Consultation outcome

Claims management regulation: consultation on secondary regulations

Updated 22 November 2018

1. Introduction

At Summer Budget 2015, the government commissioned an independent review of claims management regulation in response to reports of malpractice in the claims management sector. The independent review found that the current regulator, the Claims Management Regulation Unit (CMRU), lacked sufficient powers and resources to regulate the market and concluded that the Financial Conduct Authority (FCA) would be well-placed to deliver a step change in regulation of the sector.

At Budget 2016, the government accepted the independent review’s recommendations and announced its intention to transfer claims management regulation to the FCA.

The Financial Guidance and Claims Bill, which was introduced in Parliament on 22 June 2017, aims to enable this transfer by making claims management activity a Regulated Activity under section 22 of the Financial Services and Markets Act 2000 (FSMA) and a Controlled Activity under section 21 of FSMA (restrictions on financial promotion). It also extends FCA regulation of claims management companies (CMCs) to Scotland, where CMCs are currently unregulated. The bill is currently progressing through Parliament and if Parliament chooses to pass it in to law, secondary legislation will be required to further define the scope of regulation.

If passed, the bill gives the Treasury powers to define claims management services in secondary legislation for the purposes of each of the Regulated Activities Order and the Financial Promotion Order. The draft of these secondary regulations is the focus of this technical consultation.

The draft regulations in Annex A largely aim to replicate the current regulatory regime, as set out in the Compensation Act 2006 framework, insofar as the regulated activities, kinds of claim and exemptions are concerned, with some minor changes. The draft secondary regulations at Annex A also make some changes to the FCA’s consultation requirements. The regulations being consulted on will only form part of the final statutory instrument (SI). The final SI will also include the temporary permissions regime, transitional provisions to put the framework for the transfer in place, as well as consequential provisions.

This consultation document sets out the rationale for the government’s suggested approach and invites comments on the draft secondary regulations set out at Annex A. It also invites comments for the proposed approach to the temporary permissions regime.

2. Draft secondary regulations

This chapter sets out the proposed approach to defining the scope of claims management activities for the purposes of FCA regulation.

2.1 Regulated activities

As set out above, the Financial Guidance and Claims Bill will (if passed) give the Treasury powers to define claims management services in secondary legislation as a Regulated Activity under section 22 of FSMA and a Controlled Activity under section 21 of FSMA (restrictions on financial promotion). The Regulated Activities Order sets out the activities and investments that are regulated by the FCA and the Financial Promotion Order regulates communications and promotions in relation to certain types of activity, as regulated by the FCA. The government proposes to largely retain the current scope of claims management regulation for both the Regulated Activities and Financial Promotion Orders, as the scope of claims management regulation is already well-established.

Under the Compensation Act 2006 framework, CMCs are regulated for the services they provide in relation to claims in the following sectors: personal injury, financial products and services, employment, criminal injuries compensation, industrial injuries disablement benefit and housing disrepair. Regulated services currently include:

• advertising and marketing, covering all communication channels and ‘seeking out’ business, such as where a firm sends a survey asking whether a consumer has taken out a loan in the last 5 years
• advising on claims, which might include giving information prior to a referral, or written advice
• referrals and introductions of potential claims or claimants, such as where a firm obtains claimant details and passes them to a third party to progress the claim for a fee
• making inquiries, including investigating and commissioning the investigation of the merits of a claim, such as by requesting a client’s account details from a bank with a view to using the results in pursuing the claim
• representation in making a claim

The SI in Annex A aims to replicate this regulatory scope as far as possible within the framework of FSMA, for both the Regulated Activities Order and the Financial Promotion Order.

The government is proposing to make one significant change, intended to help strengthen the regulation of CMCs. The current regime relates to activities for six sectors, with a single permission covering all regulated conduct across any combination of activities and sectors. Under the new regime, the government proposes that there should be seven different permissions. This will make it possible for the FCA to take into account the different types of work across each sector and different activities.

Each CMC will require separate permissions depending on the specific activities and sectors that they wish to operate in. Depending on firms’ specific business models, some CMCs may require just one permission, while other CMCs may require several permissions. The proposed permissions are:

• seeking out, referring and identifying claims
• advising, investigating and representing in relation to personal injury
• advising, investigating and representing in relation to financial services and products
• advising, investigating and representing in relation to employment
• advising, investigating and representing in relation to criminal injuries
• advising, investigating and representing in relation to industrial injuries disablement benefit
• advising, investigating and representing in relation to housing disrepair

The government’s view is that the activities of seeking out, referring and identifying claims are consistent in nature across each sector, and do not require sector-specific competency or knowledge. For this reason, firms wishing to perform these activities will require one permission, regardless of which sector the activity relates to.

However, from the point at which CMCs provide advice to a client about a claim, investigate the claim, or represent a client, the six sectors that CMCs operate in become distinct and varied in nature. For example, advising, investigating and representing a client in an employment tribunal claim requires a very different set of skills, knowledge and expertise compared to advising, investigating and representing a client in relation to a claim for a mis-sold packaged bank account. In order to ensure consumers are adequately protected, it is important that CMCs have the appropriate skills, knowledge and expertise for the claims they are managing. As such, it is appropriate that a separate permission should be required for each distinct sector in which CMCs operate.

Firms will need to be able to demonstrate to the FCA that they have suitable competency for each sector in which they wish to carry on business. However they will not need to be assessed for competency or suitability in sectors which are unrelated to their business model, which is intended to help minimise the regulatory burden placed on firms. It will also help to ensure the FCA’s resources are used in an efficient and effective manner.

The government’s policy intention is that claims made under section 75 of the Consumer Credit Act 1974 (relating to the liability of a credit company for breaches by a supplier) are within the scope of the FCA’s claims management regime and we will consider whether an addition to the draft SI in Annex A is necessary.

Question 1

Do you agree to the overall approach of maintaining the current scope of CMC regulation, but with multiple permissions?

Question 2

Does the SI in Annex A achieve the aim of maintaining the scope of regulated claims management activity, but with multiple permissions?

Question 3

Do you agree with the policy intent that claims made under section 75 of the Consumer Credit Act 1974 are within scope of the FCA’s claims management regime?

Question 4

Are there any other sectors that should be added to the scope of regulated claims management activity?

2.2 Exemptions

Exemptions to the claims management regulatory regime currently exist in order to ensure that regulation is proportionate to the needs of the sector and its consumers. By exempting certain persons and organisations, the government can ensure that those offering claims management services on a charitable or not-for-profit basis, or in some cases those that are already regulated by another body, do not come under FCA regulation.

The Compensation (Exemptions) Order 2007 lists the following exemptions to CMRU’s regulatory regime:

• legal practitioners
• persons providing services regulated under FSMA, including persons who are exempt from the general prohibition or benefit from an exclusion under the Regulated Activities Order
• most charities and not-for-profit advice agencies
• trade unions certified as independent, subject to complying with the Code of Practice for the Provision of Regulated Claims Management Services
• those providing services to defendants who in doing so may be involved in counter claims against the claimant or claims against a third party, typically loss adjusters
• independent complaints reviewers
• student unions
• the Motor Insurers’ Bureau
• the Medical Protection Society and medical defence unions
• small scale introducers where this is incidental to their main business and the person to whom they introduce business takes responsibility for their activities

The government proposes that the current exemptions are broadly retained, with a number of small changes.

As with the regulated activities, exemptions also extend to Scotland. Relevant references to provisions in Scottish legislation are included in the draft regulations.

In 2007 a Code of Practice was established as a condition of trade union exemption from claims management regulation, in order to address concerns in relation to a small number of trade unions who represented clients under coal health schemes. A Monitoring Board comprising the Ministry of Justice, Certification Officer and the Trades Union Congress was set up to monitor the operation of the code. The Monitoring Board looks at systemic issues rather than individual complaints, which are handled through trade unions’ complaints systems.

Since the Monitoring Board was set up, no evidence has been found of systemic issues in trade union claims management activity and there have been no complaints about trade unions since 2011. The government proposes retaining the existing Code of Practice as a condition of trade union exemption from claims management regulation, as well as retaining the Monitoring Board in its current role. However, the Treasury would replace the Ministry of Justice on the monitoring board and would republish the Code of Practice as the department responsible for this policy area. As the scope of FCA claims management regulation will include Scotland, the government also proposes that the Scottish Trades Union Congress would be represented on the monitoring board.

There are also some minor changes to ensure the regulations work in FSMA, for example in relation to the description of insurance brokers and small scale introducers. These changes will ensure the FCA regime works properly.

Question 5

Do the provisions in Annex A work in relation to Scotland?

Question 6

Do you agree that compliance with the Code of Practice should remain a condition of trade union exemption from claims management regulation?

Question 7

If you agree that compliance with the Code of Practice should remain a condition of trade union exemption from claims management regulation, do you agree that the current Code of Practice is suitable?

Question 8

Does the SI in Annex A achieve the aim of maintaining the current exemptions?

Question 9

Should the government consider any further exemptions?

2.3 Territorial scope of regulation

The current regulatory regime covers claims management services carried out in England and Wales. In order to address anticipated changes to the CMC landscape in Scotland, the government has extended the scope of claims management regulation through the Financial Guidance and Claims Bill to include Scotland once regulatory responsibility transfers to the FCA.

In order to replicate the regulated activities and exemptions in the current regulatory regime, the regulations in Annex A provide that all CMCs conducting claims management activities in Great Britain are regulated by the FCA, regardless of where they are located. Claims management activity will be determined by reference to the fact it is carried out in Great Britain or is carried out in respect of a claimant or potential claimant ordinarily resident in Great Britain.

Question 10

Do you agree that the SI achieves the aim of regulating all CMCs providing regulated claims management activities in Great Britain?

2.4 FCA consultation requirements (rules and guidance)

The Financial Guidance and Claims Bill extends CMC regulation to Scotland. The regulations in Annex A aim to exempt the FCA from conducting a cost benefit analysis in relation to draft rules for Scotland which are the same as, or have the same effect as, the current regulatory framework in England and Wales. This is, in effect, an extension of a similar provision in the Financial Guidance and Claims Bill in respect to England and Wales, which requires the FCA to produce a cost benefit analysis only in respect of any uplift from the existing regime.

The regulations also disapply the FCA’s competition duty in respect of rules or guidance that are the same as, or have the same effect as, CMRU’s rules or guidance. This is because CMRU did not need to have regard to such a duty when it made its rules.

Question 11

Do you agree that the FCA’s exemption from its consultation requirements under FSMA in respect of rules that are the same or have the same effect as those under the Compensation Act 2006 regime should be in place for Scotland as well as England and Wales?

Question 12

Do you agree that the FCA’s competition duty should be disapplied in respect of rules or guidance that have the same effect as the current regulator’s rules?

Question 13

Does the SI achieve the aim of exempting the FCA from its consultation requirements under FSMA in respect of rules that are the same or have the same effect as those under the Compensation Act 2006 regime?

3. Temporary permissions regime

The transfer of claims management regulation to the FCA is important for strengthening regulation of the sector. However, the government is aware that this will be a significant change for firms, particularly for those being brought into the FCA regime that do not currently conduct a regulated activity. As such, the government has worked closely with the FCA to develop plans for a temporary permissions regime. The temporary permissions regime will be implemented through secondary regulations and will form part of the final SI but is not included at Annex A. This chapter sets out the proposed temporary permissions regime and seeks views on the approach.

3.1 Temporary permissions

The temporary permissions regime will be in place for 15 months from the date of transfer to the FCA and all firms with a valid CMC licence under the current regime will be eligible to register for the regime. While operating under temporary permissions, firms will be able to operate in the same way that they operate a single permission, as they do currently under the current regulator, but will be required to abide by all relevant FCA rules.

Firms that wish to obtain a temporary permission will need to notify the FCA of their intention to do so by the day before transfer to the FCA, as well as paying the necessary fees. Firms that fail to do this will no longer be able to operate legally once the transfer has happened, although they could submit an application as a new market entrant after that date.

3.2 Applications for full authorisation

Firms will be given different application periods and a firm’s application for full authorisation by the FCA must be made by the deadline of its application period. The FCA will set out when and how firms apply for full authorisation and will publish full details of the application window in due course. The consequences of not submitting an application by the relevant deadline would be that the firm’s temporary permission would fall away and so they would no longer be authorised to carry on regulated activities.

The FCA will process applications as soon as possible, with the expectation that all applications will be determined within 12 months of the end of the application periods. Only firms that demonstrate they satisfy, and will continue to satisfy, threshold conditions (the minimum standards for authorisation) will be authorised. All of a firm’s conduct during the temporary permission regime will be taken into consideration if firms subsequently apply for full authorisation.

3.3 Newly regulated activity

There are some firms that do not need to be regulated under the current regime but that will need to be regulated under the new FCA regime. Claims management activity in Scotland, for example, is currently not regulated.

Where these firms do not have CMC authorisation for any activities they conduct, the government is proposing that they should still be eligible to register for the temporary permissions regime to ensure they do not have to cease trading. These firms will be required to abide by all relevant FCA rules in the same way as other firms operating under the temporary permissions regime. They will also need to apply for full permission by the end of their application window.

Some firms currently conduct activities that are already regulated alongside those that are not – for example a firm conducting activity in England and Wales as well as in Scotland. These firms will be required to have valid CMC authorisation under the current regime to be eligible to register for the temporary permissions regime.

Question 14

Do you agree with the proposed approach for the temporary permissions regime?

Question 15

Do you have any further comments in relation to this consultation?

4. Consultation questions

Question 1

Do you agree to the overall approach of maintaining the current scope of CMC regulation, but with multiple permissions?

Question 2

Does the SI in Annex A achieve the aim of maintaining the scope of regulated claims management activity, but with multiple permissions?

Question 3

Do you agree with the policy intent that claims made under section 75 of the Consumer Credit Act 1974 are within the scope of the FCA’s claims management regime?

Question 4

Are there any other sectors that should be added to the scope of regulated claims management activity?

Question 5

Do the provisions in Annex A work in relation to Scotland?

Question 6

Do you agree that compliance with the Code of Practice should remain a condition of trade union exemption from claims management regulation?

Question 7

If you agree that compliance with the Code of Practice should remain a condition of trade union exemption from claims management regulation, do you agree that the current Code of Practice is suitable?

Question 8

Does the SI in Annex A achieve the aim of maintaining the current exemptions?

Question 9

Should the government consider any further exemptions?

Question 10

Do you agree that the SI achieves the aim of regulating all CMCs providing regulated claims management activities in Great Britain?

Question 11

Do you agree that the FCA’s exemption from its consultation requirements under FSMA in respect of rules that are the same or have the same effect as those under the Compensation Act 2006 regime should be in place for Scotland as well as England and Wales?

Question 12

Do you agree that the FCA’s competition duty should be disapplied in respect of rules or guidance that have the same effect as the current regulator’s rules?

Question 13

Does the SI achieve the aim of exempting the FCA from its consultation requirements under FSMA in respect of rules that are the same or have the same effect as those under the Compensation Act 2006 regime?

Question 14

Do you agree with the proposed approach for the temporary permissions regime?

Question 15

Do you have any further comments in relation to this consultation?

5. How to respond and confidentiality

5.1 How to respond

Responses to the consultation questions are requested by 1 June 2018. The government cannot guarantee that responses received after this date will be considered.

Responses can be sent by email to: CMC.Regulation@hmtreasury.gsi.gov.uk.

Alternatively, they can be posted to:

Claims Management Regulation Consultation
Financial Services Group, 1 Red
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding, please state whether you are doing so as an individual or representing the views of an organisation. If you are responding on behalf of an organisation, please make clear who the organisation represents and, where applicable, how the views of members were assembled.

5.2 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 and the Environmental Information Regulations 2004).

If you would like the information that you provide to be treated as confidential, please mark this clearly in your response. However, please be aware that under the FOIA, there is a Statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidence.

In view of this, it would be helpful if you could explain why you regard the information you provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. In the case of electronic responses, general confidentiality disclaimers that often appear at the bottom of emails will be disregarded unless an explicit request for confidentiality is made in the body of the response.

5.3 Freedom of information

Any FOIA queries should be directed to:

Correspondence and Enquiry Unit
Freedom of Information Section
HM Treasury
1 Horse Guards Road
London
SW1A 1HQ

Email: public.enquiries@hmtreasury.gsi.gov.uk