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Claims Management Regulator to use financial penalties?

The Claims Management Regulator [CMR] today announced that it is seeking new powers to impose financial penalties on non-compliant Claims Management Companies [CMCs]. It is proposed that amendments are made to the Compensation Act 2006 to give the Secretary of State the power to impose a financial penalty in a number of circumstances. A schedule to the Act already gives the CMR the power to impose conditions on, suspend or cancel authorisations of regulated persons, but there is no provision for the CMR to use financial penalties as a regulatory enforcement tool.

In what circumstances might the new powers be used?

The CMR will seek to use its new powers (if granted) in the following circumstances:

  • “as a consequence of failure to comply with rules prescribed by the Regulator about the professional conduct of authorised persons (the Conduct of Authorised Persons Rules);
  • as a consequence of failure to comply with a code of practice;
  • in relation to investigating complaints about professional conduct;
  • as a consequence of failure to comply with a requirement to take out a policy of professional indemnity insurance; or
  • as a consequence of failure to comply with certain requirements regarding the provision of information or documents.”

What will the CMR take into account when imposing a financial penalty?

Of course, a number of factors will need to be taken into account when implementing the new powers, but it is likely that the CMR will take into account any consumer detriment they identify and quantify, the length and severity of breach, the conduct of the business during investigation, and any third party detriment to those other than consumers such as solicitors, banks, the FOS and the FCA.

What checks and balances are in place?

At present, there is an appeal route from CMCs who feel the CMR has made an error in applying sanctions against them. CMCs are able to appeal all statutory enforcement decisions made by the CMR through the First-Tier Tribunal (General Regulatory Chamber) (Claims Management Services) although the Tribunal decisions website shows that only four appeals have been made and that none have been made since 2010. It is axiomatic that the Act will need to be amended to give a right of appeal to the First-Tier Tribunal. It is likely that possible grounds for appeal might be the imposition of any financial penalty; the amount of a financial penalty or the date by which a penalty, or any part of it, must be paid.

Driving out the rogue CMCs will be welcomed!

It is highly likely that the proposal will be welcomed by regulators, consumer groups and businesses. It should not be assumed that professional CMCs themselves will be against the proposals. A number of professional CMCs strive to raise standards; such firms should not, and do not, fear tighter regulation. Such firms are just as passionate as other interested parties in driving out the rogues which get the whole CMC sector a bad name.

What is missing from the proposals?

The Financial Services and Markets Act [FSMA] as amended by the 2012 Act gives the Financial Conduct Authority [FCA] and the Prudential Regulation Authority [PRA] the power to contract directly with ‘Skilled Person Firms’ in addition to the customary approach where the regulated entity enters the contractual arrangements with a ‘Skilled Person’. Rules have also been made to enable the costs of such Skilled Person Reports to be payable as a fee by the regulated entity. A ‘Skilled Persons Report’ is a supervisory tool which enables the regulators to gain much more in depth analysis and investigation into firms, without bearing any of the costs. The FCA is using these reports more frequently than ever. Although the CMR may feel it would not use such powers often, it would, nevertheless, it would be a useful addition to their armoury.

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The Benefits and Services of the Professional Financial Claims Association are intended to extend beyond its own membership. The Financial Claims Management sector needs a credible ‘voice’ at a time of change and increased scrutiny within the sector.