Compensation (Claims Management Services) (Amendment) Regulations 2014
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Lord Faulks
That the Grand Committee do consider the Compensation (Claims Management Services) (Amendment) Regulations 2014.
Relevant document: 8th Report from the Joint Committee on Statutory Instruments
The Minister of State, Ministry of Justice (Lord Faulks) (Con)
My Lords, the regulations before the Committee amend the Compensation (Claims Management Services) Regulations 2006 with regards to the available enforcement tools of the claims management regulator. The regulations provide for the regulator to impose financial penalties on non-compliant regulated claims management companies. The penalties would apply to: breaches of the Conduct of Authorised Person’s Rules; failing to comply with a code of conduct; failing to comply with directions relating to indemnity insurance; failing to comply with directions relating to redress and complaints handling; failing to comply with an information notice from the regulator; and obstructing the execution of a warrant.
The regulations also provide for certain situations in which CMCs will not be able to surrender their authorisation without the consent of the regulator. This is to ensure that a CMC cannot avoid investigation and enforcement action by simply surrendering its authorisation. The new financial penalty power provides an additional deterrent from malpractice within the regulated claims management industry. With this new power, the regulator can look to remove any monetary gain that may have been made by a CMC through non-compliant practices, where possible.
Before setting out further details about the regulations and why the Government are taking this action, I will briefly explain some background with regards to claims management regulation and the need for an additional available sanction in this area. Businesses providing regulated claims management services in England and Wales under the Compensation Act 2006 must be authorised to do so by the regulator, which forms part of the Ministry of Justice.
Claims management regulation covers a range of sectors, most notably the personal injury and financial products and services sectors. There are also a number of lower profile claims sectors, such as employment, criminal injuries, industrial injuries disablement benefit and housing disrepair, which are subject to regulation by the regulator. Once authorised, regulated CMCs are required to comply with certain conditions of authorisation, including adherence to the Conduct of Authorised Persons Rules. Where breaches of the conditions of authorisation are identified, the regulator can take enforcement action, such as the variation of the CMC’s authorisation, by imposing additional conditions or the suspension or cancellation of authorisation in the most serious cases.
These measures form part of a wide package of reforms which I will explain shortly. First, I will set out why they are needed. Bad practices by some regulated CMCs have created poor outcomes for some consumers and businesses, particularly in the area of financial products and services. Current enforcement powers have not deterred some CMCs from carrying out speculative behaviour or engaging in other forms of malpractice. This has led to delays in receiving compensation for some consumers who have legitimate claims and has increased costs for some defendant financial services firms where claims are unsubstantiated. Where a CMC is subject to formal enforcement action, such as the cancellation of authorisation, this can directly affect clients whose cases cannot be progressed by the CMC if its authorisation is removed.
The power to impose financial penalties on non-compliant CMCs does not replace any existing enforcement sanctions but provides an additional, flexible tool that will assist the regulator to carry out its duties even more effectively. This new power therefore acts in the best interests of both consumers and businesses by ensuring that the regulator has a full range of appropriate tools to deter non-compliant behaviour.
A public consultation on the proposed amendments received wide support from the claims management and banking industries as well as those with a general interest in claims management matters. Responses to the consultation suggested that the proposed measures would improve regulation while providing an additional and necessary deterrent from malpractice.
It is important to make clear that, since the start of regulation in 2007, the regulator has utilised its existing powers fully and has done extremely well to stamp out non-compliant behaviour across the claims management industry. The regulator continues to make improvements to the regulated claims market through targeted compliance programmes and enforcement action.
Since April 2013, the regulator has overseen a package of reforms to the regulatory regime. These include: key changes to the conduct rules to ensure that claims are substantiated before being pursued; naming CMCs under investigation and subject to enforcement action online; increased resources and the establishment of a specialist compliance team to tackle non-compliant marketing practices; a ban on CMCs offering financial rewards or similar benefits to potential claimants as an inducement to make a claim; a ban on the payment or receipt of referral fees between CMCs, lawyers, insurers and others; and the appointment of the first two independent non-executive board members to the executive-led claims management regulation board, enabling a greater element of external challenge and continuous improvement.
With that background, I turn to the draft amended regulations before the Committee today. In effect, the order amends the regulations to include provisions regarding: the process that must be followed to impose a financial penalty, which is the same process currently used for the imposition of existing forms of formal enforcement action; the requirements to consider the nature and seriousness of any breach by the regulated CMC and its turnover in determining the amount of the penalty; and the penalty that can be imposed, which will be a maximum of £100,000 for regulated CMCs with a turnover of less than £500,000 and 20% of turnover for regulated CMCs with a turnover of £500,000 or more. It also amends how the regulator can deduct any administration costs incurred in collecting or enforcing the payment of a penalty before the remainder is paid into the Consolidated Fund; how the penalty can be enforced by the regulator as a civil debt, if necessary; and the restriction on the surrender of authorisation by an authorised person without the consent of the regulator.
I am sure that the Committee will agree that the regulator must have the necessary tools to impose a range of appropriate sanctions that deter malpractice and encourage regulatory compliance. The order provides the regulator with additional powers to ensure that a complete range of robust and proportionate enforcement options can be considered as appropriate. I therefore commend the draft regulations and beg to move.
Lord Kennedy of Southwark (Lab)
My Lords, I say at the outset that the Opposition very much welcome what is proposed today. Since joining your Lordships’ House in June 2010, I have regularly raised the question of claims management companies and the end of the industry that indulges in bad practice. I also want to start by paying tribute to the work undertaken by the claims management unit at the MoJ, led by Kevin Roussell. It does a really good job with limited resources and the regulations will be another important tool in its box to deal with bad practitioners who rip off consumers and cause unnecessary costs for businesses to which they submit claims.
What is most reprehensible is submitting pointless, vexatious claims to financial services providers with which their client has no record of doing business. That is done as a fishing expedition on the off chance that they may get lucky, with no regard to the cost to the business, the clogging up of the processes in each business and the Financial Ombudsman Service, or to the genuine people who have been ripped off by bad practice in the financial services industry, who will have to wait even longer to have their claim settled.
I must say that I have no problem with the responsible claims management company, which can provide a valuable service to its clients. It can give advice on how to proceed, and as long as its client is aware of the charges to be incurred and is happy to pay them, and the company is properly processing and managing claims, that is fine. Nothing here will concern the responsible claims management company. In the consultation there was broad support for the proposals from all respondents, including the claims management industry, which wants to improve the image of its industry, raise standards and get rid of the rogues.
However, it is important to put on record that CMCs working in this field are dealing with bad practice in the financial services industry. There have been a number of cases in recent years where people have behaved very badly in that industry. I note in the Explanatory Memorandum that the Ministry of Justice does not see a case for consolidation at present. I think that that is probably right. I hope, however, that the department will keep this under review, as things change over time, sometimes very quickly. We may get to the point where the case for consolidation becomes more compelling. If that is the case, the Minister can be assured of support from these Benches. I have no wish to detain the Grand Committee any longer than necessary, and conclude my remarks by again welcoming the proposals.
Lord Faulks
I am grateful for the observations of the noble Lord, Lord Kennedy, who has indeed several times in your Lordships’ House raised questions about claims management and the more unattractive habits in which they have been prone to indulge. I am also grateful to him for specifically drawing the Committee's attention to the claims management unit and Kevin Roussell, who runs it. I have visited that unit in Burton-on-Trent. It is a small, efficient, extremely dedicated collection of employees who, I think, have made real progress in improving the industry. Although there are some who wonder why we need claims management companies at all, we are increasingly left with fewer, better regulated and better organised claims management companies who provide a service to clients.
I accept the noble Lord’s point that that there is a need to be nimble and alert, and possibly in due course to consolidate. This is an area where the market changes swiftly, and there has to be a swift response—if necessary, a legislative response—to make sure that changes in market do not bring about unacceptable practices. We feel that the changes embodied in the statutory instrument—the new power to impose financial penalties—which are similar to those of regulatory authorities such as the Financial Conduct Authority and the Information Commissioner’s Office, are an additional and useful adjunct to the existing powers. I hope the Committee will agree that they are proportionate and necessary measures, and in those circumstances, I commend the regulations to the Committee.