The fact that the proposed reform of whiplash claims and the raising of the Small Claims Track limit were both announced by the Chancellor in last year’s Autumn Statement is indicative of the seriousness of the government’s approach to these issues. They are of concern to Her Majesty’s top two Ministers, the Prime Minister and the Chancellor of the Exchequer. Also within George Osborne’s Autumn Statement was an announcement that there would be a fundamental review of CMCs and the way in which they operated.
Last week, the Chancellor announced in the Budget that Carol Brady, who had been charged with leading that review, had finished her report.
For some considerable time CMCs have played a key role in fuelling the spiralling whiplash claims numbers both pre and post-LASPO, as well as a post-LASPO increase in volumes of Noise Induced Hearing Loss claims.
The report makes a number of significant recommendations that will impact upon the personal injury claims space, including shifting regulatory responsibility for CMCs to the Financial Conduct Authority. DWF Partner and Head of Motor and Fraud, Nigel Teasdale, looks at the report and the key recommendations.
The recommendations and the regulator
The report makes a total of 17 recommendations and also sets out what it sees as the Claims Management Regulator’s “ideal organisational objectives” and the recommendations are very much tailored to assist the Regulator to meet those objectives. A number of the issues and recommendations have in fact previously been included in the Insurance Fraud Taskforce report.
We already know that the government has accepted one of the review’s recommendations as, at the same time that the Chancellor announced that the review was complete, he also announced that responsibility for the regulation of CMCs would pass from the MoJ to the Financial Conduct Authority. This was always going to be a very attractive proposition for the government, given that the FCA has oversight over the financial services and insurance sectors, those being the two sectors that CMCs have the most contact with.
The key recommendations that are likely to have an effect on CMC behaviours are:
- All firms should be re-authorised under a robust new process and seek permission for each of the activities they carry out
- Personal accountability owed by directors, so that persons wishing to perform controlled functions for a CMC regulated by the CMRU should be required to:
- Pass a fit and proper persons test, which will consider honesty, integrity and reputation, as well as competence, capability, and financial soundness.
- Be personally accountable for rule breaches for which they are
- Recording of the referral source
- The introduction of an ‘outcomes based’ regulatory framework, to ensure actual and not just technical compliance with regulations
- The Claims Management Regulator to make greater use of his powers of entry and seizure
- Recording of all calls between CMCs and their clients, to be retained for 12 months
Responsibility for regulation to pass to FCA
This was always going to be an attractive proposition for Brady and for the government, as the vast majority of claims relate in some way either to the financial services sector or to insurers, both of whom the FCA regulate. Whilst Brady suggested in her report that a “safe pair of hands” might be desirable during what will be the most radical overhaul of the sector since it came into being, it seems likely that the government were ultimately more attracted by the report’s suggestion that the FCA was “likely to be able to deliver a more ambitious package of reform overall”.
Those directing CMCs to be accountable
As the Insurance Fraud Taskforce pointed out in their final report, unscrupulous CMCs play a role in encouraging fraud and in pressuring otherwise honest people to exaggerate and make up claims, only then to run for the hills when the claimant is caught out. At the end of 2015, the IFB had 56 CMCs under investigation as part of staged motor accident scams, and the IFB reported that criminals were using CMCs to legitimise their actions and draw in more people to take part.
When rogue CMCs are closed down, or go into liquidation, they often quickly reappear as a ‘phoenix company’ with the same individuals at the helm, sometimes using pre-authorised CMCs to continue to ply their trade. To address this issue, the review has suggested that existing CMCs re-register with the regulator and that they should agree to be subject to a more rigorous regulatory framework. Further, those directing the actions of a CMC are to become subject to a ‘fit and proper persons test’, similar perhaps to the FCA Senior Managers’ regime, which had been suggested by many who responded to the consultation as suitable.
Outcomes based regulation and the need to record
In order to stop what the review saw in some instances as merely ‘technical compliance’ with the CMC conduct rules, the review suggests that control measures be enhanced, so that they are rules based and ‘outcomes based’. In this way CMCs will be obliged to always act in a consumer’s best interests.
Presumably in an effort to put an end to cold calling and to assist the Regulator in its policing of the referral fee ban, the review has suggested that CMCs be obliged to record how they came by the customer’s details and the review also recommends that CMCs be obliged to keep all call recordings with their clients for a period of 12 months.
Greater use of the Regulator’s powers
The review pointed out that the approach currently taken by the Regulator to give prior notice to CMCs of an audit provides CMCs with an opportunity to ‘sanitise premises’ in advance. Whilst the Regulator has the power of entry under a court issued warrant as well as powers to seize records, those powers need to be used more widely the review found.
Where is the extra money that is likely to be needed to fund this increased activity going to come from? The review suggests that some, if not all, of the fines levied by the Regulator might be used to fund the Regulator’s work and this seems like a sensible suggestion. For the financial year 2014/15, the Regulator raised £4m in application and regulation fees from CMCs, which then went to pay for the running costs of the CMRU. When one considers that the fine levied against National Advice Clinic last year for making nuisance calls was £850,000, this idea could provide a useful fillip to the CMR’s funding arrangements.
As the review points out, the waters ahead in the CMC market are likely to be choppy and it will be interesting to see whether any CMCs look to avoid coming under the FCA’s scrutiny and instead become part of an alternative business structure. If they were to do so their actions would then fall under the scrutiny of the SRA instead. As the review points out in discounting the suggestion that the SRA took over responsibility for regulating CMCs, “…..the SRA are not renowned for taking strong action where detriment caused by CMCs has been identified”. It will also be essential for the transfer of responsibilities to be carried out as smoothly as possible, so as to ensure that the regulator does not “take its eye off the ball” (as the review puts it) in the months ahead.
That said, since Brady completed her review, the SRA has issued a warning notice to solicitors, of the ‘risk factors when dealing with personal injury matters’, reminding solicitors of their obligations under the Principles and Outcomes of the Code, specifically in respect of the referral fee ban and ensuring that they have proper authority to act. The warning could well now lead to action being taken against those who ignore their responsibilities and as a sign that the SRA intend to up their game.
Making those who direct CMCs personally responsible for rule breaches “for which they are responsible” is a welcome suggestion although could lead to difficulties where there is more than one director.
Assuming that the SCT limit is increased to £5,000, then it is likely that CMCs will have a greater role to play in personal injury claims that would fall to be dealt with in that track, but the rise of a number of wider consumer issues, such as those seen in the VW emissions scandal and the various reported data breaches, could also see CMCs extend into those types of areas as well.
One of the review’s wider recommendations was that “The CMRU should retain its ability to design and implement new rules to reflect changing market conditions”. We would firmly agree with that proposal but would also add that the regulator should not shy away, if asked by government, from extending its regulatory reach to beyond CMCs and could also look to regulate the currently unregulated Credit Hire Organisations. Perhaps with the FCA behind it, that might be something it might look to do in the future, particularly if there is an increase in credit hire and credit repair claims after the reform of whiplash claims and the increase in the SCT limit take effect.
The MoJ is also considering who might be best placed to regulate Medical Reporting Organisations following it’s review of MedCo and we would not be surprised to see them also brought under this umbrella.
The Claims Management Regulator is currently seeking views on proposals that there should be a cap on the level of fees that CMCs can charge. Whilst it is only proposing that any cap apply to ‘bulk claims’ such as PPI claims, the Regulator is inviting views on whether there should also be a cap on charges for those CMCs acting in the personal injury sector. Insurers’ views may be in favour of a cap and they will also wish to ensure that it is set at a level which is consistent with increasing control over the CMC sector. While it may be understandable that the CMRU do not see CMC activity in the injury sector as raising a high level of concern, this will quickly change should the SCT limit be raised as expected. The consultation on the Regulator’s proposal closes on 11 April.
Ultimately, it is good to see that the Government is taking on board calls for closer regulation of the whole sector to accompany the whiplash reforms