Claims Management Companies: The new regulatory regimePrint publication
Walker Morris Banking Litigation partners Louise Power and Rob Aberdein explain the new regulatory regime and the Financial Conduct Authority’s proposals for changes to the regulation of claims management companies across England, Wales and Scotland.
CMCs and the need for change
Prior to the last few years, claims management companies (CMCs) were predominantly associated with ‘ambulance chasers’ seeking compensation for minor personal injuries – think ‘trip and slip’ cases, whiplash and the like. However, nowadays there are a large number of CMCs which specialise in financial services claims – from claims arising from consumer credit agreements (such as credit cards and personal loans), to bank charges and PPI. In fact, a review of the CMC market in the Ministry of Justice’s (MoJ) Claims Management Regulation Annual Report 2016/17 (the 2016/17 Report) demonstrated that the vast majority of CMC turnover now relates to financial services.
Consumer groups such as Which? and the Financial Ombudsman Service (FOS) have, for some time, expressed concerns about CMCs, due to serious shortcomings such as exaggerating success rates, discouraging customers from pursuing claims themselves and failing to be upfront about charges. As a result, the financial sector will now be affected by significant reforms in this area.
In the Spring Budget 2016, the Chancellor announced the Government’s intention to clamp down on rogue CMCs. As part of that plan, the Financial Guidance and Claims Act (the Act) was proposed and, as of 10 May 2018, has now been made law.
The Act is seen as the first step in tackling conduct issues and aims to strengthen the regulation of CMCs. It will also facilitate the transfer of regulatory responsibility to the Financial Conduct Authority (FCA) on 1 April 2019.
The Financial Guidance and Claims Act 2018: The scope of change
The FCA will be given powers to cap the fees that CMCs charge consumers ; ensure a more robust authorisation process for new firms (including the introduction of new sector specific permissions required to cover activities such as providing advice to clients in relation to a claim, investigating a claim or representing a client); impose increased personal accountability for CMC managers in relation to the actions of the business; and to make wider use of warrants and seizure powers.
The legislation also amends the Financial Services and Markets Act (FSMA) and extends the regulatory regime to Scotland.
On 5 June 2018, the FCA published its proposals, which set out how it intends to regulate CMCs when it assumes regulatory responsibility on 1 April 2019. The FCA’s stated aim is to improve the perception of CMCs and to reinforce that that they are “trusted providers of high quality, good value services that help customers pursue legitimate claims for redress”. The FCA’s consultation highlighted the proposals that they believe are integral to achieving that aim. This includes the following requirements for CMCs:
- To provide potential customers with a short summary setting out important information about their services.
- Where CMCs buy ‘lead lists’ from third parties for the purpose of gathering information, they must carry out due diligence on how the information was obtained and to ensure that it was gathered legally. CMCs must also keep records of these checks.
- To record all calls with customers and keep recording for a minimum of 12 months.
- Requiring firms to hold capital linked to the type of business they undertake.
- To protect client money.
The FCA is consulting on its proposals and feedback is requested from CMCs established or serving customers, in England, Scotland and Wales; organisations that are affected by CMCs (such as those that use CMCs to generate leads); trade bodies representing CMCs, or trade bodies representing firms that receive claims about their products/services from CMCs; consumer interest bodies; other bodies currently involved in regulating businesses that provide claims management services, for example, the Information Commissioner’s Office (ICO); and customers who use, or are considering using, firms that provide claims management services
The consultation, which closes on 3 August 2018, can be accessed here.
 The Act caps the amount CMCs can charge for their services, in relation to PPI claims specifically, at 20% of the compensation awarded. However, the CMC will not be able to recover a fee where the claim has been unsuccessful. The new Management Conduct of Business Sourcebook (MCOB) stipulates that where a customer cancels their agreement after a mandatory 14 day ‘cooling off period’, they will be entitled to charge a ‘reasonable amount’ for the work that has been undertaken in respect of that claim. The FCA’s power to introduce new rules to restrict the amount that CMCs can charge will also extend to other sectors.