Legal Services Act 2007 (Claims Management Complaints) (Fees) (Amendment) Regulations 2016

Lord Beecham Excerpts

Monday 18th January 2016 Grand Committee

[The Minister of State, Ministry of Justice (Lord Faulks) (Con)]

The Legal Services Act 2007 (Claims Management Complaints) (Fees) Regulations 2014 enable the Lord Chancellor to charge fees to regulated claims management companies to recoup the costs of the Legal Ombudsman’s work in handling complaints about these companies. Since January last year, the Legal Ombudsman has been able to consider consumer complaints against claims management companies. It is funded for this work by grant-in-aid from the Lord Chancellor, and the 2014 fees regulations enable the Lord Chancellor to recoup the costs from the companies themselves. It is right that the costs of handling such complaints fall on the claims management sector and not on the taxpayer.

The draft regulations before us amend the level of fees set out in the existing 2014 fees regulations for the financial year beginning 1 April 2016 and for subsequent years. This will ensure that the Lord Chancellor can recover the full costs of the Legal Ombudsman in dealing with complaints about the claims management industry in the 2016-17 financial year.

The Legal Ombudsman has one year’s experience of operation of the complaints scheme. During this time, the Legal Ombudsman has dealt with fewer cases requiring an ombudsman decision than expected, although the number of complaints is increasing. The number of initial consumer contacts and inquiries to the scheme has been substantially more than envisaged.

In the light of its experience so far, the Legal Ombudsman has revised downwards its estimate for the number of cases that will require ombudsman resolution during the next financial year and therefore the expected costs. However, in addition to the Legal Ombudsman’s expected costs for 2016-17 we also need to recover a shortfall in the amount invoiced for 2014-15 and 2015-16. This was the result of a greater number of market exits than was estimated in the fee model. This means that the total cost to be recovered from the market for 2016-17—around £2.3 million—remains broadly similar to that for 2015-16. Due to the contraction in the market, however, fees have had to be increased. Effectively, it is a smaller cake.

Noble Lords will be aware that a fundamental review of the regulation of claims management companies is currently taking place. The review is considering what powers and resources are required for a strengthened regulatory regime and what other reforms may be necessary, and is due to be completed in early 2016. As such, I cannot say any more about it at the present time.

The claims management sector has undoubtedly acquired a poor reputation as a result of a small number of companies engaging in poor business practices. The Legal Ombudsman provides redress for consumers of regulated claims management companies, including the potential for awards of compensation, and will continue to assist the claims management regulator in driving out poor standards and practices in the market.

I know that noble Lords welcome the fact that the Legal Ombudsman is now able to deal with complaints about claims management companies. It is therefore right that the Legal Ombudsman’s costs relating to regulated claims management complaints continue to be met by the claims management sector, in the same way that the costs relating to complaints about the legal services sector are met by that sector. I commend the draft regulations to the Committee.

[Lord Beecham (Lab)]

My Lords, the Government are right to take action in this matter, and I certainly endorse the new arrangements that have been laid out, but it has a rather curious history. Looking at paragraph 4.2 of the Explanatory Note, I can see that it was some seven years after the passage of the 2007 Act before steps were taken to deal with this issue. The paragraph contains this rather curious sentence:

“This provision treats the designated Claims Management Regulator as an approved regulator to be levied in the same way as other approved regulators for the costs of the Legal Ombudsman”.

It goes on to say:

“However, there is currently no designated Claims Management Regulator and the function is fulfilled by the Secretary of State”.

One might have thought that he had more important things to do. Obviously, Mr Gove and his predecessor will not have been involved in this personally, but it is a curious situation that for some years there apparently was no functioning regulator in post.

The position appears to be, as the Minister has indicated, that a £500,000 shortfall has occurred in a very short period. I do not know whether he is able to indicate how many cases there were. He said that there were not many, but £500,000 is a reasonably large amount of money. It will be interesting to know how many cases there were and how many of those were from small companies, which appear to be leaving the market. But the very fact that after all these years there are clear deficiencies in how some of those providing this service are operating raises questions about the degree to which their activities are regulated in advance of the unfortunate outcome, which sometimes leads them to be subject to charges for maladministration or their conduct. Does the review to which the Minister referred encompass looking at the qualitative regulation of the industry? Should there not be a floor above which the resources of these companies should be fixed? If not, we will continue to have a situation in which, quite apart from the financial implications for the Government, people who have consulted these companies presumably are being short-changed. One wonders what has happened to valid claims that have gone astray as a result of maladministration. That side of it does not seem to be touched on at all in relation to this order, but it may be encompassed within the review. I certainly hope that that is the case, but if it is not, perhaps the Minister could undertake to look into the nature and quality of the supervision that ought to be exercised and, if necessary, what improvements should be made to what has gone on recently.

[Lord Beith (LD)]

My Lords, I very much agree with the noble Lord, Lord Beecham, about the rather curious nature of the regulatory arrangements for claims management companies. The Lord Chancellor left himself holding the baby when the original legislation was taken through. I never thought that this arrangement would last as long as it has. It is quite right that it should be subject to review. It is obviously right that the costs of dealing with what the noble Lord called the maladministration in the industry is visited upon the industry and not the taxpayer. Therefore, I support the order and the principle behind it.

The history of claims management companies has been one of things that go beyond individual complaints. There have been systemic changes to the way the legal system operates and attempts to turn it into an ambulance-chasing activity. We all have some worries about whether, in another area, the necessary referral fee bands have actually brought some of the claims management activities in-house, into some solicitors’ practices, where once they were precluded. This is a very difficult area and the regulatory problems that it generates are not just individual cases being badly dealt with but systemic weaknesses. I hope that when we dispatch this order successfully as an appropriate means of dealing with the costs arising from individual claims, we will not neglect some of the wider issues that this industry has generated.

--- Later in debate ---

I hope that, notwithstanding the reservations that have been expressed about the length of time it took to set up this system, and notwithstanding the general concern that the Committee has about claims management companies, noble Lords will accept that there is an importance in providing the route for redress for consumers of regulated claims management companies that is provided, and that it is right that the companies should pay for the costs of complaints handling rather than the taxpayer.

[Lord Beecham]

I entirely endorse what the Minister has said, but the danger is that the process of finding companies works only if the companies are in existence and have resources. Therefore, it seems to me that the regulation needs to be at an earlier stage to ensure that they do not carry on business unless they can demonstrate that they have the financial capacity to meet their liabilities. I assume—but it would be good to have the confirmation, if not today than perhaps subsequently—that that element is being considered as part of the review to which the Minister referred.

[Lord Faulks]

I am grateful for that, and I understand the noble Lord’s concern about having prior approval rather than waiting for things to go wrong; I think that is effectively what he is saying. I do not want to pre-empt what is in the wide-ranging report. Of course, there are a number of ways of ensuring that, including the possibility of professional indemnity insurance, or something of that sort. But I accept his point that it is important that there is protection before, rather than after, the event. I do not undertake that the review will cover that point, but it is none the less a valid concern.