Out-Law / Your Daily Need-To-Know

Enforceable written contracts among new rules for claims management companies

Out-Law News | 09 Apr 2013 | 3:12 pm | 2 min. read

Claims management companies (CMCs) will have to enter into written contracts with their customers before they will be able to take any fees, under changes to the regulatory regime by the Ministry of Justice (MoJ).

The new rules (32-page / 164KB PDF), which will come into force in the summer, will end all verbal contract arrangements between CMCs and consumers. CMCs will also have to make it clear that they are regulated by the Claims Management Regulation (CMR) Unit within the MoJ, rather than by the MoJ itself; and will have to inform their customers within 14 days if their authorisation is suspended or changed.

"Time and time again we see examples of consumers who have inadvertently agreed to a contract with a CMC without a written contract in place," said Kevin Rousell, the MoJ's head of claims management regulation. "I want people to have time to think through their arrangement and be happy and clear about exactly what the deal is before they part with any money."

The new rules would "help to drive malpractice out of the industry" and improve the reputation of the "vast majority" of firms that followed the rules, he said.

CMCs handle claims for compensation on behalf of consumers, but many have been criticised by consumer protection groups for poor practices and not being transparent with regards to fees. There are around 3,000 CMCs licensed with the CMR, predominantly operating in the personal injury and financial services sectors.

Although personal injury firms account for the largest number of CMC licences, over 90% of complaints received by the regulator relate to firms operating in the financial services sector, according to MoJ figures. The main focus of the sector is currently claims relating to mis-sold payment protection insurance (PPI).

The new rules follow an MoJ consultation, published in August, and come as part of wider attempts to tackle poor practice in the sector. A ban on inducement advertising by CMCs, where firms offer financial rewards or similar benefits to consumers to encourage them to make a claim, took effect on 1 April; while customers who receive poor service from CMCs can now refer complaints to the Legal Ombudsman and potentially receive compensation.

Consumer protection groups cautiously welcomed the changes, but called on the Government to take "bolder" action against "unscrupulous" firms. Richard Lloyd, executive director of Which?, said that it was "disappointing" that the Government had not used its review to introduce stronger enforcement powers and heavier penalties for firms found to be in breach of the rules.

"PPI claims have fuelled an explosive growth in the industry, with thousands of people fleeced by CMCs charging hefty fees for simple complaints that consumers can easily do themselves for free," he said. "That's why, although these new rules are a step in the right direction, we think the Government should be much bolder in cleaning up the claims industry. Upfront fees should be banned and those in charge of claims firms properly held to account for bad behaviour, with hefty fines imposed, licences revoked and individuals barred from running CMCs if they're found guilty of breaking the rules."

"Thousands of people are telling us that they are totally fed up with nuisance calls and texts from CMCs. On their behalf we're campaigning for regulators, including the Claims Management Regulator, to crack down on those responsible and call time on this major nuisance," he said.