27 November 2018
The regulation of Claims Management Companies (CMCs) will pass from the Ministry of Justice to the Financial Conduct Authority on the 1st April 2019 as a consequence of the Financial Claims and Guidance Act 2018.
The Government believes the existing regulatory regime is too lax and so it has enacted legislation that will mean CMCs will be subject to much stricter regulation under the FCA. The FCA, for its part, always keen to increase the scope of its regulatory power, leapt at the chance to regulate the claims industry, and set out in its consultation paper the more robust regime it intends to apply to CMCs
In its enthusiasm to regulate the claims industry did the FCA consider how it will manage the intrinsic conflict of interests between the CMCs and the other organisations that it currently regulates?
This conflict of interest exists because the FCA will soon be regulating a sector whose profitable existence is at the expense of the large financial institutions that it also regulates.
The Brady Review touched on this concern but quickly concluded that this was not a barrier to FCA regulation because the FCA was a well-established regulator that was used to “supervising a wide range of businesses with divergent and, at times, diametrically opposed interests.”
This explanation fails to address the enormity of the conflict that exists between the banks and insurance companies that caused the UK’s largest financial mis-selling scandal and the CMCs that assisted customers to reclaim over £20 billion in compensation. Or the conflict between CMCs helping people to obtain injury compensation, and an insurance industry that lobbies incessantly for the slashing of compensation payments to injured motorists.
There have been a number of occasions where the large financial organisations appear to have used their substantial influence over the government and regulator to escape punishment; or to encourage the regulator to take action to the detriment of other organisations and consumers. It is inexcusable that the only significant regulatory action taken by the FCA in connection with the PPI mis-selling scandal was not to penalise the banks, but to support them by agreeing to introduce the PPI deadline.
Another example is the FCA’s PPI awareness campaign featuring the robotic head of Arnold Schwarzenegger. The advert directs viewers to the FCA website which prominently informs them that “complaining about PPI is a simple step you can do your self – for free – and avoid paying a claim company.” If the FCA was impartial the advice should have included a warning that many of the banks have been fined millions for mishandling PPI complaints and that the latest figures from Financial Ombudsman Service show that banks wrongly reject 36% of all PPI claims.
Michael White, the former political editor of the Guardian, writing about the FCA’s decision to drop its investigation into UK banking culture, said most regulatory regimes end up with the regulator “if not in bed with the industry it is targeting, then at least engaged in heavy petting”. This two-some has existed for many years notwithstanding the intransigence and wayward behaviour of the finance sector and so there is little prospect that the CMC sector, even as a new co-regulatee, will breakup this cosy relationship.
The interests of CMCs not only conflict directly with the other organisations the FCA regulates, but also with the regulator itself. CMCs generally exist because they identify areas where customers have suffered financial loss and where the regulator has been incapable or unwilling to take any action. The FCA is therefore in a very dubious position - regulating organisations that make money exploiting areas where FCA regulation has failed.
There is little doubt that where the FCA seems unwilling or afraid to take any significant regulatory action against the powerful financial institutions, this reluctance will not be extended to the CMC’s it regulates. CMCs will find FCA regulation tough and I am sure the banks and insurance companies will continue to use their substantial influence to make sure the FCA stays focused.
Love or loath them, CMCs play a key role in holding big business to account over poor practice and corporate greed and provide access to justice for a wide range of consumers who may be unwilling or unable to bring a claim themselves. This is supported by FCA’s Financial Lives survey that found 67% of customers who used a CMC to make a claim would not have done so without the involvement of a CMC.
George Osborne instigated the transfer of CMC regulation to the FCA to “drive out further unnecessary costs from insurance premiums”, and the Financial Claims and Guidance Act 2018 is clearly part of the insurance industry sponsored personal injury reform package. Since the government has shown no intention of softening the impact of the reforms that will devastate the personal injury sector, perhaps the intention is to use the FCA to regulate this industry out of existence.
