The FCA took over responsibility for overseeing the activities of the claims management sector from the Ministry Of Justice in the spring of 2019. As part of this transfer, firms were required to apply for FCA authorisation to enable them to carry on operating in the sector, i.e. demonstrate they meet the FCA’s threshold conditions.
Using data from these applications, plus other sources such as complaints, regulatory reports and ongoing supervisory activity, the FCA produced an informed ‘Dear CEO….’ letter (25/10/20) in which it outlined:
- Its view of the key areas that continue to pose a risk of harm to consumers or the markets in which CMCs operate.
- Its expectations of CMCs, including how firms should be mitigating these key harms.
- Its supervisory strategy and programme of work for the next two years to ensure firms are meeting expectations, i.e. that harms and risks of harm are being remedied and/or mitigate.
The FCA identified seven areas of concern where consumers were either being harmed or at risk of harm by the conduct of CMC, citing evidence of:
1. Misleading, unclear and unfair advertising – Misleading or poor-quality financial promotions, leading consumers to, particularly the vulnerable, being at risk. The FCA stressed CMCs should ensure their advertising is clear, fair and not misleading, as required in the FCA’s Claims Management: Conduct of Business (CMCOB) sourcebook.
2. Poor disclosure – Opaque information about fees or the availability of free alternatives to making a claim, meant that consumers, in some instances, are not able to make well informed decisions about using a CMC. Again, the FCA referred to the standards explained in the CMCOB sourcebook.
3. Unclear fee structures – Some CMCs not being transparent about their fees leaving consumers unclear whether they would need to pay a CMC or that a CMC’s fee will significantly reduce the amount of redress they might otherwise receive.
4. Poor service standards – Poor-quality advice, inadequate processes and procedures, and sub-standard representation. The FCA stated this as a problem area citing CMCs being required to have appropriate resources to ensure that they are suitably skilled and experienced to provide the services they are authorised to provide and able to conduct its business with due skill, care and diligence.
5. Failing to undertake sufficient checks – And collecting relevant information before presenting claims to third parties, resulting in submission of spurious claims, slower processing and poor outcomes. The FCA reminded CMCs that they should take reasonable steps to investigate the existence and merits of each element of a potential claim before making or pursuing claims.
6. Individuals and business models – Some CMCs were set up by, or closely associated with, individuals who have previously been involved in misconduct. The FCA made it clear that it intended to decline applications from CMCs with such relationships and that applications should not provide potential conflict of interests between the firm and consumers, i.e. that firms’ business models and operations were suitable.
7. Marketing – Some firms have been looking to use existing data to recycle and re-market claims, giving rise to nuisance calls. The FCA stated that firms should comply with direct marketing legislation and the GDPR.
However, most telling, was the FCA’s final finding that many CMCs demonstrated a poor understanding of, and sometimes attitude towards, their regulatory obligations. The FCA went on to state it expected CMCs to have a good understanding and regard to the requirements applying to them, take a proactive approach to regulatory compliance and deal with the FCA in an open and co-operative way. Telling indeed!
The FCA referred to previous ‘Dear CEO…’ letters on financial promotions and the validity of claims before closing the letter by saying that it expected firms to take the letter seriously, to have business models that put customers at the heart of what they do and finally, have appropriate governance and systems and controls in place to police the firm’s business practices.
In their defence, CMCs are new to the standards expected within financial services. However, it is clear the FCA have concerns about the general standards of behaviour in this sector. For those who say that the FCA’s ‘bark is worse than its bite’ should remember what happened to the payday loans sector, and particularly Wonga, when the FCA took control of the sector a few years ago.
It is clear that CMCs will be in the FCA’s ‘line of sight’ for the foreseeable future and whilst the sector may not be as rogue as some parts of the payday loans sector, it is clear there will need to be a sustained focus on standards across the sector to ensure it has a long term future under FCA regulation.
A wake-up call indeed.