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Law for Business

Knowhow - guidance - precedents

27 NOV 2012

Compensation Act, Claims Management and Competition Law

The Ministry of Justice has issued a consultation paper in November 2012 that invites feedback for claims handling by companies that manage compensation payouts in order to adopt a policy from 1 April 2013 that sets out a framework for complaints against companies authorised to provide regulated claims management services in England and Wales under the Competition Act 2006, and those businesses and individuals contemplating making an application for authorisation, see https://consult.justice.gov.uk/digital-communications/claims-management-companies-fees.

The consumer protection agencies have called on the Government to crack down on Claims Management Companies which levy a standard charge of 25% from any compensation payment, plus VAT to consumers who use their services. According to a survey of over 2,000 insurers carried out by Which and MoneySavingExpert.com in 2012, only 49% of respondents were aware that using a CMC would be any more successful than bringing a claim on their own, while two thirds of the people surveyed had received unsolicited phone calls or nuisance text messages from CMCs usually about payment protection insurance (PPI), http://nwpropertyservices.net/media-centre/cc/compliance-news--17-august-2012.php.

The Ministry of Justice (MoJ) has been responsible for directly regulating the activities of businesses providing claims management services since April 2007 under Part 2 of the Compensation Act 2006. The CMR Unit in the Ministry of Justice has revoked 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 in April 2012. 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.

As there are many consumers claiming a refund for mis-sold PPI who expect a ‘cash in hand payment', the MoJ stated that those in this position have to find alternative means to pay the CMC's share of the award. The 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 the regulators have found that these products have been ‘widely mis-sold' to consumers in the past; in many instances they were informed that a policy was optional or because they were not covered by the insured policy they signed, http://www.ppiadviceline.co.uk/blog/category/how-to-claim-ppi-guides/.

It has been reported that the CMC's are causing delays in the resolution of cases involving mis-sold payments protection insurance (PPI) by not taking the well established approach of the Financial Ombudsman Services into account. The FOS which deals with individual customers complaints against financial institutions where parties are unable to reach an agreement. At present it is dealing with 1,500 new disputes daily. While only 5-7 % of all PPI cases reach the FOS, it has found for the consumer in the ratio of 7:10. In evaluating the case the FOS considers whether the information provided by the business was ‘clear, fair and not misleading' and products recommended to customers were appropriate http://www.out-law.com/en/articles/2012/august/claims-management-companies-creating-unnecessary-additional-work-for-ombudsman/.

The Competition Act 2006 came into force to address the growing compensation culture and to ensure that the public received dependable service from claims management companies. The Act created a Claims Management Services Regulator to supervise claims management companies and  disqualify them under section 5. The Regulator can monitor standards of competence and professional conduct; promote practices likely to facilitate competition; ensure that arrangements are made for the protection of users, including complaints provision of information about charges and other services.

This statute was accompanied by the Compensation (Regulated Claims Management Services) Order 2006 that defined the scope of regulation to cover the claims. It defines claims management services as ‘advice or other services in relation to the making of a claim' [the Legal Ombudsman was set up in 2010 and provides a free service that investigates complaints made by members of the public and ‘very small businesses' against the legal profession. It can award compensation up to £30,000. The Legal Services Act which established the scheme, allows it to be extended to claims management services]. The Act makes it illegal for an individual or a corporation to provide claims management services by way of business unless authorised, exempt or otherwise in receipt of a waiver (s 4(1)). The claims management companies have also been forced to compensate for poor service from 2013 and consumers are able to refer their complaints against the (CMCs) to the Legal Ombudsman http://www.lawgazette.co.uk/blogs.news-blogs/referral-fees-ban-sra039s-missionimpossible.

Ban on referral fees

The government intends to convert the claims management companies into Alternative Business Structures (ABS) in the period after April 2013. This will be implemented when the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) comes into effect which will ban referral fees paid by solicitors firms to the Claims Management Companies. The Compensation Act which regulates and authorises the payment of referral fees will no longer be effective in the area of this provision.

This will also invalidate the Legal Services Act 2007 whose main purpose was to increase competition between lawyers and non practitioner who had licenses in claims management and it allowed the CMCs and others to charge a referral fees. The implication of that is that at present the CMC can charge a client whose claim attracts is for an amount of £1,200.00, a £700.00 referral fee. The CMC can simply instruct the solicitor on an agency basis and pay the solicitor £500.00, keeping the balance of £700.00. Thus the CMC receives £700.00 and the solicitor £500.00, for performing the same work in the process of claims processing.

The critics state that the ban on referral fees will be insignificant and not protect competition as has been intended by the Act. This is because the sellers of the service, the Claims Management Companies will simply process the whole case themselves, or carry on selling the work to other ABSs and law firms as there has never been any restriction on payment of referral fees between lawyers. In any event CMCs which are ABSs can instruct the solicitors that they currently sell clients to the legal firms on an agency basis.

The Law Society has opposed the government plan to dismantle the present regime by making the point that the referral is not easy to identify and that it was not easy to define what constitutes ‘the payment is for the referral'. This is based on the view ‘as long as there is no threat to the public interest, there is no way of preventing this arrangement. If the government really wants to cut out spurious and fraudulent claims, this is surely not the way to go about it.'

It also mentions the profits made by CMCs which will not be reversed by notionally banning the referral fees. There are too many companies that make too much money from this system ‘and too many law firms that rely on this marketing for their very existence'. It calculates that there were 2,533 claims management companies in existence by 2011, providing 65% of the personal injury sector's turnover. This business was competitive and brought in £377m every year to the legal profession.

The government will find it difficult to enforce the ban and will cause the companies CMCs and law firms to merge by a process of fusion. The legal profession and business sector are integral and will not suffer from lack of cooperation. The compensation from insurance companies is a large sector of the market in the UK and claims will continue to engender profits.

Zia Akhtar is a member of Grays Inn. He specialises in competition and trusts law. He has written in the Law Society Gazette; Solicitors Journal; European Competition Law Review; Trust Law International, Statute Law Review etc. zedpen@yahoo.co.uk

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