Regulatory update: FCA sets out plans for regulation of claims management companies (CP18 / 15)

Posted: 7th June 2018

Background

On 5th June 2018, the Financial Conduct Authority (FCA) published its draft rules on proposing how it will regulate claims management companies (CMCs). The regulation of CMCs is due to be passed on to the FCA on 1st April 2019.

Following a review of CMC regulation commissioned in 2015, the Government announced that the FCA would take over regulation of CMCs. Regulation will extend to Scotland, where firms are currently unregulated. The regulator has set out how it proposes to authorise and supervise firms and the steps it will take should CMCs breach their rules.

Andrew Bailey, Chief Executive of the FCA stated:

“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.”

Key proposals

• The proposals place a requirement on CMCs to provide a potential customer with a short summary document containing important information, such as an illustration of fees charged and an overview of the services the CMC will provide to the consumer. This document will need to be provided before any contract is agreed.
• There is an obligation on firms to highlight any free alternatives to using the CMCs, such as ombudsmen schemes within marketing material and pre-contract disclosures.
• There is an intention from the regulator to apply the new Senior Managers and Certification Regime (SMCR) to CMCs and will the FCA will consult on this in a separate consultation paper in autumn 2018.
• Firms will need to notify their intention to register for Temporary Permissions and pay the relevant fee to the FCA before 1 April 2019. Firms will then need to go through the FCA’s authorisation process.
• New firms will need to decide whether to begin their authorisation process with the Claims Management Regulator or wait and submit an application to the FCA after April 2019.
• The proposals include creating a new section of the FCA Handbook called the ‘Claims Management: Conduct of Business sourcebook’ (CMCOB). The regulator is also proposing to apply wider rules which generally apply to all the firms they regulate, such as their Principles for Business (PRIN)
• The FCA will consult further on whether CMCs need to hold capital linked to the type of business they undertake and will review the way in which money held on behalf of customers can be better protected.
• The regulator is proposing a requirement for CMCs to record and keep all calls with customers for at least 12 months. Furthermore, when purchasing ‘lead lists’ form third parties, CMCs will be required to conduct ‘due diligence’ to ensure potential contact details have been obtained legally.
• Finally, firms will need to comply with the ‘clients best interest rule’, acting honestly, fairly and professionally at all times.

Next steps

The FCA would like interested parties to feedback on the proposed changes by 3rd August 2018, with a view of reviewing responses and publishing a policy statement by Q4 2018.

Consideration for firms

The tightening of regulation is likely to be widely welcomed by the wider financial services industry. At this stage, the likely impact on financial services firms will be an expected reduction in complaints which originate through CMC’s.  

Increased transparency under the new regulation should allow consumers to better understand the relevant fees and charges applied and should also encourage complainants to use direct complaints channels. As a result of these changes, firms should actively consider how they can ensure continued access, inclusion and understanding of the complaints process are delivered through holistic complaints operating models.