8 October 2018
From April 1 2019, regulation of claims management companies (CMCs) will pass from the Claims Management Regulator at the Ministry of Justice (MoJ) to the Financial Conduct Authority (FCA). The existing MoJ Conduct of Authorised Persons Rules and Complaints Handling Rules occupy just 26 pages, whereas a swift glance at the size of the FCA’s current rulebook, or Handbook, illustrates just how significant this change of regulator will be for claims companies.
Amongst the new rules the FCA proposes to introduce, are obligations relating to pre-contract disclosure of fees and services and recording of client phone calls.
A number of CMCs have been disciplined by the MoJ and/or the Information Commissioner’s Office for failing to ensure marketing leads are obtained correctly. The FCA looks certain to monitor this closely come April.
CMC’s applying for FCA authorisation are in common with the consumer credit firms who went before them and will need to have a robust business plan, supported by systems & controls, that for many will appear onerous and a distraction from their day to day operation. Not only will these need to be physically evident, but they will also need to be seen to be an integral part of how the firm operates, a firm’s culture is very much part of the FCA’s assessment.
However, one of the main changes that claims companies will need to get used to is the idea of individual accountability. The FCA has emphasised that, from December 2019, CMC management and staff will be subject to its Senior Managers & Certification Regime (SM&CR) – an initiative that allows directors and senior managers to be held accountable for compliance failings within their areas of responsibility, and for them to be fined or banned from working in financial services by the FCA.
Under the Regime, Senior Managers will need to be approved by the FCA before they commence their role. All CMCs must have at least one Senior Manager, and those with an annual turnover of £1 million or above will also need to appoint an additional Senior Manager to the Compliance Oversight Function. At the application stage, all Senior Managers will be required to have a written Statement of Responsibilities, clearly setting out their duties and what they are responsible for.
Once approved, the company becomes responsible for carrying out an annual assessment of whether their Senior Managers remain ‘fit and proper’ to continue in senior positions.
The Certification Regime, the second component of the SM&CR, applies to any employee whose job role could lead to significant harm to the firm or its customers, such as employees with management and supervisory responsibilities, or the individual responsible for safeguarding client money. These individuals will not need to be authorised by the FCA, but the CMC must carry out their own ‘fit and proper’ assessment of these individuals when they are recruited, and on an annual basis thereafter.
The consultation proposals make it clear that a ‘fit and proper’ assessment should include:
- An assessment of the individual’s: honesty, integrity and reputation; competence and capability; and financial soundness
- Regulatory references from previous employers
- For Senior Managers, a criminal record check
The Regime includes a series of Conduct Rules that all employees will need to abide by.
The switch of the regulator will also see CMCs in Scotland subject to formal regulation for the first time.
Regulatory reporting and Financial Ombudsman Service scrutiny of their complaints are other key changes for CMCs to get used to from April.
Any CMC in doubt as to whether FCA regulation will really increase their regulatory burden should ask any consumer credit or debt management firm how their compliance obligations have increased since the FCA took over from the Office of Fair Trading as consumer credit regulator. The FCA authorisation process isn’t to be taken for granted and CMCs will need to devote time and resource to their application for authorisation if they wish this to be as smooth as possible.