Published: 12th June 2018

Of relevance to: All Claims Management Companies and their advisers
Key date: Consultation closes 3 August 2018

The Financial Conduct Authority (“FCA”) has published draft rules outlining how it will regulate Claims Management Companies (“CMCs”) when regulation passes to it on 1 April 2019. At the same time the Financial Ombudsman Service will become responsible for resolving disputes about CMCs.

The claims management industry has grown substantially since the Claims Management Regulation Unit was established within the Ministry of Justice in April 2007 and the composition of the market has also changed, with financial services claims having overtaken personal injury as the greatest source of turnover for claims management companies. It is estimated that CMCs have taken over £3.5 billion in consumer charges since 2011 for payment protection insurance mis-selling claims alone.

The recent Financial Guidance and Claims Act 2018 enables the transfer of regulation of CMCs in England and Wales to the FCA from the existing Claims Management Regulator, and extends regulation to Scotland, where CMCs are currently unregulated.  Northern Ireland will continue to have no equivalent regulatory regime.

The new regime will also include CMCs dealing with claims under section 75 of the Consumer Credit Act 1974, where the credit card company is jointly and severally liable for any breach of contract or misrepresentation by the retailer or trader.

Many of the existing Claims Management Regulation rules will be carried across to the FCA Handbook, with amendment where appropriate. The FCA propose to apply new standards to CMCs in a number of areas, the majority of which will apply from 1 April 2019.  However, some requirements will apply from a later date, including the proposed prudential standards related to:

  • the type of business they undertake,
  • their total income,
  • their expenditure, and
  • whether they hold client money.

CMCs that hold client money will need to segregate it from their own money and hold it on trust, whilst maintaining accurate and up-to-date records that identify the client money they hold on behalf of each client. In addition, their capital resources requirement will be increased by £20,000 and they will be required to appoint a person to be accountable for client money oversight.

The FCA’s proposals require 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. This document will need to be provided before any contract is agreed.

CMCs will also need to highlight any free alternatives to using the CMC, such as ombudsmen schemes, in marketing material and pre-contract disclosures.

CMCs that buy so-called ‘lead lists’ from third parties will be required to carry out due diligence to ensure that the leads have been obtained legally and to keep records of this. The FCA is also proposing that CMCs will have to record and keep all calls with customers for at least 12 months.

The FCA has also set out its approach to authorising both existing and new CMCs. Firms will need to notify their intention to register for Temporary Permission 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 FCA will publish, in autumn 2018,  a separate consultation paper that will set out how it plans to apply the Senior Managers & Certification Regime to CMCs.

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