Can the FCA take on claims management companies?

At the beginning of October, the Ministry ?of Justice (MoJ) announced it was considering moving the regulation of ?claims management companies (CMCs) from its own claims management regulation unit to the Financial Conduct Authority (FCA). Clearly, CMCs won’t figure high as far as Christmas card lists are concerned, but why the FCA and why now?

In the Summer Budget, Chancellor of the Exchequer George Osborne decided on a ‘major review’ of CMCs, together with a cap on the fees they are able to charge consumers. It is well known that the postbags ?of members of parliament are made heavier by the number ?of complaints they receive ?about nuisance calls from ?CMCs. The chancellor is also determined that insurance claims be stripped of ‘unnecessary costs from insurance premiums’ resulting from CMC activity. The Budget document is particularly concerned with consumer complaints which fall within ?the jurisdiction of the Financial Ombudsman Scheme (FOS). 

A rigorous regime

The FCA announcement, which was jointly made by the MoJ and the Treasury, calls for evidence on a ‘much more rigorous regulatory regime for CMCs’ ?and considers whether the FCA might be the right regulator to meet that brief. It is actually one of a number of options being considered, the others being joint regulation by the MoJ regulatory unit and the FCA, creating a new independent regulator, or enhancing the regulatory unit’s powers.

At the start of 2015, the ?Legal Ombudsman (LeO) ?began handling complaints about CMCs, taking over from the MoJ. Although it received ?1,000 consumer contacts in the ?first three weeks of complaint handling, only 37 of these ?were considered worthy of investigation, a much lower number than had been expected (around 3,000 complaints a year).

In August, a CMC specialising in hearing loss cases became ?the first to be fined by the MoJ under new government powers. After hundreds of complaints regarding speculative calling were received, it was fined £220,000. In 2014/15 the MoJ issued warnings to 296 CMCs and 105 had their licences withdrawn. 

The total number of CMCs ?has almost halved since 2011, ?to around 1,750. Although ?many critics of CMCs say this is too little, too late, there are signs that CMC regulation is becoming effective. Nevertheless, it appears this is not enough for the Treasury, which is pushing the review. ?The chairman of the Chartered Trading Standards Institute, Carol Brady, is leading that review, and is expected to take ?a fairly ‘consumerist’ stance in doing so.

It may seem odd to some ?that the MoJ is contemplating giving up the work of its claims management regulation unit, but the chancellor is clearly the senior partner here. There is ?also a long history of ministers not really liking the notion of regulators operating from within their ministries, preferring them to be at arm’s length and easier to criticise. 

There seems to be no desire ?to move claims management regulation to one of the existing legal regulators, and it is unlikely that a new legal regulator will ?be created just for CMCs. It is equally unlikely that the review will merit joint review by the FCA and MoJ, which would probably be unpopular with almost everyone. This means that the most likely outcome of the review is that regulation of ?CMCs will be handed to the FCA. 

Ambivalence and scepticism 

There is a public perception that the FCA is not terribly effective, following the fallout from the 2008 banking scandals, and its existing regulated community is at best ambivalent as to its work, but this scepticism is not always shared by ministers. 

In 2014, when taking Consumer Credit Act regulation away from the ineffective Office of Fair Trading, the government decided to add it to the ?FCA’s responsibilities, which demonstrates a degree of trust. 

When taking on board consumer credit regulation, ?the FCA approach was to fit ?it into its existing regulatory structure and approach. This has worked, although at times it has looked like fitting square pegs into round holes. However, ?CMC work does not really fit ?with financial services in the same way that consumer credit activities do, and an entirely new approach from the FCA would probably be needed, although this is not necessarily what the FCA would want to do. From the CMC perspective, it is unlikely the FCA experience would be a pleasant one; Mr Osborne is likely to ensure that it adopts a very firm approach.

Stuart Bushell is managing director of SIFA @sifa_stuart www.sifa.co.uk