The clock is ticking for claims management companies, with the Financial Conduct Authority poised to take over regulation of the sector – around 1,700 firms - on 1 April 2019. A new regime is coming and it promises to be rigorous.
The claims management sector has long attracted criticism. Firms are described as ‘ambulance chasers’ relentlessly chasing business and offering services that are costly and often unnecessary. Yet, they continue to attract business and indeed, have made billions from the PPI mis-selling scandal.
They have cornered a market and argue their value lies in both raising awareness of consumers’ rights to claim and in completing the administrative process that some may find too complicated.
Currently, the Claims Management Regulator (CMR), part of the Ministry of Justice, regulates claims management firms. However, there have long been concerns that this has insufficient resources and powers to tackle wrongdoing. A recommendation to switch to the FCA was made in a key report – the Brady Review – in 2016 and the government backed this.
Consulting the market
The FCA is poised to issue final rules and has undertaken considerable consultation. Firstly it focused on overall regulatory strategy and produced guidance in June. Then in September, a further consultation paper was issued on how the Senior Managers and Certification Regime will apply, which closes on 6 December.
According to Andrew Bailey, the FCA’s chief executive: “A well-functioning claims management sector can help to provide justice and redress to people who have suffered harm. But the market doesn’t always work as it should and poor conduct persists across the sector. We want claims management firms to be trusted providers of high quality, good value services that can truly help consumers.”
Proposals due to come into force include:
- Requiring firms to provide customers with a short summary containing information such as an overview of services and fees, before a contract is signed.
- Recording and keeping customer calls for at least 12 months and retaining emails and text messages.
- Highlighting any free alternatives to using a claims management firm.
- If buying in leads, firms will need to carry out due diligence checks and ensure they are compliant with data protection rules.
Meanwhile, the regulator will keep a watchful eye on marketing and introduce prudential checks including on whether client money is held and if so, this needs to be segregated and held in trust. Further, it will clamp down, through tighter registration controls, on ‘phoenixing’ - where rogue directors strip a business of its assets, become insolvent and then re-emerge in a new guise.
Footing the bill
There will also be higher fees to pay - the FCA will spend around £17 million on setting up and delivering regulation to the sector, described as ‘project costs’ and it is claims management firms that will foot the bill.
Given that claims management firms may well be under pressure once the PPI deadline next August arrives, the FCA has said it will be seeking to recover some £7.1 million in fees for 2019/20 promptly because it anticipates some firms exiting the market. This will avoid a disproportionate burden on those firms that remain in business for the subsequent year.
For large claims management firms, there is more bad news on costs as the FCA will abolish the current cap of £150,000 on total annual fees and all will be hit with extra costs for transferring from the Legal Ombudsman to the Financial Ombudsman Service.
So, given all this, are we likely to see a substantial drop off in the number of claims management firms? Critics of the sector would say this is no bad thing, However, payday loans, packaged bank accounts, holiday sickness and cancelled flights will go some way towards plugging the PPI gap – and given the resourcefulness of claims management firms, there will be plenty more new markets where claims could be generated – keeping this lucrative gravy train on the tracks.