Claims Management Companies (“CMCs”) are businesses that offer legal claims management services to the public. Many CMCs typically process large numbers of complaints against financial services companies. PPI and interest rate hedging product complaints are of particular focus at present.
In 2015, there were approximately 1,752 CMCs in the industry (down from a peak of 3,367 in 2011). Whilst some CMCs are reputable, others have been accused of providing poor services, using nuisance calls and text messages, and making unmeritorious claims/complaints. Such CMCs often charge high fees, and commissions on after the event insurance policies.
Current Regulation of Claims Management Companies
The Claims Management Regulator, based within the Ministry of Justice, is presently responsible for regulating the activities of CMCs. Firms that breach the regulator’s conduct rules face fines of up to 20% of their annual turnover, as well as having their trading licence suspended or removed. The regulator can also ban firms from taking fees from customers before a contract has been signed and can name firms which are subject to enforcement action or under investigation.
The Hearing Clinic was the first CMC to be fined by the regulator. It was fined £220,000 in mid-2015, following hundreds of complaints from members of the public who had received speculative calls about claims for Noise Induced Hearing Loss. Many of those called had subscribed to the Telephone Preference Service (TPS), indicating that they did not want to receive such calls.
Recent figures also show that 296 CMCs received warnings from the regulator in 2014 to 2015 and 105 had their licences removed.
The Government’s Proposals
An independent review into the regulation of CMCs has recently been undertaken, as it was recognised that more stringent supervision may be required. Budget 2016 announced (on 16 March 2016) that the government accepts the recommendations of that review.
The amount that CMCs can charge their clients for winning financial claims will be capped. The cap will reflect a reasonable profit level for the risks CMCs are taking in relation to claims. Levying upfront fees will be prohibited. CMCs will no longer be able to make large profits for little risk, and consumers should receive the vast majority of any compensation paid.
Responsibility for regulating CMCs will be transferred to the Financial Conduct Authority (the dates of transfer remains to be confirmed). A tougher regulatory regime will be imposed, which will include managers of CMCs being held personally accountable for the actions of their businesses (in line with the FCA’s general approach to senior management accountability). A Senior Managers Regime will be introduced that will require the re-authorisation of all CMCs.
The increased regulation should be welcomed by reputable CMCs, the wider financial services industry, and consumers. It should help to clean up the worst practices of some CMCs. The fee caps will likely reduce the capacity for opportunistic CMCs to make excessive profits at the expense of their clients. The numbers of unscrupulous CMCs may be expected to reduce further as the reforms bite. Personal liability on senior management for the actions of a CMC should also help to tackle cultural issues in the market.