Claims management companies (CMCs) could be forced to hold capital to cover their liabilities under new proposals designed to strengthen their regulation.
The Financial Conduct Authority (FCA) will take over the regulation of CMCs from 1 April next year, and has put a series of proposals up for consultation that will significantly enhance the rules that they must follow. Regulation will extend to Scotland, where firms are currently unregulated.
CMCs will need to hold capital linked to the type of business they undertake and adhere to requirements to protect any money that they hold on behalf of clients.
According to the consultation document, CMCs, other than those which are solely lead generators, will need hold a minimum level of eligible capital, to be set at between £5,000 and £10,000, to meet the prudential resources requirement.
If the CMC holds client money, it will need to hold an additional £20,000 in eligible capital. This includes lead generators.
Other proposed requirements include providing a potential customer with a short summary document containing important information such as an illustration of fees charged and an overview of the services the CMC will provide. This document will need to be provided before any contract is agreed.
CMCs will also need to highlight any free alternatives to using the CMC, such as ombudsmen schemes, in marketing material and pre-contract disclosures.
Firms that buy so-called ‘lead lists’ from third parties will be required to carry out due diligence to ensure that the leads have been obtained legally and to keep records of this. The FCA is also proposing that CMCs will have to record and keep all calls with customers for at least 12 months.
Andrew Bailey, chief executive of the FCA, said: “A well-functioning claims management sector can help to provide justice and redress to people who have suffered harm. But the market doesn’t always work as it should and poor conduct persists across the sector.”
“We want CMCs to be trusted providers of high quality, good value services that can truly help consumers. A key element of our approach to regulation will be ensuring that consumers are both protected and treated fairly. The proposals we have outlined today are integral to achieving that aim.”
The FCA’s consultation will run until August.