Claims companies rush for profits before a new regulator takes hold

On 5th June the Financial Conduct Authority (FCA) published a consultation on regulating Claims Management Companies (CMCs) when they fall under the remit of the FCA on 1st April 2019. It is expected that a great many of them will fail to obtain FCA authorisation once the new regulator examines their practices. In March 2018 there were 594 claims management companies operating in the financial services sector alone.

So there is a rush to make profits whilst there is still time. CMCs are supposed to be registered with the existing Claims Management Regulator (CMR), but published figures show that in the year to March 2018, 602 businesses were notified to the CMR as suspected of unregistered (and therefore unregulated) trading. The CMR sent 90 warning letters to unregistered firms, investigated 8, removed 5 websites and cautioned just one firm.

Additionally, since April 2013, the regulator has visited 1384 registered CMC’s with around 100 found to be in breach of a ban on referral fees alone. Twenty-two warnings were issued but no fines were imposed and only one licence was revoked.

The big question is whether law firms will be caught by FCA regulation, or shelter under the supervision of the Solicitors’ Regulation Authority (SRA)? Two regulators with different rules controlling the same activity could lead to significant gaming by some firms to avoid restrictions on their current practices.

A thematic review published by the SRA indicated that some law firms charged as much as 50% of the total claimed for clients. Lenders said that some firms submitted large numbers of pro-forma complaints. This is a common trend by claims management companies and no-win no-fee lawyers. Large numbers of pro-forma complaints are made to financial services firms with little or no detail – sometimes even when the firm has made no loan at all to the complainant! The hope is that the firm will be swamped with claims and simply make pay-outs without checking the circumstances. Some firms have received communications from legal firms threatening court proceedings in respect of alleged mis-selling of loans when there has been no previous customer complaint at all.

A MoneyCheats spokesperson said: “Many claims management companies and no-win-no fee lawyers are persuading people to make false or inflated compensation claims. They often take 25%-50% of any pay-outs. ​Sometimes they demand upfront fees of hundreds of pounds which are not always refunded when claims fail. Many are flouting regulatory rules to investigate the existence and merits of each element of a potential claim before presenting it, but rather send out hundreds of speculative, unsubstantiated, claims in the hope of pay-outs. Now they are intensively rushing to make profits before they become regulated by a much tougher regime in 2019 when they will need to be authorised and supervised by the FCA.

“The current situation cannot be right. Compensation should be paid to those who have genuinely suffered detriment. There should not be a profit making enterprise either for the complainant, a claims management company or a no-win-no-fee lawyer. The cost of goods and services rises for decent people because of unjustified pay-outs and the staffing costs of complaints handling. People with justified compensation claims are being delayed because claims staff are overloaded and the Financial Ombudsman Service, whose new streamlined approach to speed matters up, has attracted much criticism from complainants and firms alike for unfair results.

“It is time to de-rail this gravy train which is careering dangerously out of control.”