Out-Law / Your Daily Need-To-Know

Hundreds of claims management firms have left industry since introduction of "tough new rules", government says

Out-Law News | 21 Aug 2014 | 10:28 am | 2 min. read

The number of claims management companies (CMCs) operating in the UK has fallen by nearly 600 since stricter rules came into force in April 2013, the government has said.

Figures from the Ministry of Justice (MoJ) showed that the number of firms regulated to handle compensation claims, such as those for personal injury or mis-sold financial products, fell from 2,693 in April 2013 to 2,097 in March 2014. In recent years, the MoJ has increased regulatory fees and fines for cold-calling, prevented firms from offering cash and other incentives to consumers and banned the payment of referral fees for profitable claims between no-win no-fee lawyers, CMCs and others.

The government said that the figures, which were included in the annual report of the MoJ's Claims Management Regulation (CMR) unit, were evidence that the new approach was "having a dramatic effect". However, financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that it was too soon to tell whether the reforms were having the desired effect of improving CMC business practices.

"It has to be positive news for those who are inundated with calls and texts from claims companies regarding compensation they are allegedly due that the number of such regulated companies has reduced by almost 600," he said.

"There is no doubt some of these companies have left the market due to the steps taken by the government and regulatory bodies. However, this does appear to ignore basic economic realities that some companies will have been unprofitable for reasons unrelated to the government's actions, including the finite number of PPI claims which can be made," 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. The CMR unit, which is part of the MoJ and responsible for regulating these firms, has introduced a number of regulatory reforms since February 2012, when prime minister David Cameron announced that action would be taken to tackle high insurance premiums and pass the costs on to consumers.

Since April 2013, CMCs have been required to enter into written contracts with their consumers before being able to take any fees and have had to inform their customers with 14 days if their authorisation is suspended or changed. CMCs can no longer offer financial or other rewards to consumers to encourage them to make a claim or 'refer a friend', while those who receive poor service from CMCs can now refer complaints to the Legal Ombudsman and potentially receive compensation.

More broadly, the MoJ has also banned the recovery of 'success fees' charged by no-win no-fee lawyers from unsuccessful parties and their insurers. It has also banned the 'referral fees' which used to be paid between lawyers, insurers, claims firms and others for profitable claims, and cut the fees that lawyers can charge insurers for processing basic, uncontested claims for compensation for minor injuries suffered in road accidents from £1,200 to £500.

"We have made it very clear to businesses that we take a zero tolerance approach to any malpractice or attempts to take advantage of victims of crime," said Kevin Rousell, head of the CMR unit.

"Our changes have made a clear impact, for the benefit of consumers – but no regulator can ever stand still and we are going further. The new fines we are introducing this year will give us the power to impose tough sanctions on those firms that flout the rules with much more precision, power and proportionality than ever before," he said.