The FCA has published proposals today to halt the growing practice of claims management 'phoenixing.’
A number of failed firms have set up or been connected with new Claims Management Companies (CMCs) which are then used to try and claim millions in compensation from the Financial Services Compensation Scheme (FSCS).
In future, the FCA will ban CMC firms which have a "relevant connection" with the claim from seeking compensation from the FSCS.
Claims management 'phoenixing' occurs when financial services firms go bust but later reappear in connection with CMCs and charge consumers for seeking compensation against their former firm’s poor conduct by bringing claims to the FSCS.
The FCA says in one case the managing director of a financial advice firm provided inadequate service to consumers but after he was barred from acting as a company director, his wife set up a CMC. The CMC then represented customers trying to claim more than £5m from the FSCS in claims against the husband’s former financial advice firm. The FCA refused the authorisation of the CMC as the firm did not meet standards.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Consumers should be able to choose to use a CMC to help them claim compensation from the FSCS. But paying someone to provide help who is connected with the firm that caused the consumer's loss is wrong, particularly where the firm had a responsibility before winding up to help its customers to obtain compensation.
“Our proposals are designed to put an end to this practice and to increase consumer trust and confidence in financial services firms, CMCs and the redress system.”
By stopping CMCs from managing FSCS claims with which they have a relevant connection, the FCA says it will ensure CMCs are not seeking to profit from past misconduct of individuals connected with the CMC.
The FCA says the plans are designed to ensure that firms have customers’ best interests at heart and are not incentivised to treat customers poorly and that when things go wrong, will take responsibility and put things right for their customers.
The consultation is open for comment until 21 June.
The FCA became responsible for the regulation of claims management companies in April 2019, following a Government review. Since then, the FCA has dealt with 979 applications for authorisation, with around 20% of CMCs leaving the sector. Some 656 firms have been approved, while 24 have been refused or rejected.
In addition, 168 applications have been withdrawn with around 75% of these withdrawals occurring following FCA scrutiny, which showed the firms were unlikely to be ready, willing and organised to be authorised.