The Financial Conduct Authority (FCA) has introduced proposals to stop the practice of ‘claims management phoenixing’, by banning Claims Management Companies (CMCs) from managing Financial Services Compensation Scheme (FSCS) claims where they have a relevant connection to the claim.
Claims management phoenixing occurs when individuals from financial services firms go out of business, 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 has taken action where it has been possible to do so to prevent this practice, including where the managing director of a financial advice firm provided inadequate service to consumers. After the managing director was barred from acting as a company director, his wife set up a CMC.
The CMC represented customers claiming more than £5m from the FSCS in claims against the husband’s former financial advice firm. The FCA was able to refuse the authorisation of the CMC as the firm did not meet standards.
While the FCA was able to stop claims management phoenixing by refusing authorisation in this case, the new rules being proposed will put a stop to claims management phoenixing across the market.
Sheldon Mills, executive director of consumers and competition as 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.”
Keith Richards, CEO of the Personal Finance Society, added: “Last year I received 40 complaints about the conduct of claims management companies in less than a week when we highlighted our concerns and shared this evidence with the regulator.
“The FCA is right to be concerned about individuals connected with a wound-up financial services firm reappearing in connection with a claims management company.
“Individuals should not be able to financially benefit from their own past conduct, which caused consumers to be out of pocket.
“It is appalling that of the 250 claims management companies the FCA regulates with permission to manage financial services claims, at least 18 are linked with businesses that could allow individuals to benefit from their past firms’ poor conduct.
“The cost of poor practices at a minority of claims management companies impacts public trust and pushes up the cost of financial advice. Phoenixing must stop.
“I respect that professional CMCs have a key role to play but poor and unethical practice needs stamping out.”
Claims management phoenixing generally requires the existence of a compensation scheme which will pay claims relating to the activities of financial services firms that have wound up and potentially owe compensation to consumers.
By stopping CMCs from managing FSCS claims with which they have a relevant connection, the FCA will ensure CMCs are not seeking to profit from past misconduct of individuals connected with the CMC.
The consultation is open for comment until 21 June 2021.
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. 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.
