FCA reminder could be 'final warning' to CMCs

In a Dear CEO letter, dated 26 October 2020, the FCA said, since it took over the regulation of CMCs from the Ministry of Justice in April 2019, “in general, many CMCs have demonstrated a poor understanding of, and sometimes attitude to, their regulatory obligations”.

The watchdog added: “We expect CMCs to have a good understanding and regard to the requirements applying to them, take a pro-active approach to regulatory compliance and deal with the FCA in an open and co-operative way.

“If they fail to do so, we will consider whether they continue to meet our threshold conditions and comply with our rules. Any failure to do so may result in us using our supervisory or enforcement powers, and this may include closing down a firm and/or refusing its application for authorisation to carry on claims management activities.”

Drivers of harm

In the letter, the FCA identified seven key “drivers of harm” based on a range of information and data, including CMCs’ regulatory reports, complaints data, information gathered from authorisation applications and other regulatory work.

Issues identified by the FCA include misleading, unclear and unfair advertising; poor disclosure of pre-contractual information about fees; unclear fee structures; poor service standards; failing to undertake sufficient checks; close associations with individuals at previous firms involved in misconduct;  and use of existing data giving rise to nuisance calls. 

Andrew Thornley, head of public affairs at law firm Carpenters Group, told Post: “This is the third Dear CEO letter that the FCA has sent to CMCs now and they don’t hold back.”

“They’ve seen both failures in terms of attitude to regulation, but also to adherence to regulation,” he noted.

Thornley added: “We are still in the early days. The FCA is still finding out much about CMCs in the same way as CMCs are finding out the approach that the FCA takes to regulation.

“In the letter [the FCA says] there hasn’t been understanding of, or even a kind of tolerance of, the rules from CMCs. I feel is the final warning before the FCA starts getting serious and taking enforcement action against these firms.”

Thornley pointed out that the letter came “at the same time as reports of nuisance calls going up 60% during lockdown”.

He said: “Because people are stuck at home, it’s quite an important time, not least because we have the Civil Liability Act (2018) whiplash reforms coming in, and quite a few people are recognising that there are gaps here that CMCs might seek to exploit, so clamping down against poor practice and behaviour is even more important than it was perhaps before.”

Another area the FCA is looking at is businesses creating ‘phoenix’ companies after being told to close.

According to Thornley: “In the past, CMCs would receive some sort of sanction, a fine, and then close and reopen with the same directors or the same members of staff operating in this so called phoenix company. And the FCA recognised this and are flagging this as well to say that you can’t close one company and then reopen it. It is an area that the FCA is looking at, and we’re pleased with that.”

Supervision

Matthew Maxwell Scott, executive director of the Association of Consumer Support Organisations, said: “Well-regulated CMCs offer consumers an important choice when they make a claim, and their role in helping people seek redress is acknowledged by the FCA. 

“The Brady Report concluded that CMCs needed better regulatory oversight and governance, and so it’s unsurprising that the FCA has found some ongoing areas of concern as CMCs take steps to adapt to its new regime. These include transparency of advertising standards, fee structures, claims due diligence and data management. 

“We’ve seen a significant reduction in the number of CMC authorisations since the FCA took over regulation, reflecting more stringent regulatory hurdles. Some CMCs have struggled with the depth of information and detail needed to make a successful application. 

However, Maxwell-Scott added that more can still be done to “make sure poor behaviour is weeded out, including failing to prepare for the long-delayed whiplash reforms”.

He said: “Once these long-standing issues are addressed, through regulation such as the Conduct of Business Rules and the Senior Management Certification Regime, we will see a better market that delivers good consumer outcomes by encouraging choice, transparency and high-quality products and services.

“We urge CMCs and the regulator to continue to work together to ensure the regime is fair and proportionate.” 

Sarah Hill, partner and head of fraud at law firm BLM said the letter is a “welcome step taken by the FCA as part of their supervision strategy for CMCs”.

She added: “The connection between claims farming and insurance fraud has rapidly accelerated as CMCs venture into new areas to generate business.

“We have witnessed first-hand the harm to consumers who have been misled into making claims for compensation and the consequences that ensue when things go horribly wrong.

“Regulation and education are key to protecting the vulnerable consumer.”