Claims Management Companies (CMC’s) and the regulation of their activities has been back in the news this week, for all the wrong reasons (which seems to be the norm I’m afraid). This time the news was about the all too familiar story of charges, both their size and transparency.
Its reported that a CMC hit a vulnerable client with a bill for almost £12,000 out of a compensation award of just over £32,000 which equated to a 36% fee. Turns out the client had allegedly tried to cancel their contract with the CMC only to be repeatedly told that they were too far down the line to cancel. It’s very disappointing to hear this kind of story coming out of the CMC market which has been under the regulation of the Financial Conduct Authority (FCA) for more than two years now.
The story was brought to light by advisor firm Philip Milton & Co who tried to intervene to have the contract cancelled. They noted that the client could have made the claim direct to the Financial Services Compensation Scheme (FSCS) for £375, some thirty times less than it actually cost. This case is the latest in a long line of complaints against CMC’s conduct generally, which is also backed up by the FCA’s own research into the Claims market, leading to them only last week having to write all CMC’s to express their concerns about poor customer service, poor processes, misleading advertising and poor disclosure of contractual details – quite a list!
The FCA is also concerned by the increase in so called “bogus claims” where there is no investigation made by the CMC who simply create a claims against an adviser as part of a “fishing expedition”, or in some cases even where the CMC has no relationship at all with the supposed client.
You have to wonder why the FCA continues to allow the CMC market to operate in this way when they recently introduced a ban on contingency fee charging by financial advisers. The financial adviser market is clearly far more highly regulated than the CMC market, with professional indemnity insurance requirements, FCA and FSCS levies paid and of course the requirements for advisors to be qualified to practice way beyond the standards applied to many solicitors or accountants for example, including the requirement to demonstrate ongoing Continuous Professional Development (CPD). So why does the FCA continue allow “unqualified” CMC’s to operate as though it’s the wild west when it comes to making claims?
Some advisors have suggested that a fixed fee approach might make more sense, including a cap on fees. As usual the FCA doesn’t make it easy for anyone and financial advisers (despite their skills, knowledge and expertise) are forbidden by the FCA from assisting a client with a claim against a provider or other advisor because they would be de facto acting as a CMC. In order to provide such a service, the advisor would have to register as a CMC and pay the extra FCA fees – you couldn’t make it up sometimes.
On the other hand of course, the client in question had clearly been badly advised to the extent that such a large amount of compensation was paid, so it’s true that not all advisers act in the best interests of their clients – there are rogues in every walk of life unfortunately. However, you only have to listen to the radio or watch daytime TV to know that the claims business continues to be lucrative, with the number of wall to wall adverts soliciting for claims against financial advisers. If a ban on contingent charging was introduced and a fixed fee applied, then CMC’s wouldn’t find the market so lucrative.
Don’t forget that its claims by CMC’s that are driving up the costs of professional indemnity insurance, which is turn directly increasing the cost of advice and also reducing the number of advisers, neither of which is good for clients.