FCA regulation of CMCs
Written by Charlie Palmer on 03/05/2019

FCA authorisation forms for CMCs

On 1 April 2019, the FCA published a number of forms and guidance notes for firms to register as Claims Management Firms.

The forms are:

  • Application for authorisation - supplement for claims management and accompanying notes.
  • Threshold conditions supplement.
  • Individual form to assess the appropriate resources and suitability in relation to individuals responsible for the management of a CMC.

The publication of the new forms coincides with the FCA's assumption of responsibility for the regulation of CMCs, which took effect on 1 April 2019.

IFAC overview of CMCs

Claims management for the IFA and MGI broker

From what IFAC have read and understand many IFAs and MGI brokers do NOT need additional permission to help clients complain in their ordinary business. 

  1. Assisting a client or provider with a claim does not meet the permission criteria 
  2. Recovering costs for staff time assisting with a claim does not warrant the permissions
  3. Taking the case on and handling it for the client with no benefit to the firm does not warrant the permission if you already have permission with the FCA, 
  4. If you are helping client for no remuneration, you will not be granted permission. 


 IFAC believe this is aimed at is “claims to gain” type firms…..

  • Taking potential cases on with a view to obtaining a percentage of the claim
  • Charging for the claim management above normal p/hour recovery costs
  • Taking over the claim completely with an aim to gaining a return and paying the client a fixed fee for a win


IFAC comment on FCA permission regime for Claims Management firms

The actual permissions available to IFAs are nothing if not complex – a common theme with regulation in the year 2019

These are the seven different permissions available

  1. Seeking out, referrals and identification of claims or potential claims (personal injury claim; financial services or financial product claim; housing disrepair claim; claim for a specified benefit; criminal injury claim; employment related claim
  2. Advice, investigation or representation in relation to a personal injury claim
  3. Advice, investigation or representation in relation to a financial services or financial product claim
  4. Advice, investigation or representation in relation to a housing disrepair claim
  5. Advice, investigation or representation in relation to a claim for a specified benefit
  6. Advice, investigation or representation in relation to a criminal injury claim
  7. Advice, investigation or representation in relation to an employment related claim


What FCA rules apply to a claims management company?

CMCs that are authorised by FCA must follow FCA rules. 

  • provide clients with a 1-page summary of all the key information, before they sign a contract
  • supply a detailed breakdown of how they will charge clients, including examples. This may be called a 'cost illustration'
  • offer a 14-day cooling off period to cancel a contract without being charged
  • keep clients updated with key developments of a claim, for example, if the lender has requested more documents
  • explain ombudsman schemes or any other official ways to claim or complain.
  • clearly explain how to complain if client is unhappy with the service they provide

CMCs must not:

  • Cold call: unable to even send emails or texts (unless client has agreed to receive them)
  • Use any form of high-pressure selling such as asking for on-the-spot decisions
  • Price cap: no CMC may charge more than 20% plus VAT of the claim, if related to PPI misselling.


FCA authorisation for CMCs, what the regulator expects

Points for consideration prior to authorisation

Tribunal system?

Do you want to represent customers in front of a tribunal?

Vulnerable clients

Do you want to deal with vulnerable consumers? (potentially anyone, and certainly anyone over the age of 70) if yes, please show the set relevant procedures.

Pre contract disclosure

Pre-contract information needs checking for compliance prior to submission to FCA. This includes, but is not limited to, the terms and conditions of the contract, details of any referral fee paid to a third party for the introduction of the claim and an outline of the CMC’s complaints procedure.

Customer agreement

Draft Customer agreements need to be in place.

Recording calls system must be in place

CMCs will have to record all calls with customers and keep the recordings for a minimum of 12 months, including where a lead isn’t generated, if there was no further contact with a customer. If a customer makes a complaint in the 12 months following. See CMCOB 2.3 in FCA rulebook

Type of permission required

These are seven the different permissions available but FCA will want you to justify every one, with worked up business plan and numbers.

Don't expect an easy ride! You'll need professional oversight from a firm like IFAC.

Marketing by CMCs

All CMCs will be subject to FCA rules on financial promotions. These include rules to make sure materials are clear, fair and not misleading. It is almost certain that a CMC will need to find a process to check promotions prior to using them.  IFAC provide that oversight for over 500 regulated firms as part of their membership package.

Alternatives? 

CMCs must make reasonable enquiries into alternative options available to the customer to pursue the claim, such as via legal expenses insurance. 

Ensure customers understand the contract

CMCs must be able to show that the customer understands the contract they are agreeing to. To get the client’s agreement is not sufficient.  Nor is it good enough if you are 100% convinced that the client understands the contract.  You need to  be able to show this to a regulator.  That is ten times more difficult.

Lead generation

CMCs on fees paid to third parties that need to be disclosed. All fees disclosed under the existing regime will still need to be disclosed under the new regime.

Client money?

FCA classified CMCs into 2 groups based upon their annual reported turnover in the  year ending on their Account Referencing Date (ARD):

  • Class 1 CMC – a CMC with annual total income of £1 million or above
  • Class 2 CMC – a CMC with annual total income below £1 million 

CMCs subject to the client money rules must appoint an auditor to produce a report on client assets. 

Resources requirement

CMC’s must hold a minimum level of eligible capital to meet the prudential resources

requirement, which is the higher of:  £10,000 for Class 1 CMCs and £5,000 for Class 2 CMCs, from 1 August 2019.  If the CMC holds client money they will need to hold an additional £20,000 in eligible capital. 

Costs of regulation

The cost is a minimum of £550 per annum, (turnover up to a £1m) plus £600 to apply.

IFAC costs

IFAC would charge most CMCs £400 per month to operate as their compliance manager, sponsor an application to the regulator, and to audit the regulated firm.

Exemptions from regulation

IFAs might note that many activities relating to claims management are covered by their existing permissions.  This is a more precise set of exemptions below

  • Insurance brokers providing a service in respect of a policy that they have arranged (in accordance with section 19 of the Financial Services and Markets Act 2000). 
  • Firms authorised by the Financial Conduct Authority (FCA)  in the course of carrying on a regulated activity (e.g. advising on investments) may notify clients that they may have a claim against a previous adviser. 
  • Small scale introducers (i.e. ‘exempt introducers’) where this is incidental to their main business and the person to whom they introduce business takes responsibility for their activities. 

Brokers who refer (for a fee or commission) uninsured personal injury losses to a solicitor or to a claims management business are not covered by the exemptions above.  

ALASTAIR.FRAME@IFAC.EU

SPECIALIST IN CLAIMS MANAGMENT


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