Setting up a claims management company

One of the more niche areas of my practice, but which is one of the most interesting is the regulatory work that I undertake, advising claims management companies (CMCs) on various aspects of their businesses, and solicitors on how they can transact with CMCs within the law, without for example infringing the partial ban on referral fees contained in LASPO 2012. Setting up a CMC poses particular challenges and advice is often needed on multiple topics, of which I identify three below.

The first relates to the regulatory environment in which CMCs operate as this is about to become more complex. On 1st April 2019, the Financial Conduct Authority (FCA) will become the regulator of all claims management companies (CMCs) in England, Wales and Scotland. The move from regulation by the Ministry of Justice (MOJ) is to rationalise the regulation of what is now a significant sector of the broader financial services industry, and perhaps also to signal a tougher approach to regulation than has hitherto applied.

CMCs who are currently regulated by the MOJ will not automatically port over to the new regulator: rather they must register for a temporary permission between 1st January 2019 and 31st March 2019 and then apply for full authorisation by the FCA.All firms applying for full authorisation by the FCA must be able to demonstrate that they can meet and will continue to meet the threshold conditions contained in the FCA Handbook: a copy of the requirements can be found here: FCA Handbook Threshold Conditions

The FCA has already consulted on how it intends to regulate CMCs: that consultation has closed and in due course, final rules will be published, perhaps very soon, setting out what standards CMCs will need to adhere too. A copy of the consultation paper can be found here: FCA Claims management how we propose to regulate claims management companies. Similarly the FCA has also consulted on the fees it proposes to charge CMCs. The FCA is funded by the firms it regulates through fees, and it has to recover its costs. A copy of that consultation can be found here: FCA Claims management companies recovering the costs of FCA regulation and the Financial Ombudsman Service. It is intended that the fees will be charged periodically and payable on an annual basis. The periodic fee will be linked to the size of the firm’s business.

At the current time the FCA is consulting on how its Senior Managers and Certification Regime will apply to CMCs: initially applicable to banks and deposit takers, this regime is being expanded out to most financial services firms in December 2019 and CMCs will not be excepted from this provisions. The consultation closes on 6th December 2018 and a copy of the consultation paper can be found here: FCA Claims management companies how we propose to apply the Senior Managers and Certification Regime.

The second area of challenge relates to compliance with the provisions of the GDPR and the DPA 2018. Since the implementation of the new law in May 2018, a new more stringent approach to data processing, and in particular issues of consent has applied to all businesses. The new rules have particular resonance for CMCs, because personal data is in a sense, the life blood of their businesses, as it is the key to pairing an individual to a compensation claim and assumes a particular significance in monetising information. Some parts of the industry have achieved notoriety, in recent years, through the illegal selling and use of personal data. Most people have a tale to tell about being hounded by texts and telephone calls, often made by cold calling using old data. The Information Commissioner has a very helpful website https://ico.org.uk which provides much information about the new law, and about how the ICO interprets that law: the latter of course, is useful to know, because it provides a steer as to what behaviour might prompt the ICO to enforcement action, but may not actually represent what the law is, when interpreted and applied by the courts.

The third relates to the contractual documents that must exist to enable a CMC to release the value contained in the personal data that it has. Depending on the business model that is being utilised, this can be achieved by the CMC either advancing a claim on behalf of a client themselves, or referring a client onto a solicitor to make a claim. In the former case, care must be taken to put in place a fair and enforceable fee agreement with the client, often ensuring that it complies with the Damages Based Agreements Regulations 2013 as most arrangements will constitute claims management services, paid for on a contingency basis. The agreement must also not infringe other relevant provisions eg the Unfair Terms in Consumer Contracts Regulations, and usually contain notices of the right to cancel required by other consumer legislation.

In the latter case, when the CMC and a firm of solicitors strike an arrangement for the referral of work, and this is recorded in a contract,  the Solicitors Code of Conduct lays down requirements on how solicitors may accept referrals of clients, what are acceptable fee sharing arrangements and restrictions on contracting with referrers of work, where cold calling or other illegal behaviour has taken place. It should be noted that as the Solicitors Code of Conduct has statutory force, being effectively made under powers contained in the Solicitors Act 1974, contracts formed in breach of its provisions are likely to be illegal and hence unenforceable. In the personal injury sphere, the provisions of LASPO 2012 have to be carefully borne in mind, to ensure that the ban on referral fees in personal injury claims is not infringed.

In summary, there are interesting times ahead in the immediate future for the claims management industry. My instincts tell me, that whenever the rules change in whatever context, it leads to an upsurge in litigation. In this respect, within the space of a year, there will be fundamental changes in data protection legislation and claims management regulation, which could very easily prompt clashes between the regulators and the regulated.

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