this consultation and will be considered as part of a wider review of the compensation framework.
“Overall, we feel our rules strike the right balance between capturing the CMCs that are causing the most egregious harm and unfairly preventing CMCs from managing claims where no benefit flows,” the FCA said.
CMCs will be required to notify customers if the rules require them to stop acting for a customer, and should they cease managing a claim they will have to take particular steps laid out by the regulator.
Regulatory efforts to date
The FCA assumed control of CMC regulation in 2019, taking over from the Claims Management Regulator, and received requests from more than 900 companies to continue trading under its control.
Last year, the FCA announced proposals to ban CMCs from managing FSCS claims where they have a relevant connection to the claim.
Later that year, the FSCS told FTAdviser it had alerted the regulator to 412 phoenixing cases. This included 145 such advisers in 2021, in addition to 267 that it had flagged previously.
The FCA has also been regulating the CMC industry more broadly, focusing on fees as well as instances of phoenixing. In November, the regulator confirmed it will go ahead with a proposed cap on CMC fees come March 2022 in an effort to curb “excessive charging”.
Following a consultation period which began in January and ended in April last year, the regulator found the only way it could secure "an appropriate degree of protection against excessive charging" was by introducing a cap which aims to save consumers around £9.6mn a year.
ruby.hinchliffe@ft.com
