FCA: Litigation funding under spotlight
The Financial Conduct Authority’s (FCA) review of the claims management market will focus on financial services and products, and housing disrepair, it has announced.
The review – which encompasses both claims management companies (CMCs) regulated by the FCA and law firms, largely regulated by the Solicitors Regulation Authority – will look at business structures, litigation funding and “regulatory arbitrage”, among other issues.
The review was announced earlier this month and this week the FCA set out the terms of reference. An interim report is likely in December and any final recommendations have to be made by next April.
The regulator acknowledged that consumers may find claims management services useful “where processes are perceived to be complex, consumers face barriers to engagement, or confidence, time or capability is limited”.
Both the FCA and SRA have worked to curb poor practices, it said, but “despite these interventions, our supervisory work continues to identify behaviours that raise significant concerns about consumer outcomes and how competition operates in these markets”.
These included “aggressive marketing leading to nuisance complaints”, misleading or unclear advertising, “weak controls over customer acquisition”, the progression of “high volumes of speculative or weak claims”, persistent weaknesses in consumer understanding around fees, likelihood of success and alternative routes to redress, and a lack of disclosure about potential conflicts of interest.
These behaviours were most common during periods of large-scale claims activity, such as with payment protection insurance complaints, which “may reflect incentives to pursue revenue aggressively and compete on volume rather than on quality or consumer outcomes”.
Though there may be learnings on other areas, such as personal injury, the FCA said it would focus on financial services and products claims, and housing disrepair claims.
“We have chosen these two focus areas as they have potentially different business models and associated pricing incentives, providing a broader perspective across the claims management services market.
“They are also areas where our supervisory work has found behaviours that raise concerns.”
It pledged to work closely with the SRA, with data from 2024 showing that 75% of leads from FCA-regulated lead generators were ultimately delivered to law firms.
There are currently 395 firms with FCA authorisation to engage in claims management activities – down from around 900 when it took over regulation in 2019 – of which 207 are lead generators. Some 137 CMCs pursue financial claims.
Most CMCs are small, with limited staff numbers and modest turnover from regulated claims activity – a median of around £94,000 – according to FCA data; only a small minority report income above £1m.
The regulator noted how some firms provided multiple services, including litigation. “We want to see how activities related to claims management fit into the business model, drive overall financial performance and interact with other products and services…
“We also want to understand the impact of AI and other recent innovations on firms’ business models and whether any efficiency benefits are passed on to consumers. For example, the use of AI tools may reduce the time and costs firms spend dealing with claims.”
Funding of claims firms will be scrutinised: “For example, firms can take on external debt financing and face interest costs. Others can be funded by private equity or private credit, with a focus on generating returns for their shareholders, or by third-party litigation funding, including portfolio funding.
“We will explore how different funding structures influence firms’ operational and growth strategies, including the extent of offshore funding activity.”
The review will also consider the “fragmented regulatory landscape”, spanning the FCA, SRA, Bar Standards Board, CILEx Regulation and Law Society of Scotland.
“Evidence from our supervisory work suggests regulatory obligations can differ for firms undertaking economically similar activities depending on which regulator has primary oversight.
“As part of our work, we will explore whether this fragmentation may create scope for regulatory arbitrage and/or uneven compliance costs.
“We will also look at whether harmful practices could be arising at the edges of regulatory regimes, given the dispersion of responsibility for advertising, data use, pricing and conduct across different regulators, and if so, whether these have any impact on competition and consumer outcomes.”
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