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Regulatory update: claims management regulation, cutting the costs for consumers – financial claims (MoJ consultation)

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Background

The Claims Management Regulator (CMR) forms part of the Ministry of Justice (MoJ) and is responsible for the regulation of claims management companies (CMCs) providing regulated claims management services in England and Wales under the Compensation Act 2006.

In the 2015 Summer Budget, the Chancellor announced that proposals were to be brought forward for the introduction of a cap on the fees that regulated CMCs can charge consumers.

Consumer charges currently range from around 10% at the lowest, to 40% at the highest. On average, consumers are typically charged around 25%-30% of the final compensation that may be awarded. This amounts to around £300 being taken out of every £1000 of compensation paid to a consumer on average.

The CMR launched its consultation on placing restrictions on the level of fees that regulated CMCs can charge consumers in the financial products and services claims sector.

The consultation ran from 15 Feb 2016 to 11 Apr 2016.

CMCs are understood to have pushed back strongly against the proposed changes. The final response is still awaited and will be of interest to the FCA who are scheduled to take over the regulation of CMCs from the MoJ. The move will require changes to primary legislation and is likely to happen in 2018.

Key Proposals

The MoJ sought views and further evidence as part of its consultation in relation to the following proposals to;

  • Cap the maximum completion fee to 15% (Inc. VAT) for bulk claims (such as mis-sold payment protection insurance claims) with a single lender and cap the overall charge for claims worth more than £2,000 in total to £300.
  • Introduce a maximum ‘cancellation’ fee of £300 for bulk claims when a consumer cancels their contract with a claims management company after the initial 14 day ‘cooling off’ period.
  • Ban CMCs from receiving or making any financial payment for referring or introducing a consumer to a third party in relation to a PPI or PBA claim
  • Ban any fees where no relationship is found between a consumer and a lender.
  • Ban all upfront fees for all financial claims, where CMCs ask to be paid before any work is carried out.
  • Cap the maximum completion fee to 25% (Inc. VAT) of the final amount of compensation awarded in all other types of financial case.

Related reviews of CMC’s

In addition the MOJ’s consultation, there have been other reviews into CMCs which show legislators’ burgeoning desire to addess issues in this area.

Carol Brady, non-executive member of the Claims Management Regulation Board and Chair of the Trading Standards Institute, released an independent assessment of CMCs in March of 2016 that made recommendations in the areas of regulatory architecture, the issues of CMC authorisation and what the future supervisory approach should be.

This supplemented by a Public Accounts Committee (PAC) report. The PAC report, published in May this year, goes further than Carol Brady’s work in its criticism of CMC conduct. However, as well as criticising CMCs, it apportions responsibility to the FCA, HM Treasury and the Financial Ombudsman for the speed of their reaction to the “entirely predictable” approach that CMCs have been taking.

The main recommendations of the PAC report were that:

  • The Treasury and the MoJ should be more public about how they intend to reduce the role of CMCs in PPI claims
  • The FOS should set a timetable for reducing the PPI complaint backlog

These reports simultaneously predicted the sort of conclusions the MoJ consultation might reach and exemplified the need for legislators and regulators to act in this area.

What is the impact if the cap is implemented?

It has been noted by some industry commentators that if fee caps are implemented, CMCs may try to circumvent the effect of new rules by registering as alternative business structures with the Solicitors Regulation Authority (SRA), avoiding MoJ regulation.

This could mean the proposed fee caps may not need to be implemented by CMCs until such time as this further issue is addressed by legislators. This area will be closely monitored going forwards.

The rules will also not apply to contracts entered into prior to the rule change.

Thoughts for firms

The transfer of CMC regulation to the FCA – as well as the impending fee cap – may result in some CMCs concluding that business is no longer profitable, leading them to leave the market. Others may be affected by the increased personal accountability which will result from direct FCA supervision.  

A minority of CMCs may attempt to circumvent their responsibilities and the fee cap by changing their business structures and registering with the SRA. This is certainly one area for financial services firms and regulators to closely monitor.

It is, however, questionable how much impact the latest proposed reforms will have on PPI claims in particular. They will effectively come into force quite late in the day with regards to the impending time-bar. Most customers may already be contractually committed to current CMC fee structures. However, the proposed reforms should make a real difference for future claims trends by providing increased protection for consumers.

The timing for the FCA taking over CMC regulation from the MoJ is yet to be confirmed, but the FCA has established a working group to progress the matter. 

Ultimately, the proposals mentioned above are likely to help to reduce the heavy administrative burden on financial service firms who spend much time and resource dealing with speculative and bulk claims lodged by CMCs. Consumers will also likely benefit from the financial protections awarded and the expected increase in the scrutiny applied to CMC practices.