Claims management companies (CMCs) are still producing “misleading, unclear and unfair advertising”, the Financial Conduct Authority (FCA) has said.
The regulator also accused some CMCs of using FCA authorisation to “legitimise” unregulated services.
In a letter to CMCs earlier this month, the FCA said consumers, particularly vulnerable ones, could be misled by “poor-quality promotions”, often produced “as a result of poor-quality internal processes and sign-off procedures”.
There were examples, in breach of its rules, of “poor or no disclosure” that the company was a CMC, about the fees and how to contact the Financial Ombudsman Service (FOS) to make a complaint.
The FCA said CMCs must make clear to consumers whether products were regulated or not, to ensure that consumers were not “harmed by any non-regulated services” they provide.
“The way in which regulated firms carry on unregulated activities can affect our overall view of the fitness and propriety of individuals and firms, and we will act where necessary.”
A further problem was “inappropriate sourcing of customers”, where CMCs failed to make checks before buying customer leads or ensure they had been “sourced lawfully from a firm with the correct FCA permissions”.
The FCA said: “This risk is often driven by poor-quality systems and controls, inappropriate remuneration structures, poor-quality governance, and a lack of oversight within CMCs, which can lead to bad outcomes for consumers.
“It is important CMCs ensure customer data is not being misused so customers do not receive unwanted contact from CMCs.”
Other weaknesses highlighted by the FCA were failing to “investigate the existence and merits of each element of a potential claim” and failing to limit themselves to representations which “substantiate the basis of the claim”.
Some CMCs had a “poor attitude to regulatory obligations” and did not take a proactive approach or deal with the FCA in an “open and co-operative” way.
Others did not submit “good-quality returns on time” or failed to “submit on time or at all”. There were further examples of “poor complaint handling and an inability to identify vulnerable customers”.
Since it took over the regulation of CMCs in April 2019, the FCA said 30% had left the industry because they were “unable to meet our standards” during the re-authorisation process.
It has imposed financial promotion banning orders and other restrictions on over 60 firms. Meanwhile, there had been a “significant reduction” in complaints about CMCs.
FOS said last summer that the number of complaints it received about CMCs had also fallen. In the year to 31 March 2022, there were 703 complaints, compared to over 1,100 in the previous 12 months.
A tougher version of the FCA’s ban on ‘phoenixing’ by financial services CMCs came into force in July 2022.
‘Phoenixing’ happens when individuals from wound-up financial services firms reappear at CMCs and charge consumers for seeking compensation for their former firms’ poor conduct.
The FCA used the letter to stress that its new consumer duty, coming into force on 31 July this year, would create a “higher standard of care that firms should provide to consumers in retail financial markets”.
It would “require firms to focus on supporting their customers to make good financial decisions (including those in vulnerable circumstances)”, avoid causing foreseeable harm and check whether consumers were getting good outcomes.
“A firm will, for example, not be acting in accordance with the consumer duty where it seeks to exploit customers’ lack of knowledge, understanding or behavioural biases. We have seen examples of exploitation and misleading information.”
Turning to its strategy for the next three years, the regulator said it would carry out “proactive work” to identify CMCs conducting both regulated and unregulated services and “use our powers to remove them”, minimising the potential for unregulated businesses to benefit from the ‘halo’ effect of FCA authorisation.
Other priorities would be ensuring there were “robust systems and controls” on consumer leads and data collection and that service standards were maintained in investigating claims before pursuing them.