Change in regulation of claims management companies

The current position

Currently, claims management companies in England and Wales are regulated by the Claims Management Regulation Unit (CMRU), a unit that sits within the Ministry of Justice (MoJ), while claims management companies in Scotland are not regulated at all.

From 1 April 2019 this will change, as the FCA will take over from the MoJ's unit as the regulator of claims management companies (CMCs) in England and Wales and on the same date assume regulatory responsibility for claims management companies in Scotland.

The new regime

The Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018 (the Order) implements the transfer of claims management regulation from the CMRU to the FCA on 1 April 2019. The Financial Ombudsman Service (FOS) will also become responsible for handling claims management disputes on that transfer date.

The Order came into force on 29 November 2018 to allow the FCA and FOS to make rules ahead of the changes to claims management regulation. For all other purposes the Order will come into force on the transfer date.

Last summer, the FCA published a consultation paper outlining draft rules and guidance in relation to CMCs and the process for CMCs to become authorised.

The new legislation

The Order outlines when a person is to be treated as carrying on claims management activities in Great Britain.

Claims management activities are considered "regulated activities" under the Financial Services and Markets Act 2000 (FSMA), following amendments to FSMA by the Financial Guidance and Claims Act 2018 (FGCA). Claims management activities include services in respect of claims for restitution, repayment, compensation or any other remedy relating to an obligation, loss or damage.

Part 2 of the Order amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) to specify which claims management activities are "regulated activities" requiring FCA authorisation. These activities are outlined in Part 3B of the Order and include:

• seeking out, referrals and identification of claims or potential claims; and
• advice, investigation or representation of claims and the investigation of claims.

The types of claim include: personal injury, financial services or financial product, housing disrepair, specified benefit, criminal injury and employment related.

The Order outlines that claims management activities are to be treated as controlled activities under section 21(1) of FSMA, by amending the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005. Accordingly, it is an offence to communicate an invitation or inducement to engage in claims management activities, unless an exemption applies or the communication is approved by an authorised person.

The Order, however, outlines that certain legal professionals, including solicitors, barristers and legal executives, are exempt and can carry on claims management activities in the ordinary course of legal practice, without FCA regulation under the RAO. There are also further exclusions for certain bodies including charities, not-for-profit agencies and insurance intermediaries. 

The view from industry

The transfer of this function from the CMRU to the FCA has received positive feedback within the insurance market. The move is a major reform of the current system and has the potential to lead to an increase in consumer protection.

Huw Evans, director general of the Association of British Insurers (ABI), said that the move "is absolutely the right thing to do" and that "for too long the regulation of claims management companies has not been fit-for-purpose".

However, as Martin Milliner, general insurance claims director at LV=, has pointed out, "for it to be effective... the FCA needs more funding and resourcing than the Claims Management Regulator received under the Ministry of Justice".

The FCA clearly has an important task on its hands and we must wait to see whether or not this move turns out to be a successful one.

Colin Read is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.