The Government and the Financial Conduct Authority are undertaking consultations on the future regulation of claims management companies.

Following the enactment of the Financial Guidance and Claims Act, as of 1 April 2019 the Financial Conduct Authority (FCA) will become the regulator of claims management companies (CMCs) in England, Wales and Scotland.

At the same time the Financial Ombudsman Service (Ombudsman Service) will become responsible for resolving disputes about CMCs. Both the Government and the FCA have commenced consultations regarding the future regulatory system covering CMCs.

The transfer of regulatory control of CMCs to the FCA forms part of the Government's wide ranging package of reforms relating to personal injury claims. The proposals to change the system of compensating whiplash claims within the Civil Liability Bill are currently being debated in Parliament. The whiplash reforms have brought concerns that CMCs may look to fill the gaps left by solicitors.

With this in mind, and as part of their examination of the impact raising the small claims track, the Justice Committee recently proposed that the FCA should impose a cap of no less than 20% on the proportion of compensation that CMCs can recover from PI claimants for their services. There is no reference to such a proposal within either the Government or FCA consultation documentation.

Government consultation

The Government's technical consultation sought respondent's views on draft secondary regulations transferring claims management regulation to the FCA.

The emphasis of the consultation was on the scope of regulation and the FCA’s consultation requirements. Following the passing of the Financial Guidance and Claims Act, claims management services can now be defined in secondary legislation as activities controlled by Regulated Activities and Financial Promotions Orders.

Per the Compensation Act 2006 frameworks, CMCs are currently regulated in several sectors including personal injury, and their services including:

  • Advertising and marketing
  • Advising on claims, or giving written advice
  • Referrals and introductions of potential claims or claimants
  • Investigating the merits of a claim;
  • Providing representation when making a claim;

It is the Government's intention to replicate this scope when regulation is transferred to the FCA, and maintain the current exemptions from regulations for some bodies providing claims management services such as law practitioners and charities. Nonetheless, they have sought responses on a variety of issues such as:

  • Whether the current approach to CMC regulation should be maintained but with an altered permission scheme;
  • Should any additional sectors be added to the scope of regulated claims management activities;
  • Whether the exemption scheme should be extended to additional parties;

The consultation concluded on 1 June 2018 and the feedback will be published in due course.

Financial Conduct Authority

The FCA has also commenced its own consultation, and published papers setting out the draft rules and guidance for claims management activities. The papers also set out the proposed standards to be expected of CMCs regulated by the FCA, alongside the processes for authorising CMCs and also enforcing standards.

The FCA has stated the proposed reforms aim to prevent or reduce the following harmful behaviours within the CMC sector:

  • A lack of clarity over fees
  • Poor service
  • Delays within a claim and/or financial loss
  • Aggressive or misleading marketing

The FCA sets out that it will require CMCs to comply with general conduct rules such as acting in the customer's best interests, investigating the basis of the claim, dealing with vulnerable customers and ensuring that cancelling and termination rights are made clear.

Interestingly, the FCA also proposes that CMCs be required to undertake due diligence on any lead generator from whom they accept leads. This would involve ensuring that the lead generator has obtained the lead in compliance with relevant data protection and electronic communications legislation including the recent cold calling ban, implemented via the Financial Guidance and Claims Act.

The FCA consultation will end on 3 August 2018.

What next?

The FCA will become the regulator of CMCs on 1 April 2019, and therefore, we expect further updates from the Government and FCA on the outcome of the consultation in due course.