In October 2020, the Financial Conduct Authority (FCA) sent out a letter to claims management companies (CMCs), warning them of poor attitudes towards regulatory compliance.
The FCA’s letter listed several concerns, including (among others)
- Misleading, unclear and unfair advertising
- Poor disclosure of pre-contractual information and fees
- Making information available to consumers about free alternatives.
The FCA also said it was worried about poor standards of service at some CMCs.
This was enabling them to profit twice from the same client.
What are CMCs Getting Wrong?
The FCA took over from the Claims Management Regulator in 2019, assuming control of CMC regulation.
Since then it has highlighted poor practice on the part of claims management companies.
A claims management company can provide a valuable service in helping secure compensation for consumers.
But one area in which the FCA sees clear room for improvement is in how CMCs advertise themselves.
One example is where CMCs only show case studies where the compensation their customers receive is in the very high range.
However, often the reality is that the compensation people receive is considerably lower.
The new rules are clear that CMCs must ensure any information they provide to consumers, especially for promotional purposes, is fair and clear, and not misleading.
The FCA also emphasises that CMCs need to identify themselves as such, and must make this clear to consumers, especially in situations where they could make a statutory claim through an ombudsman or compensation scheme.
In these circumstances, the consumer may be able to make a claim without the use of a CMC, and therefore without incurring the fees a CMC would charge. This fact must be made clear in the promotions of the CMC.
Where no-win, no-fee conditions apply, CMCs must offer clarity to customers concerning fees and termination fees.
How Can a Claims Management Company Improve?
CMCs must apply for FCA authorisation.
This applies to all existing and any new companies.
As of October 2020. around 900 companies had applied for temporary permissions to continue trading while they went through the authorisation process. More than 150 of these applications were either withdrawn or refused.
The FCA has various powers at its disposal to regulate CMCs once they are authorised.
Its aim is to drive up industry standards, which in turn should improve the protection and service that consumers can expect.
There are several new requirements that the FCA has made for CMCs, which include:
- Practising due diligence when it comes to lead generation
- Not encouraging customers to make claims with no sound basis, nor to make fraudulent, frivolous or vexatious claims
- Giving customers clear information upfront about chargeable fees and what services they will provide
- Providing a summary document of services they will provide before the customer signs a contract
- Letting customers know in their advertising about free alternatives for making a claim, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme
- Recording and keeping records of customer calls for a year after the final contact, to reduce instances of high-pressure selling, and to help resolve any customer complaints.
Where a claims management company fails to comply with FCA rules and regulations, the FCA can act to ensure it is compliant.
These actions include requiring a company to change its business practices, imposing financial penalties, or, if there is serious misconduct, refusing to authorise a firm to continue operating as a CMC.
However, it is also in the interests of any claims management company to adopt best practices, since they are already competing with a legal sector that is heavily, and demonstrably, regulated.
FCA regulation, and showing compliance with these rules, should bring clear commercial benefits to CMCs.
Help With FCA Compliance for CMCs
The quality of service that CMCs offer can vary considerably across the sector.
A claims management company should help people make informed decisions about their rights and pursue claims for compensation and redress.
The FCA wants CMCs to deliver services of a consistently high quality, while maintaining proper conduct.
If they remain compliant, CMCs should be able to perform well, and compete successfully.
However, how easy will it be for these firms to navigate their way through what, for many, may be unfamiliar territory? At the very least, it demands a change in mindset for many CMCs.
The FCA’s regulatory requirements are extensive, and the FCA can enforce significant powers if it decides a CMC is non-compliant.
At Richdale, we have a team of highly-experienced compliance experts.
They can support your claims management company by helping you with every aspect of FCA compliance.
Best practice is for your customers’ benefit, and for your own future development and growth.
For more information about the specialist compliance support we offer, please get in touch.