For reasons that will be obvious to most readers, Claims Management Companies (CMCs) are generally not popular with adviser firms. Nonetheless, they are a feature of the current financial services landscape and most advisers will have welcomed the news in 2018/19 that CMCs would henceforth be regulated by the FCA.
CMCs were first regulated by the Claims Management Regulation Unit (CMRU) of the Ministry of Justice. The CMRU published conduct rules on 1 October 2014 and updated these as at 1 April 2018. The rules were sensible but pretty brief, taking only a few pages to document.
Regulation of CMCs was transferred to the FCA with effect from 1 April 2019. Policy Statement PS 18/23 was published in December 2018 and included final made rules that would apply from 1 April 2019. A number of sections of the FCA Handbook were amended to reflect the regulation of CMCs and a new Sourcebook, CMCOB (Claims Management: Conduct of Business), was added containing detailed rules for CMCs in dealing with clients.
According to data provided by the FCA, 952 CMCs sought temporary permissions when it took over regulation of the industry. Since then, around 280 CMCs have either relinquished their temporary permissions or authorisation, or have had them refused or revoked by the regulator. And we believe that the FCA has also refused to approve at least one new application since. So the regulator is clearly applying some serious attention to the activities of CMCs.
As part of their ongoing supervision of CMCs, the FCA sent a portfolio letter, dated 26 October 2020, to Claims Management Companies (CMCs) highlighting its concerns and expectations.
Adviser firms might well wonder, ‘so what?’. There are two reasons why the issues around CMCs should at least be of interest to adviser firms. First, because it serves as a useful reminder that an adviser firm wanting to assist a client to pursue a complaint in relation to financial advice provided by a previous adviser firm, a not uncommon scenario over many years, can no longer do so unless the firm holds the relevant claims management permission.
There are adviser firms that applied for and were granted that permission. Which leads us to the second reason why this article might be of interest. The recent portfolio letter to CMCs stated:
“Other firms that undertake regulated claims management activity but have been allocated to a different primary portfolio (where claims management is ancillary to their main business activity) may also find this letter useful.”
The FCA’s current supervision strategy for CMCs runs to July 2022, at which time the review findings from its supervision activities to assess whether any additional rules or action are required.
- Misleading, unclear and unfair advertising;
- Poor disclosure of pre-contractual information about fees and/or the availability of free alternatives to make a claim;
- Unclear fee structures;
- Poor service standards, including poor-quality advice, inadequate processes and procedures, and sub-standard representation;
- Failing to undertake sufficient checks and collect relevant information before presenting claims to third parties, resulting in submission of spurious claims;
- Some CMCs have been established by, or have close associations with, individuals at previous firms involved in misconduct such as the mis-selling of financial products;
- Some firms have been looking to use existing data to recycle and re-market claims, giving rise to nuisance calls.
The good news is that most of these issues are unlikely to apply in firms that have claims management permission purely to help their own clients. Generally, in this situation, the service is not marketed and unlikely to be charged for. And adviser firms should reasonably be able to understand the technicalities around a potential complaint and identify whether there are genuine grounds for complaint.
Even so, if a firm does hold the relevant permission to help the occasional client, there is a need to actually know what the FCA rules are in this regard. They are a bit more involved than the rules that previously applied and it is incumbent on firms undertaking any regulated activity to ensure they understand the rules that govern the activity. The portfolio letter stated:
“In general, many CMCs have demonstrated a poor understanding of, and sometimes attitude to, their regulatory obligations.”
Adviser firms should not assume that their ‘adviser’ compliance processes are sufficient. There are quite a few areas where claims management compliance requires a different approach, for example in relation to disclosure or the need to record all telephone calls relating to the complaint.