Number of claims management firms halves after FCA clampdown
The number of claims management firms authorised by the UK’s financial watchdog has nearly halved since the beginning of the decade after the regulator “raised the bar” for firms in the sector.
A Freedom of Information request by financial services consultancy Broadstone revealed 483 claims management companies (CMCs) operate in the sector, compared with 942 back in 2019.
The number dropped 24 per cent between 2020 and 2021 alone, when a grace period that was brought in after the watchdog took over regulatory oversight of the industry in 2019 ended.
CMCs were made to submit their full, highly detailed applications for formal authorisation from the Financial Conduct Authority (FCA), which led to numerous operators unable to meet the new standard.
The new regime included the Senior Managers and Certification Regime kicking in fully, meaning directors would become personally, legally, and financially liable for any rule-breaking.
Steep application fees and mandatory annual regulatory levies were also brought in meaning for some small firms, the cost of survival as a regulated entity suddenly outweighed the profit they were bringing in.
Phil Smith, head of redress at Broadstone, said: “The sharp decline in the number of authorised claims management firms since the FCA took over regulation reflects a market that has come under far greater scrutiny and regulatory pressure in recent years.
“Higher standards around governance, conduct and consumer outcomes have undoubtedly raised the bar for firms operating in the sector.”
Claims firms face FCA review
The steady reduction of firms in the sector has continued as the City watchdog put more pressure on the industry.
The FCA launched a new review of the claims management market in May, where it intends to investigate “poor practices” and “aggressive marketing” in the sector.
It has also threatened enforcement action and new laws to impose “stronger compensation mechanisms” against the claims management market, including law firms that cause harm.
The long-running motor finance scandal – where City banks have been put on the hook for compensation over the use of ‘secret’ car deals that left consumers in the dark – has put the spotlight back on the claims market.
The regulator’s chief executive Nikhil Rathi previously warned “all law firms are going to have to consider very carefully what’s in their clients’ best interests” when it came to advising against using the watchdog’s own scheme to claim compensation.
He also cautioned that the FCA would work with the Solicitors Regulation Authority (SRA) to act quickly in response to behaviour not in clients’ best interests.
Last October, CityAM revealed the financial regulator was being accused of a “massive overreach” after sending letters to law firms and claims management companies requesting information on the law firms’ motor finance services.
The letters in August, seen by CityAM, called for copies of contracts, an explanation of the consumer’s journey, and details of how the firm will determine fees.
In the letter, the watchdog didn’t say it was working with the SRA, and instead that it made the SRA aware of its interest in this matter.