CMC regulation in the new world
FCA consultation provides a clear outline of the new regulatory regime to apply to CMCs as of 1 April 2019
In our previous update, following the progress of the Financial Guidance and Claims Bill (“the Bill”) as it progressed through Parliament, we looked at the final provisions of the Bill in so far as it applied to the activities of Claims Management Companies (“CMCs”). The Bill received Royal Assent on 10 May 2018. At that point, the focus turned to how the Financial Conduct Authority (“FCA”) would look to build upon and enhance the current regulatory regime. The personal injury sector did not have to wait long for the FCA to show its hand. On 5 June 2018 the FCA issued a consultation around its proposals. This consultation gives a clear outline of the new regulatory regime to apply to CMCs as of 1 April 2019 when regulatory oversight passes to the FCA from the Ministry of Justice.
It was widely expected that the FCA would look to bring CMC regulation into line with how it regulates other sectors, such as insurance and financial advice, and the published proposals within the consultation look to do just that. The FCA has stated that the aims of its proposals are to empower customers that are looking for a value for money service appropriate to their needs; to ensure that CMCs help their customers to secure redress in accordance with the FCA’s rules; and to regulate the CMCs in such a way as to improve public confidence in the sector. So how does the FCA seek to achieve this?
The proposed new rules apply to the following classes of organisation, within the jurisdiction of England, Scotland, and Wales:-
- other organisations who generate leads for CMCs;
- CMC trade bodies;
- other relevant regulators, such as the Information Commissioners Office; and
- consumers of CMC services.
The key proposals include the following:
- Principles of Business (PRIN) rules to apply to CMCs. Insurers will be familiar with the PRIN rules. They essentially deal with integrity, skill care and diligence, management and control, financial prudence, market conduct, customers interests, communications with clients, conflicts of interest, customer relationships of trust, clients’ assets and relations with regulators.
- Threshold Conditions to be applied. These are conditions which must be met at all times in order for the regulated organisations (here CMCs) to continue to be authorised by the FCA. They include a requirement to be incorporated and have a registered office in the UK (essentially to facilitate supervision by the FCA); to have the necessary financial and non-financial resources to carry on the regulated activities; to meet the “fit and proper person” requirements of the Financial Services and Markets Act 2000; and to have a business model that is suitable for the regulated activity being carried out.
- Senior Management Arrangements, Systems and Controls (SYSC) Rules to apply to CMCs. These govern how CMCs should manage their affairs, including a regulatory obligation to combat fraud and financial crime.
- General Provisions Rules (GEN Rules) also to apply. These rules define how a CMC can advertise it’s FCA authorisation. They ban the obtaining of indemnity insurance against the risk of financial penalties and CMCs from charging a basic rate to customers wishing to contact it by telephone.
The proposals also include the creation of a new handbook called the ‘Claims Management: Conduct of Business Sourcebook (“CMCOB”)’. Some of the key provisions within that handbook require that CMCs must:
- act fairly, honestly, professionally and in the best interests of their customers;
- refrain from presenting claims that they have reasonable grounds to believe are fraudulent or without merit;
- provide a mandatory cooling off period of 14 days when entering into agreements with their customers;
- ensure that their lead generators are appropriately authorised to conduct business and that the fees charged by those service providers are disclosed to the customer;
- record all calls with customers and store those calls for a minimum period of 12 months;
- ensure that advertising of ‘no win no fee’ arrangements include details of the actual cost to the customer, as well as other free alternatives available, and provide that information to the customer in writing on a single page summary document;
- provide customers with regular updates on the progress of their claim and the fees being charged; and
- have clear and effective procedures in place to assist customers in arrears when it comes to paying their fees, and for vulnerable customers.
The consultation provides more details on the proposed reforms, as well as the wording of the new CMCOB, and we would encourage compensators to consider these documents. The consultation closes on 3 August 2018 and we will be helping clients consider their own responses. If you believe we can assist you, on this or any other matter, please don’t hesitate to contact us.
The passing of the Financial Guidance and Claims Act 2018 and the Government’s efforts to tackle the longstanding issue of CMC behaviours is a positive and essential part of the recent package of civil justice reforms around claims. However, the effectiveness of the new regulatory regime, when it comes to stamping out cold calling activity and tackling other poor behaviours around claims forming, will only be as effective as the mechanisms under pinning the regime and it is crucial that those mechanisms are properly established.
There are also certain specific issues that the regulatory regime must be tailored to address. Amongst those is the problem of most cold calling activity being undertaken in countries outside of the European Economic Area and thus outside the jurisdiction of UK and EU regulators, the perpetrators of the same being unlikely to be deterred by a ban. It is our view that unless the FCA and the Solicitors Regulation Authority takes steps to punish the end users benefitting from those cold calling activities, the ban will be difficult to enforce.
The proposed FCA CMC regulation is subject to review following the consultation closing on 3 August 2018, with the FCA having targeted the fourth quarter of 2018 for the publication of a policy statement. Ultimately the final regulatory regime is unlikely to look drastically different to that currently proposed but the FCA does appear open to making adjustments where there is a clear rationale for doing so. In the meantime, the FCA is clearly demonstrating to the sector that it is serious about providing effective oversight and improving the confidence of the public in the CMC sector.
With the MOJ having recently announced that it is pushing back to April 2020 its target date of rolling out the proposed tariff of damages for whiplash claims and the increase in the small claims track, implementation of the new CMC regulatory regime in April 2019 will be slightly out of sync. However, with those reforms having the potential to result in CMCs securing a greater share of the claimant legal services market, it is perhaps no bad thing that regulation might steal a march on the rest of the reforms.
More stringent regulation may make it difficult for smaller CMCs to remain competitive. Whilst the FCA has stated that some of the provisions will not apply to those smaller CMCs, it is not difficult to see a situation where this level of regulation could drive some CMCs out of the market. As a result of that, some further consolidation in this sector is likely, potentially serving to create a smaller number of larger and more dominant CMCs. However, if FCA regulation brings about real progress towards striking fraud and financial crime from this sector, increased transparency and a more customer focused approach from CMCs, compensators are still likely to view it as a positive development.
There remains disappointment that other service providers in the personal injury claims sector, such as credit hire organisations and medical reporting organisations, will not face a similar level of regulation. The disparity in the regulation of CMCs and those organisations is unhelpful and is viewed as a missed opportunity by many. However, overall the Financial Guidance and Claims Act 2018 remains an important further step along the path of reform in this market.
Can we help?
The consultation provides more details on the proposed reforms as well as the wording of the new CMCOB and we would encourage clients to consider these documents. The consultation closes on 3 August 2018 and we will be responding accordingly, we will also be helping clients consider their own responses to that consultation. If you believe we can assist you, on this or any other matter, please don’t hesitate to contact us.