On 17 December 2018, the FCA published Policy Statement 18/23 (PS18/23) on how it will regulate claims management companies (CMCs). In June 2018, the FCA consulted on how it intends to regulate CMCs (CP18/15) (our blog on which can be found here), ahead of the FCA becoming the regulator of CMCs on 1 April 2019. In addition to this, the FCA further consulted in August on the regulatory fees for CMCs (CP18/23)(our blog on which can be found here).
CP18/15 primarily proposed to introduce a new Claims Management: Conduct of Business sourcebook (CMCOB) and to amend relevant parts of the existing FCA Handbook. PS18/23 responds to the feedback received to CP18/15 and CP18/23. The FCA received 87 responses to CP18/15, the majority of which were supportive to the FCA’s proposals. Following the feedback, the FCA has made a number of changes to the proposals of CP18/15 and CP18/23, including:
- clarifying the requirements for lead generators when using the term ‘no win, no fee’;
- reducing the amount of information CMCs need to set out on the services they will provide in the one-page summary document;
- changing the FCA pre-contract disclosure requirements by (amongst other things):
- requiring that CMCs clarify whether their fee is based on the gross or net amount of the compensation award;
- clarifying that CMCs must ask the customer if they know of other methods to pursue their claim, such as legal expense cover;
- requiring that CMCs get a customer’s consent before charging costs that were not disclosed upfront; and
- requiring the CMC to ask the respondent and customer if they are aware of an outstanding liability which any compensation could be off-set against;
- changing the FCA ongoing disclosure requirements by (amongst other things):
- expanding the FCA guidance to include further examples of what constitutes a ‘material development’ that must be notified to the customer
- requiring CMCs to notify and obtain consent from their customers for any significant steps they intend to take to progress the claim where more than six months has passed since they last notified and obtained consent from the customer;
- accepting the suggestion to allow CMCs to deduct a portion of marketing expenditure from a CMC’s total expenditure when calculating the overheads requirement; and
- allowing CMCs to amend their overheads expenditure, used in the calculation of their fixed overheads requirement, by basing it on a multiple of the last 6 months’ unaudited overheads expenditure where there has been a decrease in overheads spending of 20% or more in that time.
In the event of a no deal Brexit scenario, the FCA notes that it has consulted on changes to its Handbook so that it is consistent with the UK’s position outside of the EU. However, the rules in the instrument in the Appendix to PS18/23 do not take these changes into account. If the draft Withdrawal Agreement is not ratified and there is no implementation period, then FCA will update the rules accordingly.
Some respondents to CP18/15 had noted the negative image of CMCs caused by the actions of a small number of firms. Commenting on PS18/23, Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, has addressed these concerns:
‘The new regime aims to drive up standards in a sector whose reputation has been tarnished by some companies engaging in high pressure selling and by failing to provide clear information on the fees they charge…The new rules will ensure firms are transparent about their estimated fees before the customer signs on the dotted line, and notify customers of free statutory ombudsmen or compensation schemes.’
The rules set out in PS18/23 will generally apply from 1 April 2019. The prudential resources requirements will come into force on 1 August 2019. The FCA notes that will publish the final Senior Managers and Certification Regime Rules for CMCs in early 2019.