The Financial Guidance and Claims Act 2018, which will fundamentally change the way claims management companies (CMCs) need to operate, became law earlier in May 2018.

This Act provides for the transfer of claims management regulation from the Ministry of Justice (MoJ) to the Financial Conduct Authority (FCA), with the switch expected to occur in spring 2019.

In the longer term, the FCA will have the power to set and vary the fees that CMCs can charge. However, in view of the fact that the FCA will not commence regulating CMCs for 12 months or so, the provisions of the Act also include an interim fee cap, which comes into force on July 10 2018 – two months after the date the Act became law.

The MoJ has now published a guidance note setting out the restrictions that will apply to claims management fees from July 10.

The new restrictions on the fees that can be charged by CMCs include:

  • Companies cannot ask clients to pay upfront fees for payment protection insurance (PPI) claims
  • No fees can be requested at any stage if a PPI claim is unsuccessful
  • A cap of 20%, excluding VAT, will apply to all other PPI claims
  • All cancellation charges must be reasonable, and an itemised bill setting out details of what the cancellation charges relate to must also be provided

The 20% cap will also apply to companies that charge an hourly rate for their services. The new law does not expressly prohibit the use of hourly charging methods, provided that the cap is used as an over-riding limit on the total amount that can be charged.

All CMCs therefore need to take steps to make sure they will be able to comply with the introduction of these new fee caps in just two months’ time – one obvious first step to take here is to amend the terms of the contracts that clients are asked to enter into.

In particular, the MoJ highlights a possible scenario whereby a potential client makes contact with a CMC prior to July 10, and is issued with a contract, but is not ready to sign it until after July 10. In these circumstances, the requirements are unambigious – all contracts signed after July 10 must comply with the new fee cap, regardless of when they were drawn up. If necessary, the CMC will need to send the client an amended contract that is compliant with the new requirements. Any contract signed after the implementation date that does not comply with the fee cap will be unenforceable.

All new and potential clients of CMCs need to be made aware of the forthcoming changes to the rules on fee charging.

The MoJ adds that any attempt by a CMC to pressurise a client into signing a contract before the implementation date will constitute a breach of Client Specific Rule 3, which relates to high pressure selling.

The MoJ will continue to regulate CMCs up until the official handover date next year, and can take enforcement action against companies that fail to observe the fee cap.

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