The FCA have published a consultation paper on proposals to restrict the amount charged by claims management companies. 

As many will be well aware, under the Financial Guidance and Claims Act 2018 (FGCA) when Parliament transferred regulation of CMCs to the FCA it gave them a duty to make rules about CMC fees for claims relating to financial products and services.   The duty given to the FCA requires them to make rules with a view to securing an appropriate degree of protection against excessive charges made by CMCs managing financial products and services claims. Parliament also gave the FCA powers, but not a duty, to make such rules for the other CMC sectors it regulates, namely personal injury, housing disrepair, industrial injuries benefit, criminal injury and employment.  The FCA prioritised making rules for the financial products and services CMC sector and will consider using these powers in the other sectors in due course.

These proposals will not apply to claims that relate to payment protection insurance (PPI) as PPI claims are already subject to a cap under the FGCA.

Data from the Ministry of Justice before the transfer of regulation to the FCA indicated that claims management activity in relation to housing disrepair, criminal injuries, employment and industrial injuries benefit claims accounted for less than 1% of all CMC revenue. The personal injury sector is significantly larger but is likely to be affected this year by the impending Government whiplash reforms (now expected in May 2021). The FCA concluded that it would be better to wait for those reforms to be implemented before considering whether to intervene in this area.

Consumers of financial products and services have the right to make a claim free of charge under the redress system. The cap the FCA is proposing applies to claims about financial products or services that are complaints under DISP, claims under COMP, or claims made where another statutory ombudsman or compensation scheme applies, such as the Pensions Ombudsman, FOS or FSCS. If CMCs manage claims about financial products and services that are not covered by these schemes, their fees will be subject to a separate proposed rule requiring them to be ‘reasonable’.

There are currently around 223 firms carrying on FCA-regulated claims management activity for non-PPI financial products and services. Their estimated revenue for 2019/20 was about £38m. The FCA collected data from a sample of CMC firms to understand more about the market and the regulator based its proposed fee cap on the data returned by 33 firms.

The FCA will continue to monitor developments in non-FCA-regulated CMC markets, for example, where claims management activity is carried on by solicitors as part of the legal services they provide, and those solicitors are regulated by the Solicitors Regulation Authority (SRA). On behalf of the Law Society of England and Wales the SRA is carrying out a duty equivalent to the FCA, requiring it to make rules with a view to securing protection against excessive claims management fees for firms it regulates.

The FCA has discussed its proposals with the SRA and will continue to liaise with a view to ensuring any differences in regulatory regimes do not lead to consumer harm. The Law Society of Scotland, the General Council of the Bar, and the Chartered Institute of Legal Executives have powers but no duty to make such rules.

Proposals

1. The FCA propose a change to the existing disclosure rules in CMCOB 4.2.5R which requires firms to provide consumers with illustrative fee calculations. It is proposed that these illustrative fee calculations will need to set out the fees that would be paid by the consumer for the 3 redress bands that are closest to the amount of redress the consumer is likely to get for their claim. Firms will no longer need to provide illustrations for the amounts (£1,000, £3,000 and £10,000) currently specified in the rules.
   The firm should also indicate which of the 3 illustrative fee calculations most closely reflects the consumer’s claim. This is in addition to the existing obligations in the rules which require firms to provide revised fee calculations as and when information becomes available to the firm that would allow them to give a personalised illustration of the fee the consumer is likely to be charged.
   
   The FCA is proposing that the cap applies to contracts which were entered into before the rules are made, but where charges are imposed after the rules come into force (pre-existing contracts).  The regulator recognises that applying a cap to charges arising from contracts that pre-date the rules will interfere with pre-existing contractual rights of firms. However, where fees are excessive, consumers should not have to continue paying at those levels after these rules come into force. Where fees have already been charged at the time the rules come into force, they will not be subject to the cap, but will count towards the cap for any fees charged after the rules come into force.

2. FCA rules already require firms to include a statement drawing attention to the option to make a claim direct without charge as part of their pre-contract disclosure to the consumer. (See CMCOB 4.2.2R(2)(g).) This provision was included considering the data collected as part of the FCA’s Financial Lives Survey. The survey found that in 2017 only around 35% of UK consumers were aware of the free alternative routes to redress. The FCA’s more tailored consumer research found that awareness of the option to claim direct was even lower for consumers of CMC services. The research found that more than half of consumers who used a CMC were not aware of their ability to make a claim direct to the firm or to a statutory body such as the ombudsman service. Considering the findings, the FCA is proposing that firms seek confirmation that the consumer does not wish to progress their claim directly themselves by requiring the statement and information about that option to be isolated in the pre-contractual disclosure, and that the consumer confirms, by way of separate confirmation, they would like to continue engaging a CMC despite understanding they have the option to progress their claim for free, by themselves.

Amount of the proposed cap

The amount of the cap will depend on how much redress is awarded. The FCA has set out five bands of redress, each of which has a maximum percentage of consumer redress and a maximum total fee. On any one claim the total fee to the customer must not exceed the lower of the maximum percentage rate and the maximum total fee. The maximum total fee in each redress band alongside the maximum percentage rate in each redress band is set at a level that will apparently ensure ‘a smooth transition, with no cliff-edges’, between the maximum fees payable in each band.

Proposed fee cap

For example, if a consumer gets £2,000 in redress, the fee will be subject to the ‘band 2’ cap which means it may be a maximum of £560 (28% of £2,000). A claimant who gets redress of £9,000 will pay no more than £2,500 (the maximum total fee for band 2, which is lower than 28% of £9,000).

Which fees will be covered by the cap?

The cap will apply only to fees charged to a consumer where the claim being managed receives monetary redress. That means that where a claim is not upheld, or is upheld but does not result in a monetary award to the consumer, the cap will not apply. The cap will apply to charges under all contracts whether or not the contracts were entered before the rules come into force. It will apply to contracts with all types of claimant, whether individual consumers or businesses.

The consultation is open until 21 April 2021 and CMC’s are invited to respond to the proposals, you can do so by completing the following response form available at https://www.fca.org.uk/cp21-01-response-form or

Email your responses to cp21-01@fca.org.uk or

Write to: The CMC Policy Team, FCA, 12 Endeavour Square, London, E20 1JN.

A policy statement is expected to be published in Autumn 2021.