From 1 April 2019, claims management firms will be regulated by the FCA. This week, the Authority set out draft rules outlining how it will regulate the sector.
We look at what the draft rules say, and how claims management firms can prepare.
FCA to regulate claims management
On 1 April 2019, the Financial Conduct Authority will take over regulation of claims management companies (CMCs) in the UK, including those in Scotland, where firms are currently unregulated. In the rest of the UK, the industry is currently governed by the Claims Management Regulator, part of the Ministry of Justice.
On 5th June, the regulator published draft rules outlining how it plans to regulate the sector. Launching the rules for consultation, FCA Chief Executive Andrew Bailey said that:
‘We want CMCs to be trusted providers of high quality, good value services that can truly help consumers. A key element of our approach to regulation will be ensuring that consumers are both protected and treated fairly. The proposals we have outlined today are integral to achieving that aim.’
The proposal highlights a disjoint between this aspiration and performance in some parts of the CMC industry, with a number of reports having ‘highlighted harm to customers in this sector’.
It lists specific examples of harm that its research has identified, including:
- Customers experiencing financial loss due to a lack of clarity about how much they will pay and the services they will receive
- Poor service – for example, poor communication about claim status
- The potential for spurious or fraudulent claims to push up prices for customers in other markets
- Aggressive or misleading marketing or sales practices leading to customers buying inappropriate services
- Disorderly wind down causing customers to suffer financial loss or delays to their claim
How do the rules propose to tackle these issues?
The proposed rules will:
- Require CMCs to provide each potential customer with a short summary document. This must contain important information, for example, an illustration of fees charged and an overview of the services the CMC will provide. This document will need to be provided before any contract is agreed.
- Require CMCs to highlight any free alternatives to using the CMC, such as ombudsmen schemes, in their marketing materials and pre-contract disclosures.
- Require CMCs that buy lists of contacts from third parties to carry out due diligence to ensure that the leads have been obtained legally and to keep records of this.
- Require CMCs to record and keep all calls with customers for at least 12 months.
- Require CMCs to hold capital linked to the type of business they undertake, and to protect any money they hold on behalf of clients.
Authorisation for CMCs
The Authority has also set out how it will authorise both existing and new CMCs. Existing firms will need to notify their intention to register for Temporary Permission and pay the relevant fee to the FCA before 1 April 2019. They then need to go through the regulator’s authorisation process.
New firms will need to decide whether to start their authorisation process with the current Claims Management Regulator or wait and submit an application to the FCA after April 2019.
How can claims management firms prepare for FCA regulation?
Aside from the required authorisation process, there are steps that claims management firms can take now to ensure they are in a good place when FCA regulation takes effect.
1. Tackle clear communication
The need to provide a summary document to each customer will not be a regulatory requirement until 1 April 2019. But in the meantime, it’s worth familiarising yourself with the Authority’s rules around Treating Customers Fairly, which give a good grounding in what the regulator is looking for on customer communications.
The regulator requires financial promotions and communications to be ‘fair, clear and not misleading’ – again, you can get a step ahead by making sure your current approach meets this standard.
2. Get your compliance processes right
Any firm regulated by the FCA needs to meet the Authority’s rules around compliant financial promotions. These not only cover the content of promotions, but the way they are reviewed and signed off, and demand a compliant audit trail documenting the review and approval process.
If you’re new to FCA regulation, it’s worth reading up on what constitutes a financial promotion. Find out how to help your Marketing team write content you can approve first-time.
And read our 6 tips for making your approval process better to ensure your sign-off processes meet FCA requirements while still enabling you to get materials to market promptly.
3. Create the right culture
The move to a new regulator – or, for Scottish firms, the start of regulation altogether – inevitably brings stresses. But the sooner you can make some of the regulatory requirements ‘business as usual’, the easier it will be to meet them, and the less likely you are to suffer compliance breaches.
Creating a culture where regulatory compliance is ‘built in’, rather than ‘bolt on’, may seem complex. But a few simple actions can help to support the culture you want – where the customer comes first, communications are clear and processes are fair.
Find out how you can build in Compliance team approval to your promotions and how technology can help Compliance teams to minimise the risk of regulatory breaches.
Brush up on FCA requirements on Treating Customers Fairly
Getting to grips with the FCA’s TCF requirements will be a good start for any claims management firm wanting to get onto the front foot with regulation.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.