Claims management companies face stronger regulation

Banking Disputes Quarterly

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Tighter regulation of Claims Management Companies (CMCs) is edging closer as the Financial Guidance and Claims Bill (Bill) makes its way through parliament. The Bill was announced in the Queen's Speech on 21 June. Amongst other things, the Bill aims to strengthen regulation of CMCs by transferring regulatory responsibility away from the current regulator, the Claims Management Regulation Unit of the Ministry of Justice, to the Financial Conduct Authority (FCA). Complaints handling responsibility will also be transferred from the Legal Ombudsman to the Financial Ombudsman Service (FOS) so that the FOS can take over jurisdiction to investigate and determine consumer complaints about the service provided by CMCs.

The Bill facilitates these changes by amending the Financial Services and Markets Act 2000 (FSMA). Clause 16 of the Bill amends FSMA so as to enable the FCA to regulate specified activities in relation to claims management services, in effect "switching on" the FCA's new regulatory, supervisory and powers so that the regulator can design and implement a robust regulatory regime. Clause 17 of the Bill ensures that the regulator has the necessary powers to restrict fees which CMCs charge in order to protect consumers from incurring disproportionate fees. Whilst the FCA is granted general powers to make rules about CMCs' charges, there is also a specific requirement that the FCA must make rules restricting CMCs' charges when they offer claims management services in relation to claims for financial services or products.

Comment

The current regulatory regime has proved itself ineffective, with consumers failing to secure value for money and lenders being confronted by large numbers of entirely speculative claims, with the conduct of claims appearing to be more focussed on earning money for the CMC rather than serving the best interests of the consumer. So, although there is still much work to be done in terms of the FCA drafting new rules and fleshing out the detail, the Bill is at least a welcome first step in tackling some of the conduct issues within the market. It will,however, obviously take some time for the FCA to develop an appropriate regime and to carry out a proper consultation before any new rules are implemented. At present there is no indication as to how long all this will take. Two years have already elapsed since the Government commissioned Carol Brady to carry out her independent review into claims management regulation and the FCA is unlikely to want to rush its consultation (especially bearing in mind the recent challenge brought in respect of the FCA's Payment Protection Insurance (PPI) Consultation process).

It is also disappointing to note that there are no specific measures in the Bill to deal with CMCs' use of nuisance tactics such as unsolicited calls and texts. Addressing this point on behalf of the Government during the second reading of the Bill in the House of Lords, Baroness Buscombe suggested that strengthening the regime as proposed in the Bill should ultimately reduce the number of nuisance calls as CMCs will have to comply with the FCA's tougher regulatory rules on marketing and advertising. That may be the case, but it will obviously take time for the new FCA rules to be drafted and for secondary legislation to be made under the powers in FSMA. Given that the two year deadline for consumers to bring PPI complaints is due to start running from the end of August 2017, any meaningful changes may come too late to curtail the anticipated spike in CMC activity which is likely to occur as that deadline approaches.