The FCA have published a consultation paper on proposals to restrict the amount charged by claims management companies.
Under the Financial Guidance and Claims Act 2018 (FGCA) when Parliament transferred regulation of CMCs to the FCA it gave them a duty to make rules about CMC fees for claims relating to financial products and services. The duty given to the FCA requires them to make rules with a view to securing an appropriate degree of protection against excessive charges made by CMCs managing financial products and services claims. Parliament also gave the FCA powers, but not a duty, to make such rules for the other CMC sectors it regulates, namely personal injury, housing disrepair, industrial injuries benefit, criminal injury and employment. The FCA prioritised making rules for the financial products and services CMC sector and will consider using these powers in the other sectors in due course.
Consumers of financial products and services have the right to make a claim free of charge under the redress system. The cap the FCA is proposing applies to claims about financial products or services that are complaints under DISP, claims under COMP, or claims made where another statutory ombudsman or compensation scheme applies, such as the Pensions Ombudsman, FOS or FSCS. If CMCs manage claims about financial products and services that are not covered by these schemes, their fees will be subject to a separate proposed rule requiring them to be ‘reasonable’.
There are currently around 223 firms carrying on FCA-regulated claims management activity for non-PPI financial products and services. Their estimated revenue for 2019/20 was about £38m. The FCA collected data from a sample of CMC firms to understand more about the market and the regulator based its proposed fee cap on the data returned by 33 firms.
The FCA propose a change to the existing disclosure rules which requires firms to provide consumers with illustrative fee calculations. It is proposed that these illustrative fee calculations will need to set out the fees that would be paid by the consumer for the 3 redress bands that are closest to the amount of redress the consumer is likely to get for their claim. Firms will no longer need to provide illustrations for the amounts (£1,000, £3,000 and £10,000) currently specified in the rules.
The firm should also indicate which of the 3 illustrative fee calculations most closely reflects the consumer’s claim. This is in addition to the existing obligations in the rules which require firms to provide revised fee calculations as and when information becomes available to the firm that would allow them to give a personalised illustration of the fee the consumer is likely to be charged.
The FCA is proposing that the cap applies to contracts which were entered into before the rules are made, but where charges are imposed after the rules come into force (pre-existing contracts). The regulator recognises that applying a cap to charges arising from contracts that pre-date the rules will interfere with pre-existing contractual rights of firms. However, where fees are excessive, consumers should not have to continue paying at those levels after these rules come into force. Where fees have already been charged at the time the rules come into force, they will not be subject to the cap, but will count towards the cap for any fees charged after the rules come into force.
FCA rules already require firms to include a statement drawing attention to the option to make a claim direct without charge as part of their pre-contract disclosure to the consumer. This provision was included considering the data collected as part of the FCA’s Financial Lives Survey. The survey found that in 2017 only around 35% of UK consumers were aware of the free alternative routes to redress. The FCA’s more tailored consumer research found that awareness of the option to claim direct was even lower for consumers of CMC services. The research found that more than half of consumers who used a CMC were not aware of their ability to make a claim direct to the firm or to a statutory body such as the ombudsman service. Considering the findings, the FCA is proposing that firms seek confirmation that the consumer does not wish to progress their claim directly themselves by requiring the statement and information about that option to be isolated in the pre-contractual disclosure, and that the consumer confirms, by way of separate confirmation, they would like to continue engaging a CMC despite understanding they have the option to progress their claim for free, by themselves.
How will the proposed cap apply?
The amount of the cap will depend on how much redress is awarded. The FCA has set out five bands of redress, each of which has a maximum percentage of consumer redress and a maximum total fee. On any one claim the total fee to the customer must not exceed the lower of the maximum percentage rate and the maximum total fee. The maximum total fee in each redress band alongside the maximum percentage rate in each redress band is set at a level that will apparently ensure ‘a smooth transition, with no cliff-edges’ between the maximum fees payable in each band.
Proposed fee cap
|Consumer Redress obtained
|Max % rate of charge
|Max total Fee (£)
For example, if a consumer gets £2,000 in redress, the fee will be subject to the ‘band 2’ cap which means it may be a maximum of £560 (28% of £2,000). A claimant who gets redress of £9,000 will pay no more than £2,500 (the maximum total fee for band 2, which is lower than 28% of £9,000).
A policy statement is expected to be published by FCA in Autumn 2021.
CFS Redundancy Payments