Portfolio Strategy: Claims Management Companies

Jan 9, 2023 9:58:52 AM

What has happened?

In January 2023, the FCA wrote to claims management companies to set out its updated view of the drivers of harm and risks that CMCs pose to their consumers or the markets in which they operate, to outline its expectation of CMCs, including how firms should be mitigating these key risks, and to describe its supervisory strategy and programme of work to ensure that firms are meeting expectations and that harms are being remedied and/or mitigated.

What are the key points of the letter for CMC firms?

The FCA’s vision is for CMCs to be trusted providers of high-quality, good-value services that help people pursue legitimate claims for redress and benefit the public interest. To assess how firms in the CMC portfolio could cause harm, the FCA has analysed information available about firms’ strategies and business models. This included details of complaints received about firms, findings from previous work carried out, insights from new applications for authorisation, and data provided by third parties.

Since taking on responsibility for the regulation of CMCs, the FCA has acted to prevent consumers from harm. It undertook a comprehensive re-authorisation process on firms following which 30% of CMCs left the industry because they were unable to meet the FCA’s standards. It recently created new rules to restrict the fees CMCs charge through a fee cap and introduced new rules banning CMC ‘phoenixing’ so that individuals responsible for financial services failings cannot subsequently set up CMCs to bring claims to the FSCS. It has also used intervention tools to protect consumers from harm by using financial promotion banning orders and agreeing/imposing requirements on over 60 firms. Alongside this work, there has been a significant reduction of contacts with and complaints to the FCA about CMCs, which is a trend replicated in data received from its external partners.

CMCs need to start preparing for the implementation of the Consumer Duty, which comes into force on 31 July 2023. This letter references some examples of how the Consumer Duty can apply to CMCs.

Although the FCA has seen improvements across the CMC industry, its analysis has highlighted the following residual concerns:

• Misleading, unclear, and unfair advertising where consumers, particularly those who are vulnerable, can be misled by firms' poor-quality promotions. Often, these are produced as a result of poor-quality internal processes and sign-off procedures.

• CMCs using their FCA authorisation to legitimise their non-regulated services. Incorrect or out-of-date permissions increase the risk of harm to consumers as they can mislead consumers about the level of protection offered or give credibility to unregulated activities.

• Inappropriate sourcing of customers where firms do not always conduct or document appropriate checks when purchasing customer data or leads or do not ensure this has been sourced lawfully from a firm with the correct FCA permissions where these are required.

• Firms failing to investigate the existence and merits of each element of a potential claim.

• A poor attitude to regulatory obligations where firms do not take a proactive approach to regulatory compliance and do not deal with the FCA in an open and cooperative way.

• As a result of the multi-firm work conducted in the last period, the FCA also identified some examples of poor complaint handling and an inability to identify vulnerable customers.

In addition to routine supervision and authorisations work, work to clamp down on unauthorised activity, the FCA will focus its strategy for CMCs on the following areas:

• CMCs conducting both unregulated and regulated activities,
• CMCs using lead generators, and
• Service standards: the FCA will carry out proactive work to consider whether CMCs are investigating the existence and merits of each element of a potential claim before making or pursuing the claim or advising the customer to make or pursue the claim.

The FCA also highlights the following areas that CMCs should give consideration to:

• Data-led regulation. As the FCA transitions towards becoming a more data-led regulator, it reminds firms that it will increase its focus on data, not limited to regulatory returns.

• Environmental, social, and governance (ESG) issues.

The FCA expects CMCs to take notice of the areas of concern and the expectations set out in this letter and to discuss this at board level or within another appropriate governing body. It has undertaken to identify CMCs that appear to cause harm, will work to identify issues, and will take action against firms that are causing harm.

The FCA will consider using its full range of regulatory tools, including enforcement, where CMCs fail to comply with its rules.

How can we help you?

If you’d like to know more about how we can help you with your claims management arrangements, or any other regulatory compliance issues, our specialist team is here to help.

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