Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018
(Limited Text - Ministerial Extracts only)
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Lord Bates
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, claims management companies offer advice and other services to consumers making claims for compensation. They can provide vital support for consumers who may be unwilling or unable to bring a claim for compensation themselves. When the CMCs market functions well, these companies can act as a check and balance on business conduct.
CMCs are currently regulated by the Claims Management Regulator, under the Ministry of Justice. This regulatory regime was established in 2006 through the Compensation Act and was initially intended to be temporary. Reports of widespread misconduct suggested that the Government should act to strengthen regulation of CMCs. In 2015 the Brady review found evidence that the majority of stakeholders felt the Claims Management Regulator lacks the sufficient powers and resources to supervise the market properly. The Government took the first step to stronger regulation in 2016 through the Financial Guidance and Claims Act. This mandated the transfer of regulation to the FCA and the handling of complaints about CMCs to the Financial Ombudsman Service.
The aim of this legislation is to introduce a robust regulatory regime for CMCs that benefits consumers and is proportionate to the needs of the sector. We consulted on its provisions and we are confident that this legislation delivers on this aim. Through changes to the regulated activities order and the financial promotions order, this legislation makes claims management a regulated activity in England and Wales and in Scotland for the first time. This will require firms to seek authorisation from the FCA in order to promote and carry out claims management services.
The order defines the types of claims management activities that will be regulated by the FCA by creating seven different permissions across different sectors for different types of activity. This will mean that regulation will be comprehensive as each CMC will need separate permissions depending on the specific activities and sectors that it wishes to operate in, which will enable the FCA to take into account the different types of work across each sector and different activities. Regulation will also be kept proportionate as CMCs will need authorisation only for the activities they actually carry out.
This is a change from the previous regime, which set out one permission enabling claims management activity across six different sectors. These six sectors have been preserved from the previous regime and mean that CMCs must be regulated for their activities in personal injury, financial products and services, employment issues, industrial and criminal injuries, housing disrepair, and for seeking out, referring, and identifying claims. As the Economic Secretary noted in the other place, the Government are aware of increasing claims management activity in areas other than those I have just named. The Government will monitor the new regulatory regime and consider how best to meet this challenge.
The order also sets out which organisations are exempt from the FCA’s regulation. Concerns had been raised about the exemption of legal professionals, but I can assure the Committee that, first, solicitors are already strictly regulated by the Solicitors Regulation Authority for their work, which can closely resemble claims management work, and secondly, CMCs will not be exempt from regulation merely because they employ a solicitor. Rather the exemption is designed to ensure legal firms are not unduly burdened by dual regulation.
We have taken steps to make sure that this is a smooth transition. The FCA will be implementing a temporary permissions regime to ease the process for CMCs. The FCA is well placed to take on the regulation of CMCs, having already started to build the department which will oversee the transition of regulation. It is well resourced and has an expert pool of conduct supervisors and detailed knowledge of financial services. CMCs will be held to the same conduct standards as all FCA-authorised firms, and the FCA’s rules will provide a robust and proportionate framework for how CMCs should carry out business and treat their customers. The FCA will be able to use its regulatory powers to deal with CMCs that do not abide by its rules.
In summary, the Government believe that the proposed legislation is necessary to ensure that the regulation of claims management companies is fit for purpose so that consumers can benefit from a professional service that offers value for money. I hope members of the Committee will join me in supporting the order. I commend the order to the Committee.
Lord Tunnicliffe (Lab)
My Lords, I, too, welcome this statutory instrument and thank the Minister for introducing it. I also endorse what the noble Baroness, Lady Drake, has said, particularly her questions. I will not repeat what she said, but just observe that the regime will involve the Senior Managers and Certification Regime. I am sorry to hear that it is not as yet being used effectively. Perhaps the Minister will reduce our concerns. Perhaps it would be more top-of-mind if the reversed burden of proof originally in the scheme had been retained. Certainly, it is meant to be a regime which makes managers very clear of their duties, if not fearful. I endorse the idea of six bundled areas of responsibility being expressly divided into seven. I think that the noble Baroness, Lady Drake, asked whether there should be more than seven. It is a bit unfair of me, but I feel that the ombudsman becoming the financial ombudsman gives me a feel that he will be steelier and more effective.
The solicitor exemption depends on the exclusion that the activity is being carried on as part of their ordinary legal practice. The trouble is that we are talking about solicitors. They are paid to get around regulations. Who will be policing that boundary? Who will have responsibility for understanding what a particular solicitor is doing and saying, “Sorry, that should now go into the financial control”? The solicitors doing this work in the ordinary course of their business nevertheless need proper regulation. Is the Solicitors Regulation Authority up to the job?
Lastly, I understand that the CMRU staff will be redundant at a point when the FCA will, we hope, looking for similar skills. I would like to know the Government’s plans at a practical level for those staff.
Lord Bates
I thank noble Lords for their scrutiny of this SI and for their general welcome. I will try to address some of the key points and questions which have been raised.
First, the noble Baroness, Lady Drake, asked about estimates of numbers. According to the CMRU, there are current 1,238 authorised CMCs in operation. The overall number of authorised CMCs has been reducing on average by 10.9% per year for the past four years. The FCA’s modelling shows that it expects to take on 906 firms in 2019.
The noble Baroness, Lady Drake, and the noble Lord, Lord Tunnicliffe, mentioned the solicitors’ exemption and concern about potential regulatory arbitrage. The SRA and the FCA are in the process of updating their memoranda of understanding to ensure that the sector is closely monitored and properly regulated. The order contains a provision which disapplies the exemption from regulation by the FCA, should a CMC seek to avoid FCA regulation by employing a solicitor. That CMC will continue to be regulated by the FCA.
The noble Baroness, Lady Kramer, asked about solicitors, and not other regulated professionals, being exempt. Solicitors are already regulated by the Solicitors Regulation Authority. I understand the point that she made about that authority. The work of a solicitor advising on a claim is the same as, or very similar to, the work of a CMC seeking compensation for a consumer. As solicitors are regulated by the SRA for their usual activity, appropriate regulatory oversight is already present.
The Government have retained the other existing exemptions; we consider it correct that these bodies are not subject to regulation. That point was made by the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake. The FCA will continue to monitor exemption from claims management regulation if it moves or migrates into other activities. Of course, it will also retain the right to come back with further suggestions.
The noble Baroness, Lady Drake, asked about the exemption for trade unions.
Lord Bates
My Lords, I was just touching upon the code of practice for trade unions, in response to a point made by the noble Baroness, Lady Drake. The Treasury proposes to maintain the code for trade unions and will replace the MoJ on the monitoring board. The Treasury is working with the Trades Union Congress and Scottish Trades Union Congress at an official level and will publish the code in due course. The code is being amended, mainly to update it to reflect the transfer of regulation.
The noble Baroness asked about CMCs moving into other sectors. We will carefully monitor the effectiveness of CMC regulation and work with the FCA, the SRA and others to ensure that the sector is benefiting its customers. On the estimate of how many CMCs will not get authorisation from the FCA and what will happen to their cases, the number of CMCs has been declining, and I gave some statistics on that at the beginning.
The noble Lord, Lord Tunnicliffe, asked what will happen to the highly qualified CMRU staff. The CMRU and the FCA are currently agreeing the transfer of staff as part of their transfer scheme under the Financial Guidance and Claims Act. The details are still subject to discussion.
The noble Lord and the noble Baroness, Lady Kramer, asked whether the Solicitors Regulation Authority was up to the task. The SRA is subject to oversight by the Ministry of Justice and provides strict professional regulation. A memorandum of understanding between the SRA and the FCA is being reviewed.
Lord Tunnicliffe
My question was: who can call a halt and say, “No, it must transfer”? If you have a solicitor who is growing like Topsy, who will know that by now they should stop doing that and reregister as a proper claims organisation?
Lord Bates
That is something that I think the FCA would be liaising on. If it felt that its activities were aligned with a CMC then, as I mentioned earlier, that would mean it would have to continue to be regulated by the FCA. On the specific point, unless there is any inspiration on its way, I will write with clarification to the noble Lord.
The noble Baroness, Lady Kramer, asked if any action had been taken on CMCs doing their due diligence on data under GDPR. The FCA is in the process of updating and publishing its rules for the CMC regime. It will be working closely with the Information Commissioner’s Office, which is responsible for the oversight of data protection laws, to ensure that CMCs comply with the order, FCA rules and data protection legislation.
The noble Baroness asked whether the SRA was an effective regulator. The MoJ is responsible for the oversight of the SRA. The FCA and the SRA are currently reviewing their memorandum of understanding, and their conclusions will be published in due course. I think that covers most of the points.
Baroness Drake
Could the Minister clarify a point from one of my questions? Where an existing claims management company, authorised under the previous regime, transfers across to the FCA on the due date in April and is then subjected to the reauthorisation process but is not reauthorised, what happens in that instance to the caseload that it has been managing?
Lord Bates
They will be given 30 days to wind down their business in the event that that happens. I can write to the noble Baroness when I write to the noble Lord, Lord Tunnicliffe, and expand on that point if that would be helpful.
Baroness Drake
It is more about the consumer protection aspect that a group of people would be caught up in that, and I wondered who would carry on managing their cases. I am happy for the noble Lord to write to me about that.
Lord Bates
I will look at the record and check that I have answered the points as best I can and write regarding the points that I have agreed to. In the meantime, I beg to move.