FCA focuses on consumer duty in letter to claims management companies

The FCA sent an open letter to claims management companies (CMCs) and other regulated firms offering related services last week, as the regulator continues its efforts to improve practices and services within the CMC sector and to impose the new Consumer Duty on firms to deliver good outcomes for customers.

In the letter (6-page / 226KB PDF), dated 5 January 2023, the watchdog pointed out the key risks of harm that CMCs pose to their customers and new risks these companies need to address. Misleading, unclear and unfair advertising by CMCs is one of the top concerns. The FCA’s analysis found that customers, particularly those who are vulnerable, can be misled by firms’ poor-quality promotions. Examples include poor or no disclosure of important information for consumers, such as failing to prominently state that the company is a CMC, what fees are charged, and the details of an ombudsman scheme.

The watchdog is also concerned about CMCs using their FCA authorisation for certain services to legitimise other services they carry out which are not regulated by the FCA. The FCA has made it clear that firms’ behaviour when carrying out non-regulated activity will be taken into account by the FCA in the context of their fitness and propriety. It is an area where the FCA’s enforcement strategy will focus on in the next three years.

Inappropriate sourcing of customers is another prevailing problem in the CMC sector. The regulator found that firms do not always conduct or document appropriate checks when purchasing customer data or leads, or do not ensure that these have been sourced lawfully.

Other main failings by CMCs uncovered by the watchdog include not investigating the existence and merits of a potential claim properly and a poor attitude to regulatory obligations such as reporting requirements.

“The FCA’s letter demonstrates its continued focus on improving practices within the CMC sector. While the FCA states that it hopes for ‘CMCs to be trusted providers of high-quality, good-value services that help people pursue legitimate claims for redress and benefit the public interest’, it charts a number of residual concerns in the industry,” said banking litigation expert Joanne Gillies of Pinsent Masons.

“Among those concerns, the references to sourcing and due diligence are of particular note. On the former, the FCA highlights the risk of poor data protection practices at the point of purchasing customer data and leads. On the latter, the FCA reminds CMCs of the need to properly prepare claims, with implicit criticism of the use of pro forma documents and exaggerated claims,” Gillies added.

A common thread throughout the FCA’s letter was its emphasis on the newly introduced Consumer Duty. The duty will come into force on 31 July 2023 and set higher and clearer standards of consumer protection across financial service. The regulator made it clear that CMCs not only have to meet its CMC-specific rules, but also need to fulfil its Consumer Duty by putting customers’ needs first and delivering good outcomes for customers.

“Perhaps most notably, the FCA’s letter makes specific reference to the new Consumer Duty in support of its concerns. This is important recognition of the fact that where poor practices prevail among CMCs, consumers as well as the industry are negatively impacted. The FCA’s letter together with the advent of the Consumer Duty may signpost a more active approach to enforcement to follow, and the concerns identified in the letter will no doubt shape that agenda,” said Jacob Hay of Pinsent Masons.

In the letter, the FCA listed out its three priorities for the next three years and pledged to take robust action against non-compliance and rule-breaking activities with its full range of regulatory tools.

Cracking down on firms that are not currently using the permissions the FCA has granted them is one of the priorities. These firms’ authorisation for claims management activity could be removed, so that “the potential for unregulated business to benefit from the ‘halo’ effect of FCA authorisation is minimised”.   

The regulator also promised to closely scrutinise how CMCs use lead generators, whether firms have robust systems and controls to ensure customers are sourced appropriately, whether data is handled legitimately, and whether complete and adequate records are kept.

Lastly, the FCA told firms that it would focus on improving the service standards of CMCs and keeping a close eye on their implementation of the new Consumer Duty. The regulator elaborated that when assessing service standards, it would particularly look at whether firms are investigating the existence and merits of each element of a potential claim before making or pursuing the claim or advising the customer to make or pursue the claim.

The FCA’s statistics show that 30% of CMCs left the industry following a comprehensive re-authorisation process on firms. The regulator has taken enforcement action against more than 60 firms to protect consumers from harm since it took on responsibility for the regulation of CMCs.