Proposals by the Ministry of Justice (MoJ), open for consultation until 3 October, will amend the rules governing CMCs to ensure that fees cannot be taken from consumers until a contract is agreed in writing.
Companies will also have to state that they are regulated by the Claims Management Regulation (CMR) Unit, part of the MoJ, rather than the MoJ itself to prevent regulation being "misconstrued as MoJ endorsement". They will also have to inform their customers if their authorisation is suspended or changed.
The consultation follows the announcement by Justice Minister Jonathan Djangoly earlier this month that CMCs are to be banned from offering cash incentives to individuals who sign up for their services. CMCs are companies which handle claims for compensation on behalf of consumers, for example in relation to personal injury cases or mis-sold payment protection insurance (PPI) claims, in exchange for a fee.
Kevin Rousell, head of claims management regulation at the MoJ, said that the proposals would give consumers time to "be happy and clear about" their arrangements before handing over money to a claims company. The consultation was, he said, the "next step" in the Government's efforts to "drive malpractice out of the industry".
"Earlier this month I said the industry will be subjected to radical changes over the next 12 months with tougher rules put in place," he said. "Time and time again we see examples of consumers who have inadvertently agreed to a contract with a CMC without a written contract in place. We want consumers to be better protected by making the claims of any contract clearer."
Consumer protection watchdogs have called on the Government to crack down on CMCs after research revealed that as many as a quarter of people bringing PPI complaints via a CMC did not realise that they would be charged a fee - usually 25% of any compensation entitlement plus VAT - for something that they could do themselves for free. Only 49% of respondents to the survey of over 2,000 people, carried out by Which? and MoneySavingExpert.com, knew that using a CMC would be no more successful than bringing a claim on their own while two thirds of the people surveyed had received unsolicited phone calls from CMCs about PPI.
The CMR Unit cancelled or suspended the licenses of more than 400 CMCs over the past twelve months, or issued them with a formal warning, according to its annual report published earlier this month. The unit shut down 260 of the 409 poor practicing CMCs it investigated in that period.
The MoJ is also seeking views on whether CMCs should be banned from charging customers a fee where the bank or credit card provider settling a PPI claim uses the money to pay off an existing loan, credit agreement or overdraft. Since many consumers claiming a refund for mis-sold PPI expect a "cash in hand payment", the MoJ said, people in this position have to find alternative means to pay the CMC's share of the award.
PPI is intended to cover repayments due on loans or credit cards for people who cannot afford those repayments as a result of an accident, sickness or death. However regulators have found that these products have been "widely mis-sold" to consumers in the past; in some cases because they were not told that a policy was optional or because they were not covered by the policy they took out. UK banks have had to pay £5.4 billion in refunds and compensation to affected customers since January 2011, according to the Financial Services Authority (FSA).