The Financial Conduct Authority (FCA) has launched a crackdown on ‘phoenixing’ involving claims management companies (CMCs) specialising in financial services.
‘Phoenixing’ in this context is when individuals from wound-up financial services firms reappeared at CMCs and charged consumers for seeking compensation from the Financial Services Compensation Scheme (FSCS) for their former firms’ poor conduct.
A consultation issued yesterday said: “Claims management phoenixing is egregious because it takes advantage of consumers who have suffered loss and allows individuals not only to continue carrying on regulated activities after they have conducted themselves poorly, but to benefit materially from their own (or their firm’s) past misconduct.”
FSCS data identified 1,319 claims where phoenixing appeared to have occurred over about six years – there were 117 people had been directors or employees of the financial services firm their CMC was taking action over.
It paid out £22.2m on them and the FCA estimated that consumers would have paid fees of £4.5m to the CMCs.
The consultation sets out proposals to stop CMCs handling compensation claims where they have connections with those claims.
However, at least 18 of the 250 CMCs it regulated to handle financial services claims had either direct or indirect (such as a spouse) connections to former firms whose actions were the subject of compensation claims.
Not all had submitted FSCS claims in relation to connected financial services firms, and the FCA said it had “taken steps to prevent them doing so where possible”.
The FCA did not have figures for those CMCs that simply generate leads or on all indirect connections, and said: “It is likely that the extent of claims management phoenixing is greater than suggested by the figures set out here because we do not have sufficient information to detect all cases of it.”
Under the plans CMCs would be banned from handling claims where they had a “relevant connection” to the claim.
This would occur where an employee or controller of a CMC or any member of its governing body was directly involved in or responsible for managing the financial services activity that was the subject of the claim.
The ban would also apply where a member of the CMC’s governing body was related to a person who was directly involved in or responsible for managing the activity that was the subject of the claim.
CMCs would also be required to notify the FCA of any financial services activity that an employee, controller or member of the company’s governing body had been involved in, or any member of the governing body related to someone responsible for managing financial services activity.
Sheldon Mills, executive director of consumers and competition at the FCA, commented: “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.”
We reported last month that the number of CMCs continues to fall and is now 80% lower than the high point a decade ago.