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The changing face of claims management regulation

  • United Kingdom
  • Financial institutions - Retail finance


The regulation of claims management and the market itself has evolved significantly in the eight years since the regulatory system was first introduced by the Compensation Act 2006.

The increased level of regulation of claims management has had a profound effect on the industry. The consultation paper issued by the Ministry of Justice (MoJ) on 20 November 2014 on the proposed regulation fee levels for 2015-16 notes that by the end of November 2013, turnover of claims management companies (CMCs) operating in the financial products and services sector had fallen by 31% compared to the previous year. That represented the biggest drop in the sector since regulation began. The number of CMCs has also been falling.

So what are the key regulatory changes which have had and continue to have such an impact on the market? There are three key developments; the changes to the Conduct of Authorised Persons Rules 2014 effective from 1 October 2014; the new powers of the MoJ to impose a financial penalty on CMCs effective from 29 December 2014 and the Legal Ombudsman taking responsibility for dealing with complaints about CMCs from January 2015.


The Conduct of Authorised Persons Rules 2014

From 1 October 2014, CMCs have been subject to new conduct rules. The new rules are intended to tackle the misconduct in the financial services sector, in particular, the failure of CMCs to substantiate claims and the making of speculative claims or other ‘phishing’ practices. The MoJ has issued a Guidance Note on the new rules.

Key changes

The two key changes are to Principles Two and Three of the General Rules. In the previous edition of the rules, a claims management business was required to ‘conduct itself responsibly’. That obligation has been extended significantly to flesh out what that means for CMCs. It specifically includes (see rule 2a-f):

  • taking all reasonable steps to investigate the existence and merits of each element of a potential claim before presenting it to a third party
  • making representations that evidence claims and are not false or misleading
  • complying with the relevant organisations’ procedures when claims are presented to a recognised Ombudsman or other compensation scheme
  • maintaining appropriate records and audit trails
  • taking reasonable steps to confirm that any referrals or data have been obtained in accordance with legislation and these rules, and
  • having appropriate safeguards in place for vulnerable consumers.

The Guidance Note explains that what constitutes ‘reasonable steps’ will vary from sector to sector but that in the financial services market, CMCs should take all reasonable steps to establish:

  • that the customer and the provider had a relationship
  • that the product was sold to the consumer, and
  • the reasons why the customer believes the product was mis-sold.

General rule three addresses the concern that those directing the CMCs’ business have not been competent or familiar with the relevant rules governing the conduct of CMCs. This new rule requires those directing the business to have a ‘working knowledge’ of the legislation and rules applicable to regulated claims management services. The MoJ makes clear in the Guidance Note that the requisite ‘working knowledge’ will be demonstrated if the CMC is run compliantly, displays high standards of service, submits good quality claims and does not breach other conduct rules.

The MoJ has recently published a Conduct Report Form, designed to help the public and other interested parties report their concerns about a CMC’s conduct in a user-friendly way that provides the MoJ with all the relevant information it needs.

The new role of the Legal Ombudsman

It was back in August 2012 that the government announced its intention to extend the Legal Ombudsman’s remit to enable it to consider complaints from customers about the services provided by regulated CMCs. That would leave the Claims Management Regulation Unit (CMR Unit) at the MoJ with more time and resource to deal with the regulation of the industry and any bad practice, for example, by using the new power to impose financial penalties (explained below).

A consultation was published in May 2014 and the response issued in November. The response confirmed that the Legal Ombudsman would start taking complaints about CMCs at the end of January 2015. The ‘go live’ date was 28 January 2015. All CMCs must now establish written complaint handling procedures that follow the Complaint Handling Rules 2015.

The Complaint Handling Rules 2015

Most of these changes aim to bring CMCs' complaint handling procedures in line with that of the Legal Ombudsman scheme rules. The new rules apply to any complaint by a business received on or after 28 January 2015 and to any complaint received by a business before 28 January, where on that date, a final response letter has not yet been sent to the complainant.

Strict response times are set out at rule 11 of the Complaint Handling Rules. An acknowledgement must be sent within five business days of receipt and a full response by the end of eight weeks or an explanation why it has not been possible to provide a full response by that deadline. It also provides that regulated CMCs must notify all clients in writing of their right to complain to the Legal Ombudsman before signing a contract with a prospective client and within a final response to a complaint.

The Legal Ombudsman service is free for consumers. That remains the position now that it has taken on the additional responsibility for complaints about CMCs. The costs incurred in dealing with such complaints will be recouped from the claims industry. The Banking Reform Act amended the Compensation Act 2006 and the Legal Services Act 2007 to allow the costs associated with extending the jurisdiction of the Legal Ombudsman to deal with complaints about CMCs to be recovered from the claims management industry.

Financial penalties

The CMR Unit can now impose financial penalties on regulated CMCs that do not comply with the conditions of authorisation or which engage in other non-compliant actions. The new powers came into force on 29 December 2014 under the Compensation (Claims Management Services) Regulations 2006 (as amended by the Compensation (Claims Management Services) (Amendment) Regulations 2014). Part 11, sections 48-55 set out the detailed provisions.

The MoJ issued guidance in December 2014 on how the financial penalties policy will work. This guidance supplements section 48 in explaining the circumstances in which this sanction may be used. It includes a failure to comply with the Conduct of Authorised Persons Rules or to comply with requirements on information provision to the Regulator. The guidance makes clear that this enforcement step is likely to be exercised (as opposed to moving to other formal enforcement sanctions) where:

  • breaches have continued despite previous compliance advice or warnings
  • detriment caused to consumers or third parties in general can be clearly monetised
  • any financial gain or loss avoided by the business can be monetised
  • the business has sufficient financial means to pay a penalty
  • no previous formal enforcement action has been imposed, and
  • action to vary, suspend or cancel the authorisation of a business would be disproportionate under the circumstances.

The size of a penalty will be calculated by reference to the overall nature and seriousness of a breach or collection of breaches. More specifically, breaches will be graded and given a ‘score’ to calculate the level of the fine. Annex A to the guidance contains a ‘scoring table’. Once a final score has been calculated, an assessment of the business’ means will be conducted. Businesses turning over less than £500,000 per annum can be subject to a penalty of no more than £100,000. Businesses with a turnover of £500,000 or more per annum will be subject to penalties based on turnover (up to a maximum of 20%).

A new era of regulation

Over the years, those affected by CMCs’ activities have worked hard to convey to the MoJ the true extent of the problems caused by misconduct, particularly those in the financial services sector. To their credit, the MoJ has listened and taken action, as a result of which, CMCs now appear to be entering a new era of regulation. The extent to which CMCs are prepared for change and their appetite for compliance remains to be seen. However, what is clear is that the MoJ’s new powers to fine and the Legal Ombudsman’s expanded jurisdiction give the regulators the power to tackle misconduct in a way that we have not seen before. This in turn, has the potential to significantly impact an industry that is already starting to shrink in size.

Links to all the documents referred to in this briefing can be found here on the MoJ website.

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