On 22 June 2017, the Financial Guidance and Claims Bill (the Bill) was introduced in the House of Lords. Since then it has passed through its first and second readings and proceeded to committee stage on 6 September 2017. The Bill follows an independent review led by Carol Brady in 2016, which recommended that regulatory responsibility for claims management companies (CMCs) be transferred from the Ministry of Justice’s Claims Management Regulation Unit to the Financial Conduct Authority (FCA) in order to effect a “step change” in the sector’s regulation.
The enactment of the Bill would see the creation of a new FCA regulated activity of “claims management services”, with the result that from 2019, CMCs will become subject to the FCA’s regulation and rules, including the FCA’s current authorised persons regime (to be replaced by the senior managers and individual accountability regime following its proposed extension in 2018). The Bill also gives the FCA broad powers to make rules which restrict the fees that can be charged for claims management services.
There can be little doubt that the FCA’s regulatory regime is more developed, better resourced and more intensive than the existing regime that regulates CMCs. The current form of the Bill may, however, permit some scope for CMCs to restructure their business so they fall outside the FCA’s regulatory reach. While much of the text of the Bill is duplicative of the current legislation in the Compensation Act 2006 and the detail of the arrangements will be saved for secondary legislation and the provisions of the FCA Handbook, we set out below some preliminary thoughts on key areas where potential loopholes may need to be closed.
What will be regulated?
Claims management services.
The definition of “claims management services” is quite broad.
Advice or other service in relation to the making of a claim
Other services include:
- financial services or assistance;
- legal representation;
- referring or introducing one person to another;
- making inquiries; and
- does not include giving, or preparing to give, evidence (whether or not expert evidence).
Claim means a claim for:
- repayment; and
- any other remedy of relief in respect of loss or damage or in respect of an obligation, whether the claim is made or could be made:
- by way of legal proceedings
- in accordance with a scheme of regulation (voluntary or compulsory); or
- in pursuance of a voluntary undertaking.
Where are the gaps?
Data subject access requests:
- Possibly not covered – not a claims management service if made to obtain information rather than in relation to making a claim;
- Could CMCs adopt this route? DSARs are not a revenue maker in their own right. CMCs would need to follow on with a claim or provide the information to an authorised firm for a fee, both of which would be a claims management service but could combine with a non-claims management service (see next).
Complaints to firms:
- Possibly not covered – if a complaint is made on behalf of a customer without expressly seeking compensation or any other remedy, it may not amount to a claims management service;
- Could CMCs adopt this route? Under DISP (FCA Handbook), authorised firms are obliged to investigate complaints, and determine what remedial action is appropriate and comply promptly with any offer of redress accepted. Firms must consider all relevant information available whether or not it is included in the complaint. So payment of redress may be made without the need for the CMC to actually make a claim. (Note: If a complaint were made where an authorised firm had set up a voluntary redress scheme, this would constitute a claims management service).
Restructure as an ABS?
- Possibly not covered – under the current regime, law firms and alternative business structures (ABSs) that perform claims management activities are regulated by the Solicitors Regulation Authority (SRA) and not by the Claims Management Regulation Unit. It is not yet clear whether a similar approach will be taken when CMCs become subject to the FCA’s regulation;
- Could CMCs adopt this route? If a legislative exemption is made, CMCs may re-structure their business as an ABS (perhaps by combining their practices with the solicitors firms to which they refer claims) so that they become subject to regulation by the SRA (rather than the FCA).
- Scotland carved out – like the equivalent provisions of the Compensation Act 2006, the Bill’s territorial reach does not extend to Scotland. Currently, all regulated activities carried on ‘in the UK’ fall within the jurisdiction ot the FCA. As a result, amendments may be needed to deal with the fact that the regulated activity of claims management services will not incorporate activities in Scotland;
- Could CMCs adopt this route? Currently, it seems that CMCs might be able to avoid the regulatory reach of the FCA by taking the benefit of the partial carve out. While concerns have been raised in House of Lords debates about the loop holes the Bill’s territorial restriction might create, it remains to be seen whether the Bill will be amended to address this issue.
Both the level and type of charges permitted will be critical to the future profitability of the CMC industry. Enactment of the Bill in its current form would give the FCA the power to prohibit entire classes of fees charged by CMCs.
In a regulatory environment focused on conduct risk, authorised firms are attune to the need to set up proactive customer redress schemes where they have identified a risk of customer detriment. But what of the role of CMCs in such schemes and should they be allowed to charge fees which reduce the value of the customer’s compensation? In circumstances where firms are proactively writing to customers to offer them a review and/or redress, many find it difficult to see how the involvement of CMCs in that process could add any value (and so why CMCs should be able to profit from their involvement). Research by Citizen Advice published in 2014 found that 39% of people who had used a CMC to make a claim did not know that they could have made the claim themselves, and almost half said that if they had been aware of the free alternatives, then they would not have used a CMC. It is not inconceivable therefore that the FCA could decide either to prohibit or limit to a flat administration cost fees charged by CMCs in connection with firms’ proactive redress schemes provided those firms make the process sufficiently accessible and fair.
What is also unsaid in the Bill is the approach to be taken to CMCs’ charging mechanisms. Currently, CMCs are entitled to request that firms pay compensation to them direct so that they can deduct their fee, before passing the remaining compensation to the customer. Further amendments to the Bill may be required to limit this practice and to ensure that the customers are not left on the backfoot where they dispute the fees charged.
The Report stage will start on 24 October when further amendments will be discussed.
While the Bill has not yet been passed, the FCA has already started work. At the FCA’s Annual Public Meeting on 18 July 2017, Andrew Bailey (Chief Executive of the FCA) explained that the FCA was in the process of scoping what the future regulation of CMCs should look like. To this end, Mr Bailey said that any evidence or information that firms could provide about CMCs and their past poor practices would be welcomed
This, together with early stages of the Bill’s legislative review, provides an opportunity for firms to promote further amendments restricting the scope of CMCs activities, clarifying the fee charging mechanisms and setting out suitable anti-circumvention rules. We note that while a number of favourable amendments have been proposed by the Lords, including prohibition of unsolicited direct approaches, broader support for those and other relevant amendments is likely to be required as the Bill moves to the House of Commons.
Together with our Government Relations and Public Policy team, we are currently monitoring the Bill’s progress and developments in this area. Please do get in contact with us using the details below if this is something you would like to discuss with us further.