The new regime aims to strengthen the regulation of claims management companies (CMCs) in response to reports of malpractice in the sector.

Background

The perception of widespread misconduct in the claims management industry led the UK Government to commission the Brady Review in 2015. The Review’s final report, published in March 2016, recommended strengthening the regulatory regime for CMCs. The Review noted that, while CMCs can provide access to justice for consumers, they do not always serve their interests, sometimes providing poor value for money, and pushing unscrupulous or poorly evidenced claims. The Review found that the current regulator, the Claims Management Regulation Unit (CMRU), lacked sufficient powers and resources to regulate the market.

The recommendations of the Brady Review form Part 2 of the Financial Guidance and Claims Act 2018(the Act). The legislation amends the Financial Services and Markets Act (FSMA) to transfer responsibility for the regulation of CMCs in England from the CMRU to the Financial Conduct Authority (FCA). It also extends the regulatory regime to Scotland, where CMCs are currently unregulated.

The Financial Guidance and Claims Act 2018

The Act requires firms conducting claims management activity, or promoting claims management services, to be authorised by the FCA.

Further detail of the regulation of CMCs is to be set out in an Order of HM Treasury (HMT), which has yet to be published. However, HM Treasury has published a consultation on a draft Order.

Regulated activities

The Financial Guidance and Claims Act gives the Treasury powers to define claims management services in secondary legislation. The government proposes to largely retain the current scope of claims management regulation, as the scope of claims management regulation is already well-established.

One significant change is proposed in HMT’s draft Order, with the intention of strengthening the regulation of CMCs. The current regime relates to activities for six sectors, including financial products and services, with a single permission covering all regulated conduct across any combination of activities and sectors. The new regime proposes that there should be seven different permissions. CMCs will require separate permissions depending on the specific activities and sectors that they wish to operate in.

Because the activities of seeking out, referring and identifying claims are consistent across sectors, it is proposed that they should require a single, separate permission, regardless of the sector to which those activities relate. However, from the point from which CMCs provide advice to a client about a claim, investigate the claim, or represent a client, a sector-specific permission will be needed.

HMT proposes that claims made under section 75 of the Consumer Credit Act 1974 should be within the scope of the new claims management regime.

Cap on charges for PPI claims

The Act caps the amount CMCs can charge for their services for PPI claims at 20% of the compensation awarded. If the claim is unsuccessful, the CMC will not be able to charge a fee. Should a consumer cancel the agreement after the 14-day ‘cooling off’ period, the CMC will be able to charge “a reasonable amount” for work done.

The Act also provides that the FCA can make rules to restrict the amount CMCs can charge for the provision of their services in relation to other claims.

Marketing of claims management services

The Brady Review highlighted the often misleading and confusing way that the services of CMCs are marketed. All firms regulated by the FCA are bound by the FCA’s principles, which set the standards of conduct with which firms must comply. The marketing activities of CMCs will therefore need to comply with the FCA’s principles, including the need to pay due regard to the interests of its customers, to treat them fairly, to provide services of a proper standard, and to target their services only at consumers who require them.

Scotland

In Scotland, the new regulatory regime is particularly relevant and timely because it arrives at the same time as new legislation on success fee arrangements in the Civil Litigation (Expenses and Group Proceedings) (Scotland) Bill (read our Law Now on the Bill).

CMCs to be held to account?

The changes to the regulatory regime for CMCs should mean a better-financed regulator more capable of holding CMCs to account. This will hopefully lead to higher standards across the claims management industry, reducing costs for consumers and businesses alike.

The largest impact is likely to be felt in the financial products and services sector, where approximately 74% of the CMC industries’ turnover is generated.