The Government is to clamp down on the poor practices of Claims Management Companies (CMCs) by introducing a more robust regulatory regime. Under the new regime, regulatory responsibility for CMCs will pass from the current Claims Management Regulator (CMR) to the Financial Conduct Authority (FCA). All regulated CMCs wishing to carry on trading will need to be re-authorised and CMC managers will become personally accountable for rule breaches for which they are responsible. Perhaps more importantly, CMCs operating in the financial claims sector can also expect to see caps imposed on their fees, which may act a commercial disincentive to continue with the more dubious practices reported.
Despite previous reforms in this area, the current regime overseen by the CMR is perceived to have been ineffective, with reports persisting of widespread misconduct by CMCs. In particular, complaints continue to be made about aggressive and nuisance marketing, consumers being given poor value for money, consumers being baffled by confusing fee structures and lenders facing large numbers of entirely speculative claims.
Often CMCs add little value to the claims process at all but typically charge between a quarter and a third of any compensation subsequently paid. This has resulted in consumer bodies such as Which? advising that complainants are usually better served by simply making their claim direct without any CMC involvement. Indeed, in our experience, the involvement of CMCs can often hinder the efficient resolution of complaints, with a conflict of interest sometimes becoming apparent between the CMCs’ commercial objectives and those of their clients. The National Audit Office estimates that between April 2011 and November 2015 CMCs received fees of between £3.8 and £5 billion out of compensation paid to consumers in relation to Payment Protection Insurance (PPI).
The Brady Review
Against that backdrop, the Government commissioned an independent review (Brady Review) to examine the nature and extent of the problem and to make recommendations. Published in March 2016, the Brady Review made the following recommendations:
- All CMCs wanting to continue trading should apply to be re-authorised under a new stricter authorisation process.
- All individuals who perform a “controlled function” for a regulated CMC (i.e., those in roles with a particular regulatory significance such as a director or a person responsible for regulatory compliance) should have to:
- pass a fit and proper person test, which will consider honesty, integrity and reputation, but also competence and capability and financial soundness;
- be personally accountable for rule breaches for which they are responsible.
- CMCs should be required to record all calls with clients and retain them for a minimum of 12 months following the conclusion of the contract with that client. This would allow the regulator to audit customer service levels.
- The regulator should develop a concise standardised disclosure document which all CMCs would have to use to disclose their key product information. This would help consumers compare services and fee structures offered by different CMCs.
- The regulator should make wider use of warrants and seizure powers.
- The regulator should consider using smaller fines or mandatory training as a credible deterrent to minor breaches.
- CMCs should signpost consumers to alternative claim resolution channels at appropriate times when communicating with consumers.
- Outcome-based conduct rules should be introduced in each area of core CMC activity.
- CMCs should be obliged to disclose the source of their referrals.
- The regulator should publish all appropriate information on enforcement activity.
- The regulator should help educate and empower consumers by providing impartial information about CMCs and the services they provide on its website.
The Brady Review was also asked to consider where regulatory responsibility should lie in the future.
It considered a number of possible options including: leaving responsibility with the existing Claims Management Regulation Unit (CMRU); creating a new independent regulator; dual regulation between the CMRU and the FCA; and transferring responsibility for regulation to the FCA. In the end it concluded that each of these had drawbacks and there was no perfect solution. Ultimately the only two really workable and effective solutions were either to stick with the CMRU, which already has considerable expertise, or, if more of a step-change were required, to transfer responsibility to the FCA. The Government has decided to opt for the latter.
The transfer of claims management regulation to the FCA will require primary legislation and other significant changes and will involve detailed policy work on the precise design of the new authorisation and personal accountability regime. Government has not yet indicated any likely timescale.
Ministry of Justice Consultation
Separately, the Government has also been consulting about capping the fees that CMCs can charge. In February 2016 the Ministry of Justice published its “Claims Management Regulation Consultation – Cutting the costs for consumers – Financial Claims” (Consultation). The Consultation takes a critical look at the claims management industry operating within the financial claims sector and concludes that whilst a CMC might add some value in certain circumstances, the current high level of fees charged by some CMCs for some claims are neither proportionate nor demonstrate value for money for consumers.
The Consultation highlights the fact that on average CMCs take £300 for every £1,000 of compensation paid. Whilst there are some complex claims, such as claims for mis-sold pensions and mortgages or interest rate swaps, where significant work might be required in investigating whether a consumer has a potential claim, the vast majority of PPI claims and Packaged Bank Account (PBA) claims do not generally require significant work and could be pursued by consumers themselves, either directly with their lender or with the Financial Ombudsman, at no cost.
The Consultation stresses the importance of ensuring that consumers who do opt to use a CMC are not taken advantage of and receive better value for money. It proposes restrictions on the charges and manner in which CMCs can contract with consumers. It anticipates that these restrictions will reduce the incentives for CMCs to collect marketing leads and that the number of nuisance calls and speculative claims will reduce as a result. This in turn should ease the considerable administrative and financial burdens felt by lenders and the Financial Ombudsman.
The proposed restrictions vary according to the type of claim.
In all financial claims there will be a ban on any upfront fee being charged to the customer.
For PPI claims and PBA claims:
- where the value of the claim is £2,000 or less CMC fees should be capped at 15% (including VAT) of the final compensation awarded;
- where the value of the claim is more than £2,000 there should be an overall total cap of £300 (including VAT);
- where a consumer cancels their contract with a CMC after the initial 14 day cooling off period there will be a maximum cancellation fee of £300 (including VAT). CMCs will be required to ensure that all charges are reasonable and will be required to provide consumers with an itemised bill showing what the charges relate to;
- where it transpires that the consumer does not have a relationship or relevant policy with the lender, the CMC will be banned from charging the consumer at all; and
- CMCs will be banned from making or receiving any financial payment for referring or introducing a client to a third party.
For all other financial claims which are not PPI claims or PBA claims:
- there will be a fee cap of 25% (including VAT) of the net amount of the final compensation awarded per product.
The Consultation on these proposals closed in April and the Ministry of Justice is currently considering the responses it received. It intends to publish a response later this year but has indicated that it expects any rule changes to come into effect during the second half of 2016. The changes are not intended to have retrospective effect and will only apply to contracts agreed with consumers after the date of implementation. Breaches of the new rules will amount to misconduct and a breach of conditions of authorisation. Non-compliant CMCs will 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.
It is hoped that these tough new measures will force CMCs to work more efficiently. Some CMCs may conclude that the business is no longer profitable and they may leave the market. The changes could also cause consolidation in the market and increased professionalism. This may have come too late in the context of PPI and PBA claims but could improve the position for lenders should other “bulk” claims arise in the future.
If the FCA does decide to introduce a time bar on consumers bringing PPI claims this is likely to lead to a spike in marketing activity by CMCs. In fact the recent consultation paper on a possible time bar has already seen a noticeable change of approach in CMCs’ advertising seeking to identify those last remaining PPI claims. It will be interesting to see what effect the proposed fee caps and other measures proposed by the Consultation will have and whether any of the other proposals can be introduced before this happens.
The proposals definitely have the potential to help reduce the heavy administrative and financial burdens on lenders who currently have to waste valuable resource and time in dealing with speculative and poorly evidenced claims. The proposals should be welcomed by lenders and consumers alike.