The Financial Conduct Authority (FCA) – which on April 01 next year will become the regulator of claims management companies (CMCs) established or serving customers in England, Wales, and Scotland – has outlined the changes it wants to see, publishing how it proposes to apply the Senior Managers and Certification Regime (SMCR) to CMCs.
As per the Financial Guidance and Claims Act 2018 (FGCA), regulation of CMCs will be transferred to the FCA from the existing Claims Management Regulator (CMR), which oversees the current regulatory regime for CMCs in England and Wales. Regulation will also be extended to Scotland and includes CMCs dealing with section 75 claims.
Ahead of the FCA taking charge, it released its draft rules and guidance for CMCs relating to the SMCR, saying the proposals aim to reduce misconduct by raising standards of governance, management, and professionalism in the claims management sector.
“There is evidence that some CMCs have poor governance arrangements and do not have competent staff who understand the regulation the CMC is subject to,” said the FCA in a new consultation paper. “For these firms, it is more difficult for them to provide an appropriate service to their customers because the systems and controls required to effectively support this are not in place.”
The watchdog stressed that although the CMR can ban sole traders, holders of key positions are not authorised before they start their role.
“This means that individuals who are not fit and proper to lead a CMC may close down one CMC and move to another, without fulfilling their obligations to customers,” it explained. “If a director does this, e.g. by taking over an existing authorised CMC, it is known as ’phoenixing’. The CMR reported 30 possible examples of phoenixing between 2015 and 2016.
“The SMCR aims to reduce harm to consumers and strengthen the integrity of the claims management market, by creating a system that enables regulators, and encourages firms, to hold individuals to account.”
What the regime seeks to do is encourage staff to take personal responsibility for their actions; improve conduct at all levels; and make sure firms and their workforce clearly understand and can demonstrate who does what – creating what the FCA called a ‘step-change’ in standards relating to individual accountability and governance.
All CMCs will need to apply for re-authorisation after April 01, 2019, while new ones entering the market after this date will also need authorisation from the FCA.
“In addition to firm authorisation, we require some individuals to be approved by us before they start their role,” noted the regulator. “For firms subject to the SMCR, this means they have to apply for anyone performing senior management functions to be approved.
“For firms subject to the Approved Persons Regime (APR), this means they have to apply for anyone performing a controlled function to be approved.”
CMCs and trade bodies representing them, as well as those affected by the sector, may participate in the consultation happening until December 06, 2018. The FCA will publish its feedback, including the final text of the rules proposed in the consultation, in a Policy Statement in the first quarter of next year.
