Regulation of claims management companies has undergone some change in recent years, since their emergence in the media following the PPI scandal. The most recent change is implementation of a fees cap which has been under development by the Financial Conduct Authority since it began regulating CMCs in 2019. The Financial Guidance and Claims Act 2018 bestowed the responsibility on the FCA to regulate CMCs and ensure their position in the financial market remains viable. In recent years, CMCs have earned a reputation amongst consumers for being excessively costly and profit orientated, poor value for money and, at times, unreliable. To bring the most benefit to the market, the FCA has adopted the opinion that CMCs should provide reasonable charges adequately reflecting the value of the services they provide. This negative reputation, as well as customer shopping trends, has encouraged the FCA to consult on and implement an appropriate fees cap in order to prioritise the customer needs and encourage better practice across CMCs.
In order to prioritise their own objectives, the FCA undertook to consult institutions in 2021 about a fees cap based on the amount of redress awarded to successful customers. The objective was to address harm and excessive fees in the claims management market for non-PPI financial services claims, as PPI claims are subject to a separate fees cap. The FCA’s motivation is to protect customers of CMCs being charged excessively, in particular through the use of hidden costs, which may hinder the ultimate goal of redress, to restore the customer to the position they were in before the harm occurred. Customers due to receive high amounts of redress are at risk of experiencing the harmful effects of excessive charging most prevalently. Because CMCs charge fees based on a percentage of the amount of redress awarded, those awarded higher redress will have proportionately higher fees, which the FCA views as a threat to the objective of redress, particularly where the cost of the service is not reflected in its quality. Investigation by the FCA indicated a general reluctance from customers to shop around and research not only alternative CMCs, which may provide better value, but alternative options such as directly approaching service providers or using the Financial Ombudsman service if applicable. In addition to this, the FCA encountered a poor understanding of the claims process from CMC users as well as overvaluing the services provided by CMCs, leading to undervaluing the redress they might receive and the prospective fees, reflecting a wider lack of engagement between customers and the CMC market and opportunity for excessive fees to be charged.
The 1st March 2022 marked the launch of the CMC fees cap. It is estimated that this fees cap will save customers £9.6 million each year. The cap will apply to claims where a consumer is awarded monetary redress from a financial services firm either directly from the firm, via the Financial Services Ombudsman or from the Financial Services Compensation Scheme. The cap will apply to all new contracts and will only apply to existing contracts where the contract is varied after the rules come into force (1st March 2022) to increase the fee; the fee is added to the contract after the rules come into force; the fee relates to a new claim that is added after the rules come into force; or the customer’s authorisation or instruction for the CMC to act occurs after the rules come into force. The maximum amounts which can be claimed by CMCs are as follows:
| Consumer Redress Obtained | Max % Rate of Charge | Max Total Fee |
| £1 – £1,499 | 30% | £420 |
| £1,500 – £9,999 | 28% | £2,500 |
| £10,000 – £24,999 | 25% | £5,000 |
| £25,000 – £49,999 | 20% | £7,500 |
| £50,000 or more | 15% | £10,000 |
The attitude of the FCA towards the fees cap is that these are the maximum amounts which can be charged, they should not form the baseline or become the normal rate charged. The FCA still seeks to encourage diversity and competition within each individual charge band. In addition to the fees cap, the FCA has also imposed additional disclosure requirements on CMCs to ensure the customer is able to make an informed decision based on complete information, without any additional hidden costs appearing. Key information such as how fees are to be calculated and other free routes of redress which may be open to the customer must also be disclosed in order to help the customer make an informed decision about the suitability of a particular CMC or whether alternative options would be more suitable.
Written by Charlotte Read