Recent reports and a consultation by the Ministry of Justice (MOJ) have pointed in the direction of increased regulation of Claims Management Companies (CMCs). This comes in what could be a critical period if the FCA’s plans to introduce a time bar for PPI claims go ahead.
A new era for CMC regulation lies ahead: following the independent review of claims management regulation, the FCA will take over from the MoJ as regulator of CMCs. The date of this change has not been confirmed.
Fee Cap Consultation by MoJ
In February 2016, the MOJ issued a consultation on Claims Management Regulation, Cutting the costs for consumers – Financial Claims which criticised both the charging methods of CMCs and their practices in relation to consumers and claim handling.
The consultation established that consumers are typically paying between 25-30% of the total compensation they receive to a CMC, with some consumers paying up to 40%. The consultation considered that the marketing techniques of CMCs through the use of television and newspaper adverts and ‘nuisance calls’, together with the lack of information and clarity given to consumers, mean that most consumers do not shop around and are likely to sign up with the first CMC who contacts them. Many customers remain unaware of free options available, such as the free advice provided by the Legal Ombudsmen. In many cases, CMCs are pursuing speculative claims before establishing that a policy exists. This prolongs the claim process for consumers and wastes financial institutions’ time.
In the consultation, the MoJ proposes a number of fee caps on CMCs. CMCs are understood to have pushed back strongly against the proposed changes.
The fee caps are intended to protect consumers and to improve the information available to them. The proposals are split across two types of claim: bulk claims (PPI claims and packaged bank account (PBA) claims); and non-bulk claims, which are not PPI or PBA claims. The fee cap proposals are as follows:
- A completion fee cap of 15% (inc VAT) of the net of any financial compensation of £2,000 or less.
- An overall cap of £300 (inc VAT) where the net of any financial compensation is more than £2,000.
- A maximum cancellation fee where the consumer cancels the contract with the CMC after the 14 day cooling off period.
- Where there is no policy between the consumer and the lender, no fee can be charged.
- No referral fees can be paid to CMCs for introducing a client to a third party.
- A completion fee cap of 25% (inc VAT) in all other types of financial cases.
All claim types
Irrespective of the type of claim, all up-front fees would be banned under the proposal.
Impact if caps are implemented
If these fee caps are implemented, it is possible that many more CMCs will choose to register as alternative business structures with the SRA, combining their practices with firms of solicitors to whom they currently refer claims. This would avoid regulation by the MoJ and mean the proposed fee caps would not apply. This is an area that needs to be closely monitored.
The response paper to the consultation is due later this year. Fee caps may come into effect in around October 2016. The rules are not retrospective and therefore only apply to new contracts entered into with customers after the rules come into force.
Independent review of Claims Management Regulation
Carol Brady published the findings of her independent review of claims management regulation in March 2016, prior to the end of the MoJ consultation period. Ms Brady criticised the practices of CMCs in much the same way, highlighting their poor value for money, use of nuisance calls and pursuit of speculative claims. However, Ms Brady acknowledged that there is a genuine need for CMCs.
Many of the recommendations for reform focused on the need for the regulator to take tougher action on CMCs. Suggestions include that the regulator considers imposing smaller fines and mandatory training for certain breaches, and publishes the names of CMCs who have faced more severe enforcement action as a deterrent to others. Other recommendations include:
- improving the CMRU website to better serve consumers
- introducing a new robust re-authorisation process with a fit and proper persons test
- creating a standardised disclosure document for different sectors which signposts alternative channels, to ensure consumers are well informed when contracting with a CMC
- ensuring CMCs record all calls with consumers and retain them for a minimum of 12 months
- considering moving regulation to the FCA to create a ‘step-change’.
A key outcome of this review is the decision by HM Treasury that the FCA will take over regulation of CMCs. The timing for FCA taking over from the MoJ has not yet been confirmed but the FCA has established a working group to progress matters. It is expected that the new regime will include personal accountability for senior management of CMCs.
The Public Accounts Committee Report
Finally, the PAC report published in May 2016 goes further in its criticism of CMCs. There is particular criticism of the estimated £5 billion CMCs have been paid out of compensation due to consumers for PPI mis-selling claims. However, the report does not place all of the blame on CMCs, stating that the profiting of CMCs was ‘entirely predictable’ with the FCA, HM Treasury and Financial Ombudsmen Service (FOS) being too slow to react to the situation. The PAC report recommends that HM Treasury and MoJ publicly report on how they are reducing the role of CMCs in PPI compensation claims whilst FOS must also set out a clear timetable for reducing the backlog of PPI complaints.
Over the past few years, the CMC regulatory regime has grown steadily tougher with the MoJ being given increasing powers to tackle malpractice. The transfer of regulation to the FCA is likely to lead to a further step change and may lead to some CMCs leaving the market, consolidation of the market and increased professionalism.
Whether or not the FCA proceeds with the proposed PPI time bar, the PPI saga is expected to continue for at least a couple more years. It is questionable how much impact the latest proposed reforms will have on PPI claims. They will come into force very late in the day. Most customers may already be contractually committed to current CMC fee structures. However, the proposed reforms should make a real difference for future claims trend areas by providing increased protection for consumers.