The FCA published the eagerly anticipated PS18/23: Claims management: how we will regulate claims management companies setting out the final rules that will apply to CMCs under the FCA’s regulatory regime. The proposed rules remained largely unchanged with some additions to the final rules which are summarised below.
Controllers
Interestingly, the FCA will apply the full permission consumer credit definition of controller to CMCs (i.e. that persons who have 20% or more shares or voting power in CMCs will be classed as controllers and will need to be disclosed to the FCA and approved as part of the authorisation application). Likewise, once authorised, a CMC would need to notify the FCA and obtain approval prior to a person acquiring 20% or more shares or voting power in the CMC. (SUP 11.3.2A (3)).
Financial Promotions/Advertisements
The FCA reiterate in the policy statement that the requirement for CMCs to disclose in advertisements that consumes do not have to use a CMC and can pursue the claim themselves for free or complaint to a statutory ombudsman or compensation scheme applies to various mediums of advertising including social media and radio.
Information Disclosure
The FCA’s final rules sets out the following disclosure requirements for lead generating CMCs that use the term “no-win, no-fee” in advertisements:
- Where applicable, lead generating CMCs are required to set out prominently in consumer communications that consumers are not required to use the services of a CMC and it is possible for them to pursue the claim themselves for free against the respondent or to a relevant statutory ombudsman or statutory compensation scheme. (CMCOB 2.2.8(3))
- Lead generators must prominently disclosure in advertisements the fees that the third party to whom the consumer will be introduced to charges in respect of the claim to which the advertisement relates. Where this is not ascertainable in advance, the method by which the fees would be calculated should be set out. (CMCOB 3.2.9(4))
- Lead generating CMCs must ensure that it discloses in advertisements that the third party to whom it introduces consumers charges a termination fee in the event that the agreement is terminated after the cancellation period. Where known, the lead generator is expected to disclose the termination fee. Where the third party’s termination fee is not fixed or ascertainable in advance, the method by which it would be calculated should be disclosed by the lead generator. (CMCOB 3.2.9(6))
- Where a lead generator does not know the method by which the third party would calculate terminate fees, as a minimum, it must inform consumers that they may be required to pay a termination fee. (CMCOB 3.2.9(7))
Pre-Contract Obligations
Fees
The FCA set out in the final rules that it expects CMCs to set out in their pre-contractual documentation (i.e. terms of business) whether they will charge their fee based on the gross or net amount of the compensation award.
Outstanding Liabilities
The final rules require CMCs to inform consumers in a durable medium that if the customer has outstanding liabilities with the respondent, are subject to or soon to be subject to bankruptcy, a debt relief order, an IVA, sequestration or a similar arrangement that any damages, compensation or settlement monies might, in certain circumstances, be off-set against the customer’s outstanding debts; and the customer will, where necessary need to pay the firm’s fees from their own funds. (CMCOB 4.2.9 (1), CMCOB 4.2.9 (3))
CMCs that process pension claims will be required to inform consumers in a durable medium that the firm’s fee may become payable before the customer has access to their pension; and the customer will, where necessary need to pay the firm’s fees from their own funds. (CMCOB 4.2.9 (2))
The above information must be communicated to consumers in a durable medium together with the name, postal address, other contact details of the firm and its Firm Reference Number and cannot be communicated within the one-page summary document.
Proactive Duty
The final rules require CMCs to proactively (CMCOB 4.3.1):
- Draw the customer’s attention to the information provided in the one-page summary about the fact that they do not have to use the services of a CMC and can submit the complaint themselves for free or complain to a statutory ombudsman or compensation scheme or represent the claim to an alternative dispute resolution scheme (if the respondent is a member of such).
- Ask the customer whether they have outstanding liabilities with the respondent and explain that if they do that any compensation might, in certain circumstances, be off-set against those outstanding liabilities; and the customer will, where necessary, need to pay the firm’s fees from their own funds.
- For pension claim CMCs, explain that the firm’s fee may become payable before the customer has access to their pension.
- Ask the customer if they, whether in Great Britain or in another jurisdiction have been subject to bankruptcy, a debt relief order, an IVA, sequestration or a similar arrangement and if so, explain that any compensation might, in certain circumstances be off-set against the customer’s outstanding debts; and that the customer will, where necessary, need to pay the firm’s fees from funds that are not subject to the arrangements.
The final rules require CMCs to record consumers’ answers to the questions about outstanding liabilities and debt resolution arrangements. Where customers are not sure about outstanding liabilities and debt resolution arrangements the final rules set out an expectation on CMCs to advise them to check. (CMCOB 4.3.1 (7))
Ongoing Disclosure Obligations
Material Developments
The final rules include two additional illustrations of material developments that would require CMCs to update customers. These are as follows (CMCOB 6.1.6 (1)):
- Where the CMC receives an offer from the respondent; and
- Where the CMC receives a decision from a statutory ombudsman, a statutory compensation or alternative dispute resolution scheme.
Additional Actions
The final rules set out that any actions that a CMC intends to take to present and pursue the claim that were not notified to the customer at the time of contracting must be notified to the customer within 10 business days of this event occurring and in a durable medium (or by telephone). (CMCOB 6.1.5 (1)(d))
Allegations of Fraud
The final rules place a positive obligation on CMCs, within 10 business days (and in a durable medium), to notify the customer about any allegation by a third party that the claim is fraudulent, except where there is a legal obligation preventing such disclosure. Where a firm is required to make such a notification it is required to advise the customer about the consequences of pursuing a fraudulent claim. (CMCOB 6.1.5 (1)(e))
Customer Consent
The final rules require CMCs to notify customers about any significant steps the CMC intends to take to progress the claim such as referring the claim to a third party (e.g. the FOS) or commencing legal action where six months has passed since the CMC last notified the customer of that step. The FCA require CMCs to obtain consent within 6 months prior to taking such steps. CMCs may obtain customer consent over the telephone or in a durable medium.
Prudential Resources
Firms’ Overhead Requirements
The final rules reflect the FCA’s recognition that sometimes a proportion of marketing expenditure can be discretionary. Despite its importance in revenue generation, the FCA accept that it is possible that CMCs would reduce marketing expenditure in the event of wind-down. As a result of this, the final rules allow CMCs to deduct 20% of total marketing expenditure from their total expenditure when they determine their overhead requirements.
It is interesting to note that the FCA stated that as marketing expenditure can be viewed as discretionary expenditure it can potentially be classified as ‘other variable expenditure’ under CMCOB 7.2.8(2) which would be completely excluded from the calculation of overhead requirement.
Change in Prudential Resources
The final rules add that a CMC’s prudential resources requirement will change if over a period of 6 months since its fixed overheads requirement was update there has been, at least, a 20% reduction in fixed overhead expenditure. This can be based on the last 6 months unaudited overheads expenditure.
Where a CMC’s prudential resources requirement changes as a result of the reduction it must notify the FCA within 14 days of that change.
Regulatory Reporting
Client Money
The policy statement requires CMCs that operate a client account to report one additional field as part of its client money reporting (Form CM001), namely to report where client money has been held for more than 5 days, excluding where a cheque or other payable order has been made but not banked. The purpose of this additional question is to help the FCA’s supervision of CMCs’ handling of client money.
Interestingly, the FCA expressed a preference for CMCs to submit regulatory data via the CONNECT system as opposed to GABRIEL. This is to be determined in due course.
Complaints
The FCA revised the complaints form guidance to clarify that lead generating CMCs should only report complaints that directly relate to their services as opposed to those that relate to the services of the third party to whom they introduce the customer.
Wind-down Procedure
The final rules apply the wind-down procedure to CMCs with temporary permission with the following modifications (CMCOB 6.3.1 (3)):
Claims Processing CMCs
- Claims processing CMCs with temporary permission will still have 20 working days to notify customers and third parties such as lenders about its decision to cease regulated activities. During the temporary permission period claims processing CMCs’ notification timeframe will be limited to a maximum of 30 days (i.e. 20 working days subject to a maximum of 30 days).
- Claims processing CMCs with temporary permission will have 30 days instead of 40 working days to return documentation to customers in the event of a wind-down.
Lead Generating CMCs
- Similarly, lead generating CMCs with temporary permission who notify customers that they will pass their details to a third party but fail to do so prior to the decision to wind-down will have 20 working days to notify affected customers subject to a maximum timeframe of 30 days.
Please do not hesitate to contact us if you have any queries.
Thank you, Jourdain Tambo – Compliance Director, Claims Management
e: jourdain.tambo@consumercreditcompliance.co.uk
t: 01423 522599