draft Legal Services Act 2007 (Claims Management Complaints) (fees) (amendment) regulations 2017

Christina Rees Excerpts

Tuesday 13th December 2016 General Committees

[Christina Rees (Neath) (Lab/Co-op)]

It is always a pleasure to serve under your chairmanship, Mr Davies. May I say how splendid you look?

I thank the Minister for his explanation of the regulations. I confirm that we do not oppose them, but I should like to make some observations and ask some questions. As he said and as the explanatory notes state, the Legal Services Act 2007 extended the complaints handling remit of the legal ombudsman to claims management companies. There is currently no designated claims management companies regulator, so under section 5(9) of the Compensation Act 2006, that role falls to the Secretary of State for Justice. The 2007 Act treats the designated regulator as an approved regulator.

Last year, the then Chancellor announced an independent review of claims management regulation. It was published in March this year, and it was announced that the Financial Conduct Authority would assume regulatory responsibilities. Will the Minister indicate when that will be done? The Brady report said:

“Despite incremental reforms and improvements to the regulator’s powers and rules since its creation, there is a widely held perception among stakeholders and government that there is widespread misconduct among Claims Management Companies (CMCs).”

The report found that many stakeholders felt that the current arrangements lacked the powers and resources to supervise CMCs properly. They believed that many CMCs took speculative cases. Many ordinary consumers did not understand precisely what CMCs offered; they did not know what alternatives existed. There is a lack of transparency in the way in which CMCs conduct their business and market themselves to people. Many people who contacted them or were contacted by CMCs were concerned about the mis-selling of payment protection insurance, and consumers were left confused about the PPI complaints process.

The Brady report also said:

“CMCs deterred many potential future complainants from pursuing complaints…through their persistent phone calls and encouragement to complain.”

Nuisance calls and text messages were common conduct complaints identified by the review, and were the result of unenforced data protection breaches. That is the type of behaviour that other professionals in the industry have called to be banned.

In June this year, the Association of Personal Injury Lawyers launched its “Can the Spam” campaign. As it pointed out, solicitors are not allowed to cold call, but CMCs are allowed to do so, within the rules and guidelines that apply. APIL says that the rules are difficult to navigate, and it has called on the Government to ban cold calling and spam texting for personal injury claims. I would be grateful if the Minister looked at that issue again.

What is the difference between authorised and non-authorised CMCs, and what is the incentive to become an authorised CMC? I am concerned that the claims management regulator cannot pay compensation, nor order a CMC to compensate a claimant if they have had poor service. Does that apply both to authorised and to unauthorised CMCs? The claims management regulator report for July to September 2016 states that for April and June 2016 it started 12 investigations into authorised CMCs and 13 into unauthorised businesses. Are those businesses all CMCs? It cancelled 74 licences, issued two financial penalties and 50 warnings, and conducted 100 audits and 245 visits. Will the Minister confirm whether those enforcements apply to authorised or unauthorised CMCs or unauthorised businesses?

The claims management regulator found that when the ban on referral fees came into effect in April 2013, the number of CMCs fell from 1,900 to 803 by the end of September 2016. Are those authorised or unauthorised CMCs, or unauthorised businesses? During the last quarter, the claims management regulator issued non-compliance notices to 53 CMCs and 13 warnings to CMCs continuing to operate the referral fee practice. Will the Minister confirm what further action the claims management regulator can take to stop that practice?

The 2013 inquiry by the Select Committee on Transport argued that an increase in the small claims limit could create a bigger gap in the market for CMCs to operate in. The November 2016 consultation document entitled “Reforming the Soft Tissue (Whiplash) Claims Process” is mindful of this risk at paragraph 103:

“The government is considering the issue of the potential for claims management companies (CMC) and paid McKenzie Friends to re-enter the PI market in response to these reforms in general, and the increase in the small claims limit in particular. These types of organisation can offer services to claimants whilst operating with lower overheads than many PI lawyers.”

Elsewhere in the consultation document, option 3, which raises the small claims limit to £5,000 from £1,000, with the total settlement remaining at £10,000, for all personal injury claims and all road traffic accident claims, is deemed to have a positive impact on CMCs. Paragraph 2.135 of the consultation’s impact assessment states:

“There may be the potential for a rise in CMCs seeking to enter the market to support LIPs”—

—litigants in person. Has the Minister taken into account the potential rise in CMCs and in complaints against CMCs, following the introduction of the increase of the small claims limit, which may happen before the 2017-18 fees are due to be recovered on 31 March 2017?

Based on the latest data from the claims management regulation unit, it is estimated that a total of about 1,450 CMCs will be authorised at the time of renewal of authorisation in February 2017 and that about 20% will exit the market before paying their regulatory fees and fees related to the complaints handling function of the legal ombudsman. There is a risk that the Lord Chancellor will be unable to recover the full costs incurred if additional CMCs fail to pay the annual fee. If that occurred, the Lord Chancellor would have to meet the shortfall.

What action can the claims management regulator take to enforce recovery of annual fees for CMCs and unauthorised businesses? What was the percentage of unrecovered fees in 2015-16? Was that taken into account when the calculation of over-recovered fees was made? I thank the Minister for presenting the statutory instrument to the Committee and look forward to his response.