Better regulation of claims management companies will reduce meritless claims, says expert

Michael Ruck, a financial regulation expert at Pinsent Masons, the law firm behind Out-Law.com, was commenting as the government announced a call for evidence on the effectiveness of the current regulatory regime. Chartered Trading Standard Institutes board chair Carol Brady will lead the review, which is expected to recommend a cap on the fees that CMCs can charge clients for winning financial cases and more powers for the Claims Management Regulator (CMR).

The review would "hopefully positively impact the approach to claims made by customers who have suffered detriment by removing those which are made by CMCs without any merit", Ruck said. "Not only is cold calling likely to be significantly reduced but institutions and firms will be able to focus their resources on considering complaints or claims which may have merit," he said.

As part of the Summer Budget in July, the government said that it would examine how to cap the fees that regulated CMCs can charge to their clients for successful claims against financial firms, in order to ensure that they cannot make excessive profits for very little risk. The government expects that this would also reduce the number of nuisance calls received by consumers in relation to payment protection insurance (PPI) and similar claims, by reducing the incentives for CMCs to collect marketing leads.

CMCs handle claims for compensation on behalf of consumers, but many have been criticised by consumer protection groups for poor practices and not being transparent with regards to fees. Despite numerous regulatory initiatives introduced since 2010, consumers, regulators, banks and insurers remain concerned that some firms are continuing to fuel speculative claims, bombard consumers with unsolicited calls and texts and keep a large proportion of any compensation recovered on behalf of a consumer as a success fee.

The CMR, which is part of the Ministry of Justice (MoJ), has withdrawn over 1,000 CMC licences since 2010, including 300 last year, according to government figures. It issued its first fine against a CMC for making millions of cold calls earlier this year. In recent years the MoJ has increased regulatory fees and fines for cold-calling, prevented firms from offering cash and other incentives to consumers and banned the payment of referral fees for profitable claims between no-win no-fee lawyers, CMCs and others.

Review chair Carol Brady has already begun consulting consumer groups and others about the potential for further regulatory initiatives, and has now begun a public call for evidence on how the claims management market is working. The evidence will be used to assess the powers and resources required for a strengthened regulatory regime. A formal consultation on draft proposals, including a fee cap and ban on upfront fees, will be published later this year, the MoJ said.

"The government is clear – CMCs must be properly regulated," said Harriett Baldwin, economic secretary to the Treasury. "That is why ... we are looking at how to ensure that consumers receive all of the money they are owed by capping the amount claims management companies can charge and cracking down on nuisance calls."