A number of provisions in the Financial Guidance and Claims Act 2018 (“the Act”) came into force on 1 October 2018, following the Act receiving Royal Assent on 10 May 2018. Amongst other things, the Act transfers the regulation of Claims Management Companies (“CMCs”) from the Ministry of Justice (“MoJ”) to the Financial Conduct Authority (“FCA”) and imposes caps on the fees which CMCs can charge. The FCA will take over regulation from April 2019.
What are Claims Management Companies?
CMCs are businesses which provide advice and / or other services in relation to the making of compensation claims for personal injuries, financial products and services, employment issues, industrial and criminal injuries and housing disrepair.
CMCs: Nuisance or necessity?
There are currently around 1,400 authorised claims management companies in operation. The Claims Management Regulation Unit (“CMRU”) was established within the MoJ in April 2007, regulating CMCs’ activities in England and Wales. However, regulation has in practice done little to improve the reputation of the claims management sector, which has over the years become synonymous with misconduct. Common complaints include poor value for money, misrepresentation of the service offered to consumers, and reliance on nuisance tactics, such as unsolicited calls and texts, as highlighted in the “Claims Management Regulator Annual Report 2016-17”.
The FCA’s consultation paper
“Claims Management: how we propose to regulate [CMCs]” reported that ‘69% of the UK adult population (or around 36 million people) have between them in the last 12 months received approximately 2.7 billion unsolicited calls, texts or emails from CMCs offering to help them make a claim… This equates to around 50 calls/texts per year for each adult in the UK.’"
A focus on complaints
The Legal Ombudsman launched a CMC complaints service in January 2015. In its report “Complaints in Focus: Claims management companies”, it stated that in the first six months after launching the service, the Legal Ombudsman was contacted almost 9,000 times, accepting over 600 complaints.
CMCs to face a tougher regulatory regime
Following an independent review, the Government announced in the March 2016 Budget its intention to establish a tougher regulatory regime for CMCs by transferring supervisory responsibility from the MoJ to the FCA.
Among other things, the Act:
- Amends the Financial Services and Markets Act 2000 to include claims management activity in the list of financial services regulated by the FCA.
- Transfers the responsibility for the handling of complaints from the Legal Ombudsman to the Financial Ombudsman Service (“FOS”), which will allow the FOS to take over jurisdiction to investigate and determine consumer complaints about the service provided by CMCs.
- Gives the FCA the power to impose a cap on the fees that CMCs can charge for their services.
- Provides specific fee caps in relation to PPI claims. The fee cap is 20% of the amount recovered for the customer. The Act provided for the fee cap to come into effect from July 2018 and it will be enforced by the CMRU until responsibility for regulation is transferred to the FCA in April 2019.
The changes mean that all CMCs seeking to continue trading may only do so once they have completed the new, stricter FCA authorisation process. All individuals who perform a role with a particular regulatory significance, such as a director or a person responsible for regulatory compliance, can be held personally accountable for rule breaches for which they are responsible.
Enforcement of the regime
Breaches of the new rules will amount to misconduct and a breach of the conditions of authorisation. Non-compliant CMCs may find themselves subject to a number of enforcement measures ranging from financial penalties to the variation, suspension or complete cancellation of authorisation to provide regulated claims management services. In addition, there are potential criminal sanctions for operating a CMC without the requisite authorisation. Penalties include up to two years’ imprisonment, a fine or both.
Spotlight on PPI
Handling claims for those who may have been mis-sold Payment Protection Insurance (“PPI”) is of course what has brought CMCs onto the public radar. The Legal Ombudsman report identified that 88% of complaints in its first six months were about CMCs dealing with mis-sold PPIs. The FCA last year set a final deadline of 29 August 2019 for consumers to make a PPI claim. As a consequence, CMCs are increasing their efforts to win business from the final wave of consumers. The specific provisions and interim measures in relation to fee caps on PPI claims would therefore appear to be a much-needed addition to the regulatory regime.
The CMC sector has had its fair share of criticisms over recent years and the enhanced professionalisation of the industry that FCA oversight will bring is to be welcomed. Some of the potential advantages to the new regime will be:
- Greater clarity for consumers in relation to fees. This will enable consumers to make an informed choice about which CMC to use, or whether to use one at all.
- The fee cap should reduce the incentives for CMCs to collect marketing leads and the number of nuisance calls and speculative claims may reduce as a result.
- CMC managers will become personally accountable for rule breaches for which they are responsible which, it is hoped, will lead to increased professionalism and a greater focus on the consumer.
- A reduction in the heavy administrative and financial burdens on respondent banks and lenders who currently have to waste valuable time and resource in dealing with speculative and poorly-evidenced claims.
The new regime should therefore be welcomed by consumers and banks alike.