FCA issues portfolio letters to CMCs and mortgage intermediaries

On January 30, 2025, the FCA issued portfolio letters to both Claims Management Companies (CMCs) and mortgage intermediaries, outlining their key areas of concern, as well as key areas of focus over the next two years. We consider below what these letters mean for both professions and their insurers.

CMCs

Regulation of CMCs transferred to the FCA in April 2019 and the portfolio letter forms part of the ongoing supervision. The FCA have been reviewing the work of CMCs over the last two years, to ensure that new rules are being properly embedded; including new fee restrictions and the extended deadlines for responses to motor finance complaints.  

The FCA’s key areas of concern in respect of CMCs are:

1. Misleading Advertising: The FCA has identified instances where CMCs are failing to comply with their obligation to provide clear and fair advertising. The FCA emphasises the need for clear disclosures, including prominently stating the company’s status as a CMC, providing fee structures, and providing information about relevant ombudsman schemes. Most recently, the FCA have found breaches of this duty relating to motor finance claims.
2. The ‘halo effect’: Some CMCs have been found using their FCA authorisation to lend credibility to non-regulated services, potentially misleading consumers about the level of protection offered.
3. Inappropriate Sourcing of Customers: A number of CMCs have been found not conducting adequate due diligence when acquiring customer data or leads, leading to potential misuse of personal information and unsolicited contact.
4. Failure to properly investigate claims: The FCA has observed that some CMCs do not thoroughly assess the validity of claims before proceeding, resulting in unsubstantiated or exaggerated representations. Those who work in this field will no doubt be familiar with CMCs’ approach to complaints – often referring a large volume of complaints, in the hope that some will ‘stick’. Indeed, many CMCs operate on a high-volume model, meaning they process as many complaints as possible rather than focusing on the merits of each case.

The letter serves as a reminder of best practice for CMCs and they will be expected to review their policies and procedures, to ensure they are complying with the FCA’s expectations.

The news will be welcomed by those subject to claims initiated by CMCs and their insurers. In addition to this extra scrutiny, CMCs will soon find themselves facing charges for bringing claims before the Financial Ombudsman Service (FOS). So, what impact will this have on those facing claims? The heightened scrutiny could lead to more substantiated and well-founded claims, as CMCs are encouraged to conduct thorough investigations before proceeding. In turn, there is likely to be a reduction of frivolous or unsubstantiated claims. Finally, the emphasis on clear and fair advertising by CMCs may reduce instances where consumers are misled into pursuing unfounded claims.

Mortgage intermediaries

Despite a large number of complaints and claims between 2019 and 2022 (which largely related to interest-only mortgages), the data shows that claims against mortgage intermediaries have slowed in recent years. Despite this, the FCA has confirmed in their portfolio letter that standards must be maintained, particularly in line with the Consumer Duty, to ensure that the advice market thrives.

The FCA’s key areas of focus for mortgage intermediaries are:

1. Consumer Duty: It wouldn’t be an FCA publication without mention of the Consumer Duty. Mortgage intermediaries will need to ensure that they are embedding the Consumer Duty to ensure that customers receive products and services that meet their needs and offer fair value.
2. High pressure selling: The FCA’s recent supervision work has highlighted that there is often a culture driven by sales targets. Firms should review their policies to ensure that incentive schemes do not hinder their staff from acting in the client’s best interests.
3. Quality of advice and unsuitable products: Customers’ needs and circumstances should be at the heart of any advice given. The FCA expects firms to do more to ensure that all options are considered, which includes challenging stated preferences, particularly if they are contradictory to the desired outcomes.
4. Financial promotions: The risks of secured lending should be featured “prominently”, ensuring that it’s not just the benefits that are detailed. This builds on the review of later life mortgage advice in 2023 and the use of social media for financial promotions in 2024.
5. Appointed representatives (ARs): A running theme throughout the letter is the role ARs play and the expectations attached to them. Firms are expected to monitor the type, volume and source of business being carried out by their ARs. Where the AR becomes dormant (i.e. they are no longer carrying out regulated activities) consideration should be given to terminating the relationship. The FCA highlights that conflicts of interest with ARs should be monitored, particularly where there are common directorships.

The FCA confirms that as part of their supervisory work over the next two years, they will be reviewing whether suitable advice is being given to customers. As part of this process, a cross-section of firms will have their advice files reviewed, before good and poor practice examples are published. Firms should be mindful of the potential implications of such a review – if firms are found to be failing to comply with the areas set out in the portfolio letter, there is unlikely to be much sympathy for them. After all, they’ve been given a two-year warning to raise their standards. For those insuring mortgage intermediaries, the FCA doesn’t seem to be suggesting there is one area of concern (i.e. the next big scandal is unlikely). They simply want to see standards raise across the board. This should give some comfort to insurers – it seems unlikely that mortgage intermediaries are going to immediately face the volume of claims that 2019-2002 brought.

Comment

The FCA’s portfolio letters represent a significant step toward enhancing the standards within the financial service sector. By addressing key areas of concern and setting clear expectations, the FCA aims to protect consumers from potential harm while promoting a fair and transparent environment for all stakeholders involved.

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