The Financial Conduct Authority (FCA) has unveiled its proposals for the rules claims management companies (CMCs) will need to follow once the FCA has taken over the existing responsibilities of the Claims Management Regulator.

For the first time, we also have a definitive date for the switch. The FCA will regulate, supervise and take enforcement action against CMCs with effect from April 1 2019. Claims companies based in Scotland will also experience formal regulation for the first time from April 2019 – there is currently no regulatory authority supervising claims companies based north of the border.

One of the most significant changes being proposed by the FCA concerns pre-contract disclosure. Before a CMC agrees a contract with a customer, they will be required to provide a summary document, which must include:

  • An illustration or estimate of the fees to be charged
  • An overview of the services the CMC will provide on a customer’s behalf, and the tasks customers will need to undertake themselves under the arrangement with the CMC
  • A statement to the effect that the customer is not required to use the CMC’s services, and that the same claim can be presented free of charge were the customer not to use the company’s services

The obligation for CMCs to keep customers informed as to the progress of their claim will encompass a requirement to provide updated estimates of potential fees, where appropriate.

Where a customer could pursue a do-it-yourself claim for free, this also needs to be highlighted on any marketing material issued by a CMC that relates to ‘no win no fee’ services. If a company is claiming to offer ‘no win no fee’ services, then marketing material must also give a prominent indication of the fees the CMC will charge, or how they would be calculated.

Another very significant change will be the need for companies to record all calls with customers and keep the recordings for a minimum of 12 months. They must also maintain records of text message and email communications.

Where CMCs purchase leads from third parties, they will need to carry out sufficient due diligence to ensure both that the lead generator is authorised and that it has appropriate systems and processes in place to ensure compliance with relevant data protection, privacy and electronic communications legislation. CMCs will need to keep a record of these checks.

The Financial Ombudsman Service will take over from the Legal Ombudsman as the body that can adjudicate on complaints about CMCs when the customer disagrees with the company’s handling of the matter.

Although a separate consultation on the issue will be conducted at a later date, this consultation paper makes it clear that the FCA’s Senior Managers and Certification Regime will apply to CMCs. This Regime allows the FCA to hold key individuals within companies personally responsible for compliance failures within their business area.

Some of the FCA’s high-level standards that will apply to CMCs include:

  • The Principles for Business – such as the need to treat customers fairly, to provide information that is ‘clear, fair and not misleading’, and to co-operate with the FCA
  • The Threshold Conditions – including the need to have adequate financial resources, and for the company to be ‘fit and proper’
  • The need to have systems and controls in place to ensure compliance with regulatory obligations

On an annual basis, CMCs will need to submit both a Complaints Return and a CMC001 form to the FCA. The latter asks for information on: staff numbers, client money held, prudential resources, professional indemnity insurance, detailed product information and information on third party generator leads.

CMCs will need to hold prudential resources of £10,000 for Class 1 CMCs (those with annual turnover of £1 million or above) and £5,000 for Class 2 CMCs (turnover below £1 million), with a requirement to hold an additional £20,000 if the company handles client money.

CMCs that are currently authorised by the Ministry of Justice can register for temporary permissions with the FCA – this must be done prior to April 1 or else the company will lose its authorisation entirely. Once temporary permissions have been granted, the company must then apply for full authorisation from the FCA during a specified application period – the dates for which are yet to be confirmed.

CMCs entering the market after April 1 cannot benefit from the temporary permissions regime, and so cannot commence trading until the FCA has approved a full authorisation application.

The FCA welcomes responses to the consultation up until August 3 2018. Final rules will be published in the fourth quarter of 2018.

CMCs are also reminded that the new caps on fees which can be charged, which include a ban on all upfront fees for payment protection insurance claims, come into force before the FCA regime commences. These fee caps apply from July 1 2018.

Andrew Bailey, Chief Executive of the FCA said:

“A well-functioning claims management sector can help to provide justice and redress to people who have suffered harm. But the market doesn’t always work as it should and poor conduct persists across the sector.

“We want CMCs to be trusted providers of high quality, good value services that can truly help consumers. A key element of our approach to regulation will be ensuring that consumers are both protected and treated fairly. The proposals we have outlined today are integral to achieving that aim.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article