New law will tighten regulation of claims companies, move regulation to FCA

The Financial Guidance and Claims Bill promises to introduce major reforms of regulation of  CMCs. Part 2 of the Bill deals with claims management services and, although it consists of only two clauses, it is expected to lead to a much stronger regulatory framework and significantly reduce widespread malpractice in the CMC industry.

The Bill amends the Financial Services and Markets Act 2000 (FSMA 2000) to transfer regulation of CMCs from the MOJ to the FCA. Speaking at its second reading in parliament, Baroness Buscombe, sponsor of the Bill, said of this provision that "it enables the transfer of CMC regulation by switching on FCA’s regulatory, supervisory and enforcement powers in respect of claims management services, so that the FCA can design and implement a robust regulatory regime."

Clause 17 then ensures that the FCA has the necessary powers to restrict fees which CMCs charge in order to protect consumers from disproportionate fees. It also requires the FCA to make rules restricting charges for claims management services dealing with claims for financial services or products. Schedule 4 of the Bill provides details for the transfer of the complaints handling function for CMCs from the Legal Ombudsman to the Financial Ombudsman (FOS).

The Bill has moved through its first and second readings in the House of Lords, and began the committee stage on 19 July. That stage will continue on 6 September. During its reading, note was made of the fact that the FCA would "develop an appropriate, proper and tough regulatory regime, and will begin consulting on this in due course".

Two issues that have emerged during the Bill's reading sofar have been the absence of specific legislative measures in the Bill to ban cold-calling and cold-texting by CMCs; and the fact that the new regulatory regime applies to England and Wales only.

Cold-Calling

Several members of the House of Lords raised objection to the omission of a ban on cold-calling by CMCs at the Bill's second reading on 5 July with Lord Sharkey stating: "The FCA acknowledges that many of the 30 million cold calls selling fee-paying debt management services were misleading and damaging and affected the most financially disadvantaged in our society. We do not allow cold calling for mortgages; we should not allow cold calling for pensions, we should not allow cold calling for debt management companies or claims management companies, and we should not allow these companies to use contacts generated by third-party or arm’s-length cold calling."

Members of parliament were however forced to back down on the issue when Buscombe insisted that "strengthening the regulation of claims management services should reduce the number of nuisance calls made by CMCs, as they will have to comply with the FCA’s tougher regulatory rules on marketing and advertising". She also said that government work was ongoing in these areas and it was not "the right time or the right place" to amend the Bill.  

Territorial Reach

On the second issue, several members of parliament also expressed the concern that the Bill did not extend regulation of CMCs as far as Scotland, even though there was research to suggest that people in Scotland receive more nuisance calls than people elsewhere in the UK. Another issue may be the capacity of some CMCs to decamp to Scotland, set up there, and still target UK residents.  

Buscombe acknowledged that this would be kept under review and that the intention of the legislation was that "CMCs approaching consumers in England and Wales and taking forward their claims should be subject to FCA regulations as far as possible". She also said that, because of the way the legislation was drafted, the government would have flexibility to adapt the definition of a CMC should the market change.

Rationale for new regulatory regime

A review report delivered by Carol Brady to the government in March 2016 has been the prompt for the Bill, having identified a number of common conduct issues within the CMC market including: poor value for money; mis-representation of service offered to consumers; nuisance calls and text messages sent to consumers and progression of speculative or fraudulent claims by CMCs. In response to the findings in the Brady review, the government promised to take action and the Bill is the beginning of honouring that commitment. Although the Brady review found that the least "disruptive" option for regulatory change would be for responsibility to remain with the MOJ, it recommended that a complete transfer of regulation to the FCA would bring about a "step change" in regulation. The government has supported the latter recommendation.

Elements of the new regulatory regime

The FCA is likely to begin consulting on the substance of the new regulatory regime in due course once the legislation comes into force. It is likely to be influenced by recommendations in the Brady review including:

• authorisation: recommendations that all CMCs which wish to continue trading be re-authorised under a robust new process tailored to the specific sector in which they operate and that people wishing to perform controlled functions for a regulated firm should be required to pass a fit and proper persons test and be held personally accountable for rule breaches for which they are responsible;
• supervision: recommendations for a standardised disclosure document for each CMC sector to better inform consumers; better signposting of alternative claim resolution channels; a mandate to record all calls with clients and retain them for a minimum of 12 months following conclusion of contract; and wider use of warrants and seizure powers;
• enforcement: recommendations around the use of smaller fines or mandatory training as a credible deterrent; tough enforcement against unauthorised activity; and publication on the regulator's website as a deterrent.

Although the Brady review did not cover the effectiveness of the Legal Ombudsman's ability to handle CMC complaints, and that body only took over the function in 2015, in line with the transfer of regulation to the FCA, the Bill has made provision for the FOS to take over CMC complaints handling. Given that it is financial services claims that are predominantly handled by CMCs, this would seem appropriate.

The CMC market emerged following civil justice reforms in the late nineties which enabled 'no win-no fee' arrangements and led to an increase in unethical marketing and trading activities particularly around personal injury claims. Considered an interim measure at the time because it was quite unusual for a government department to directly regulate an industry, the Claims Management Regulation Unit (CMRU) was set up under the provisions of the Compensation Act 2006. It operates within the MOJ to regulate the CMC industry. Although currently responsible for six claims sectors - personal injury; financial products and services; employment; criminal injuries; housing disrepair; and industrial injuries disablement benefit - a recent review of the market has shown that currently more than 99% of CMC turnover is directly or indirectly related to financial services, such as PPI and packaged bank accounts (60%) or the insurance aspect of personal injury claims (40%).

The current arrangements, prior to any new FCA regime, are that CMCs are required to apply to the CMRU for authorisation to provide services - trading without a licence or exemption is an offence. They must also adhere to the Conduct of Authorised Person Rules, which, among other things, requires them to:

• give consumers clear information about the options available for pursuing their claim and the costs of doing so;
• not use high-pressure selling tactics, not make cold-calls for claims that are going to be referred to a solicitor, not make hidden charges, and not use misleading marketing;
• have a complaints handling procedure, and if a consumer is not satisfied with a CMC’s response they can follow this up with the Legal Ombudsman.

Although more radical reform is needed and will now be introduced through the mechanics of the new Bill, incremental reforms to the CMC regulatory landscape have happened over the past several years including:

• April 2013: CMCs banned from offering financial rewards or similar benefits to potential claimants as an inducement to make a claim;
• April 2013: Payment, or receipt of referral fees, banned between CMCs, lawyers, insurers and others for profitable personal injury claims;
• June 2013: CMCs under investigation and subject to enforcement action named as part of ongoing work to raise industry standards and ensure consumers and businesses are better informed;
• July 2013: Conduct Rules for CMCs tightened to better protect consumers, including banning verbal contracts and requiring CMCs to obtain signed contracts before taking a fee;
• October 2014: Conduct Rules for CMCs strengthened further to help tackle abuses in the financial claims sector. Key changes were made around ensuring claims are properly substantiated before being pursued and any data received through telemarketing is legally obtained;
• December 2014: Power to fine CMCs for rule breaches introduced;
• January 2015: Consumers empowered to bring service complaints against CMCs to the Legal Ombudsman (LeO);
• April 2015: Threshold for Information Commissioner’s Office (ICO) to issue fines to businesses that send spam text messages or make nuisance calls reduced.