Claims farming part 4: reacting to regulation
In the previous instalments of our claims farming series, we explored developments in this field over the past ten years. During this time, the market has also undergone some significant regulatory changes.
From where we are standing, attempts to regulate claims farming and its impact have shaped the evolution of claims farming practices and the way businesses operate in this area. You could argue that the reforms have opened up opportunities for professional enablers to prosper in an ever-more challenging sector.
Let's reflect on the Insurance Fraud Taskforce report of January 2016, in which claims farming was identified as an issue. Two things stand out to me, one being the comments from the Taskforce surrounding the reforms:
The Taskforce recognises that most of these reforms were not directed at tackling insurance fraud and affect honest and dishonest claimants alike. However, stakeholders generally agreed that the reforms have had a positive effect on fraud by reducing the amount of money available to service providers in the compensation system which encouraged fraudulent activity.
And secondly, the comments around being responsive to emerging fraud risks:
Fraud is constantly evolving as criminals and opportunists find new ways to cheat the system. To some extent there is a latent 'demand' to commit fraud and the Taskforce accepts that pressure on certain types will inevitably mean that others expand or emerge. With substantial reforms to whiplash on the horizon, which has been a very substantial source for fraud, there is a risk that fraudsters move further into other areas.
An example of a new area of claim is sighted within the report, namely noise-induced hearing loss (NIHL) claims, there was a significant spike in these claims being presented against insurers. The industry's response was to look to apply a fixed cost regime around these claims, even though insurers were rejecting a significant number of these claims. The suggestion for the high number of rejections, up to 85% in some cases, was that not enough information was supplied, suggesting these claims had been farmed and presented with minimal information.
We recently posted about the industrialisation of claims and referenced the areas where we've seen clients receiving a significant increase in claims volumes believed to be as a result of claims farming activity. These are:
- Cavity wall insulation claims
- Travel sickness claims
- Japanese Knotweed claims
- EC261 flight delay claims
- Data breach claims
- Property leasehold mis-selling
As predicted, we can see that claims farming has moved into new areas (for more detail, see our cavity wall and travel sickness claims post).
The further fixed recoverable costs reforms propose to take even more profit out of the process for the professional enablers. As a result, they are forced to look at other areas and opportunities to replace that revenue. While some firms have already diversified and now provide more of the services associated with the claims process, e.g. rehabilitation and credit hire, others will rely on claims farmers providing them with new sources and streams of work.
With this in mind, there is an interesting paragraph regarding the Solicitors Regulation Authority (SRA) in the Insurance Fraud Taskforce report:
...stakeholders stated that the SRA should do more to tackle solicitors who act as professional enablers in fraudulent claims. Common areas of concern include the referral fee ban: many stakeholders argued that the SRA does not adequately enforce the referral fee ban, increasing the market for nuisance callers. The SRA argues that it is hard to effectively enforce because firms restructure themselves, often entering into a joint venture, to avoid it.
It then goes on to say:
…the SRA report that the legislation, built up over a 40 year period, gives it very different powers to issue financial penalties, and other sanctions, from other regulators.
The SRA argues that it is constrained in its enforcement capabilities because of the high burden of proof that is required to ‘prosecute’ solicitors suspected of serious misconduct. It is able to make its own enforcement decisions (such as issuing a financial penalty up to £2,000) against the civil standard of proof – that is, on the balance of probabilities. However, if it wants to enforce serious sanctions such as suspending or 'striking off' a solicitor, or imposing a substantial fine (above £2,000), it must 'prosecute' the case before the independent Solicitors Disciplinary Tribunal (SDT) which uses the criminal standard of proof, requiring that the case must be proven beyond all reasonable doubt.
The suggestion, therefore, is that the other regulatory bodies, such as the Information Commissioner's Office (ICO) and the Financial Conduct Authority (FCA) are perhaps better placed to potentially disrupt claims farming activity.
We covered the recent change in the regulator from the MoJ to the FCA in relation to claims management companies in part four of this series.
Year of the claims management company (CMC)
With the new Official Injury Claims portal now open for registration, claims management companies are now eligible to register as claimant representatives, this is new, as only law firms are eligible to register as claimant representatives to the existing claims portal.
Who is eligible to register as a claimant representative?
For the purposes of this service, a claimant representative is any organisation completing the claim process on behalf of a claimant. Claimant solicitors and claims management companies are eligible to register as claimant representatives.
Official Injury Claims
CMCs registering will also need to be registered with the FCA in order to undertake claims management activities. We have seen the FCA taking more of an interest in claims farming activity in recent months ahead of the new claims portal launch.
The FCA has wider enforcement options and powers than the SRA and the ability to dish out higher financial penalties.
This next iteration of legal reform is stripping legal costs, but presenting new opportunities for CMCs. They can take centre stage in this space as claimant representatives rather than just referrers of work. The new claims portal has created the opportunity for CMCs to re-enter the personal injury market in a more meaningful way.
CMCs no longer need to refer claims or maintain relationships with law firms, they can profit from damage-based assessments and additional services supplied to the claimant as part of their rehabilitation or replacement vehicle services.