Insurers need to be regulated like CMCs, First4Lawyers urges FCA

Insurers are “flouting” the rules that apply to claims management companies (CMCs) and the Financial Conduct Authority (FCA) is wrong to say that they are not covered by the new regulatory regime for the sector, according to First4Lawyers, the UK’s largest independent legal marketing collective.

The FCA should also introduce a risk-based fee structure so that financial services CMCs – which are responsible for 95% of complaints – pay the bulk of the cost of regulation.

First4Lawyers was responding to the FCA’s consultation, 'Claims management companies: Recovering the costs of FCA regulation and the Financial Ombudsman Service', which is part of its preparations for taking over the regulation of CMCs from the Ministry of Justice in April 2019.

First4Lawyers highlighted the practice of insurance companies contacting the other party when one of their insureds is involved in an accident – often by cold-calling – to offer claims management services.

The response said that, while the consultation identified a shrinking CMC market as a driver for the level of fees being sought, it was “silent” on the separate regulation of this activity, which falls outside of insurers’ regulated activities because it involves a third party.

Consumers need equal protection

It said: “These insurers should, without exception, also be subject to the same CMC regulatory regime and fees to ensure that all consumers are equally protected from harm regardless of the identity of those providing them with claims management services.

“This would also address very real and serious concerns about the seemingly unfair consequences of regulation on the ability of CMCs to compete with insurers offering claims management services to consumers, but it also further spreads the cost of such regulation amongst all of those participating in CMC activities.”

First4Lawyers said the Financial Guidance and Claims Act 2018, which transfers CMC regulation to the FCA, says an activity is regulated where it “is, or relates to, claims management services”. There was, it argued, no reason why insurers should be treated differently from CMCs.

Further, it said there were concerns around potential breaches of the SRA Code of Conduct – if solicitors accept referrals of work generated by cold-calling – the Data Protection Act 2018 and the Financial Guidance and Claims Act 2018, which also bans cold-calling.

This meant “there is even more requirement for insurers to be regulated as they appear to be directly flouting the rules that apply to CMCs”.

Financial services CMCs 'cause the problems'

First4Lawyers has repeatedly argued that, as financial services CMCs generate the vast bulk of problems in the sector, they should also pick up most of the tab for regulation.

“The new regulatory regime is an ideal opportunity to introduce a risk-based fee structure,” the response said. “The FCA has signified the intention to have seven different claims management permissions, and it is therefore quite possible to attribute the level of consumer protection relevant to each permission and set fees accordingly.

“We note that the consultation paper states that this would have limited benefits and could unnecessarily complicate the structure. We don’t agree: the permissions are clearly defined and each can be measured in terms of the potential harm that those carrying out those permitted activities could cause to consumers.

“They are then asked to pay a fee appropriate to that level of risk and potential harm. It is not complicated and the very clear and obvious benefit is that each CMC is paying a level of regulatory fees that is reflective of their own business model and the harms it could potentially cause consumers.”

Andy Kay, director of operations at First4Lawyers, said: “We welcome the prospect of the FCA imposing stricter regulation than CMCs currently face – those of us that operate ethically and efficiently have nothing to fear. All we are asking is that the level playing be made equal as between CMCs and insurers carrying out the same activities, and between the different types of CMCs.”