This will not just be a change of the organisation in charge. There will be a change in the basis, scope and content of regulation as well as changes to the bureaucracy in force.
Change in the basis of regulation. The existing bespoke regime implemented under the Compensation Act 2006 and regulations under that Act, the Financial Guidance and Claims Act 2018, and proposed regulations under that Act will bring CMCs into the general statutory framework under the Financial Services and Markets Act 2000, a far more detailed and developed regulatory scheme. The FCA in many areas will expect firms to be performing in the same sort of way as firms providing regulated financial services. For many firms, this will require a step change in what needs to be done to comply, and to demonstrate compliance with the rules.
Change in the scope of regulation include that CMCs that are operating only in Scotland will be regulated for the first time. There is also a proposal to extend jurisdiction to services relating to any claims made under section 75 of the Consumer Credit Act 1974 (which makes the consumer credit providers jointly responsible with suppliers where products or services are funded under a debtor-credit-the supplier agreement). Conversely some categories of organisation will be excluded from regulation and the existing exclusion for charities and not for profit bodies will be carried forward.
Changes to the content of regulation. The FCA will require CMCs to comply with certain parts of the FCA's existing Handbook applicable to the firms authorised to undertake investment business. This will include rules and guidance concerning:
- business conduct (for example there is a proposal to introduce a requirement for recording telephone calls),
- systems and controls,
- prudential standards requiring firms to hold a certain amount of capital to ensure that they are likely to remain in business; and
- rules about the handling of client money
In particular it is proposed to extend the Senior Managers & Certification Regime (SM&CR) to CMCs with a view to focusing regulatory responsibility on individual members of staff.
Communications about regulated claims management services will also be brought into the financial promotions regime restricting the way that services are promoted.
The FCA will have powers to restrict a CMC's charges (extending the idea of a fee cap applicable to PPI claims which will come in before the handover). The FCA is proposing a ban on cold calling except where the customer is consented to such calls. There will be changes to the bureaucracy in force and CMC is will need to pay fees to the FCA including a general levy to fund the Ombudsman service
A more active regulator? Whilst the existing Claims Management Regulator (a department within the Ministry of Justice) has itself been no slouch in enforcing the existing law, the FCA, given its much larger resource base and history as a highly proactive and dynamic organisation is likely to step this up further. The FCA will supervise using a combination of market-based and thematic work as well as programmes of communication, engagement and education. It will have wide-ranging powers include the ability to withdraw or suspend a firm’s authorisation, fines, applying to the Court for injunctions and restitution orders and bringing criminal prosecutions. The FCA has stated that it intends to use these powers to achieve ‘credible deterrence’ by showing there are "meaningful consequences" to breaking the FCA's rules. This may be taken as code for an intention to make some headline –worthy example.
There is no doubt that these proposals will involve additional cost for CMCs as well as an enhanced level of risk in relation to regulatory action being taken against a CMC. CMCs will need to prepare for a new level of regulatory scrutiny.
Transitional Arrangements. Once the new arrangements are in force (which is due to take place on 1 April 2019), firms will need to be authorised to provide services within the revised scope of what are regarded as "claims management services". However there will be a "grandfathering" regime which will allow existing CMCs to receive a temporary authorisation by notifying the FCA. The notification will need to be made between 1 January 30 and 1 March 2019.
CMCs will then need to apply for a re-authorisation to replace their temporary permission. This is due to happen during two separate application periods. Firms providing claims management services in relation to financial services, and firms being brought into regulation of the first time will need to make their applications between 1 April 2019 and 30 May 2019. Other firms would need to do this within a period between 1 June 2019 and 31 July 2019.
How should CMCs Prepare
This change is coming and those involved in providing claims management services will need to prepare for it. In particular:
- by checking the scope of their activities and whether these will be within the newly defined regulated scope;
- by checking whether their capitalisation, governance, systems and controls meet the standards set out in the FCA's "Threshold Conditions" and making arrangements where they do not;
- by preparing for the Senior Managers Regime by mapping out the regulatory responsibilities of their most senior staff and checking that they have the right people in place to perform these responsibilities, as well as putting in place with the arrangements for the "certification" of other relevant staff
- by revising their regulatory business plans and compliance arrangements in readiness for the detailed rules that will apply to them within the FCA Handbook;
- by amending their advertising and promotions and their terms of business and client agreements.
For many firms this is likely to involve substantial change and will require senior management, financial function and the HR and marketing personnel all to be substantially engaged.
Although the final rules are not yet available, the bones of the new regime are probably now sufficiently in place that firms should start to prepare.
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