Claims management companies: the impact of regulatory reform for the industry and for insurers
On 1 April 2019 the FCA will assume regulatory conduct for claims management companies (CMCs) established or serving customers in England, Scotland and Wales. At the same time the Financial Ombudsman Service will become responsible for resolving disputes about CMCs.
Earlier this month, the FCA set out its plans for changes to the regulation of CMCs which will be of interest both to CMCs and also to insurers who may benefit from a reduction in spurious claims and from greater uptake in professional indemnity (PI) insurance from CMCs generally.
The FCA’s vision for the future
Concerns over the lack of regulation of CMCs are not new. Increasing government focus on the misconduct of CMCs triggered the 2015 Brady review which proposed improvement to the manner in which CMCs were regulated. The implementation of proposals from that review has led to transfer of regulatory responsibility from the Ministry of Justice Claims Management Unit (MoJ) to the FCA.
In publishing its consultation paper, the FCA noted that poor conduct persists across the claims management sector and set out its vision for reform.
The FCA’s proposals include:
- Greater pre-contract disclosures to clients, including the provision of illustrated/ estimated fees and a clear guide to the services the CMC will undertake and those areas where engagement is required by clients.
- Greater regulation of marketing, particularly for “no win no fee” arrangements and mandatory signposting of clients to statutory ombudsman or compensation schemes which clients may use for free.
- Greater protection of client monies through the segregation of client monies held on trust.
- Improved record keeping requirements regarding client monies and conduct generally. As CMCs frequently advise over the telephone, the FCA have proposed a specific requirement that CMCs record all calls and maintain them for a minimum of 12 months.
- Improved accountability where CMCs encourage the pursuit of spurious or fraudulent claims.
- New capital requirements to ensure CMCs are able to withstand unexpected shocks in their finances to minimise the prospect of CMCs sudden failure, which may be harmful to clients.
- A new focus on CMCs acquisition from third parties of lists of potential clients. In keeping with the current focus on data protection, the regulator is seeking to ensure that those named on such lists have consented to the disclosure of their details.
These proposals may well be subject to change as the consultation continues. Responses to the consultation paper are required by 3 August 2018, with the regulator likely to provide further clarity towards the end of the year as to final terms of the proposed rules.
The changing landscape of regulation for CMCs was foreshadowed by new, more stringent Conduct of Authorised Persons Rules introduced by the MoJ on 1 April this year. The FCA has also highlighted that as a result of the expansion of its remit to include CMCs it will be making further amendments to FCA regulations including to its Supervision Handbook.
The estimated net cost to the claims management industry arising from the transfer of its supervision from the MoJ to the FCA is £15.9 million. With increased regulatory overheads, coupled with the new capital requirements being proposed, some contraction in the number of CMCs operating in the market may follow. Indeed government statistics indicate that the number of CMCs has already fallen by an average of 17% for the past 3 years.
The impact for insurers
With conduct standards improving in the CMC arena, insurers dealing with claims involving a CMC may see an improvement in their handling of claims resulting from the reforms.
Interestingly the FCA considered directly whether to expand the scope of CMCs required to maintain mandatory PI insurance beyond those dealing with personal injury claims. The FCA have chosen not to extend the mandatory insurance requirements at this time but, with the increasing focus on conduct within the CMC arena, many CMCs who did not previously have PI insurance may well wish to take out cover. Further, many CMCs who already have cover may wish to review their terms given the new exposure to FCA enforcement powers and to FOS decisions. When quoting or renewing risks, underwriters may meanwhile wish to probe CMCs as to their regulatory framework in anticipation of these changes.
The FCA will be consulting separately on the expansion of the new Senior Managers & Certification Regime (SMCR) to all firms regulated by the FCA, and plan to produce a separate consultation paper proposing that these rules will also be applied to CMCs. If the SMCR regime is applied to CMCs, there may be also be an increased demand for directors' and officers' cover in CMCs for those individuals occupying the relevant roles of responsibility.