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Compensation (Claims Management Services) Regulations 2006

Volume 687: debated on Tuesday 5 December 2006

rose to move, That the Grand Committee do report to the House that it has considered the Compensation (Claims Management Services) Regulations 2006. First Report from the Statutory Instruments Committee and 2nd Report from the Merits Committee.

The noble Lord said: The statutory instruments, which were debated in the other place this morning, underpin the legislative framework needed to regulate the activities of claim management companies, which is contained in Part 2 of the Compensation Act 2006. The Compensation Act received Royal Assent on 25 July. Part 2 provides a detailed framework for the regulation of claims management services. Claims farmers have remained unregulated for too long. Some encourage frivolous claims through aggressive marketing techniques, mislead consumers about the options for funding their claim, and provide poor-quality advice and service. Consumers have been suffering and there is an urgent need to tackle these abuses and raise standards across the industry.

The delivery of the Act was a major achievement. Work has progressed at a remarkable pace and the regulatory framework is now being implemented. Under the current arrangements, the Secretary of State will be the regulator. Mark Boleat has been appointed as the DCA’s head of regulation and Staffordshire County Council trading standards unit has been contracted to carry out the DCA’s monitoring and compliance function. The unit will process applications for authorisation, monitor compliance with the rules and support the DCA’s regulatory efforts by seeking out any business that attempts to evade regulation.

Regulation by the Secretary of State is intended as an interim measure. The Legal Services Bill, which was introduced on 23 November, will establish a new framework for legal services regulation, including a legal services board and an office of legal complaints. It is intended that claims management regulation will become integrated into the new structure.

When the Compensation Act was debated, Ministers made it clear that the Government wished to see a major change in the quality of service and an improvement in the behaviour of claims management businesses to help improve safeguards for consumers. The orders and regulations which are before the Committee today will help achieve this aim. A wide-ranging consultation exercise on the orders and regulations took place. The Government’s response to the consultation was published on 30 November.

The regulations are made under the powers in Section 8(8) of, and the Schedule to, the Act. These set out the requirements that service providers should meet to obtain authorisation and other details relating to the operation of regulatory mechanisms. The regulations are necessarily detailed and technical. I will outline the key provisions relating to the authorisation process, rules, complaint schemes and enforcement.

The regulations set out a range of matters to which the regulator may have regard in making a decision about an applicant’s competence and suitability. The regulator can impose conditions on an authorisation. Some conditions are imposed directly by the regulations. Examples include the requirement that the authorised person complies with the rules made by the regulator, and that if the person accepts referral of potential clients from an unauthorised person, the former takes reasonable steps to ensure that the unauthorised person complies with the rules.

The application form for authorisation will require details about directors, partners and anyone else capable of having a significant influence on the policy or management of the business; regulatory action against both the business and the individuals involved and all claims management businesses in which those involved with an applicant have been involved in the past five years; and self-certification that the business complies with the regulator’s rules of conduct. The regulations will ensure that only those who meet the criteria for authorisation and agree to comply with the rules are authorised.

Applicants will have the right of appeal to the Claims Management Services Tribunal established by the Act against a decision of the regulator concerning an application, and an appeal from the tribunal to the Court of Appeal. Tribunal rules will be made in February 2007 when the relevant provisions of the Act are brought into force.

Under the Act, in paragraph 8 of the schedule, the regulator must prescribe rules for the professional conduct of authorised persons. The regulations set out the procedures for doing so. The rules clarify and expand on the requirements that all authorised persons must comply with. The rules focus on a few key points: prohibition of high-pressure selling including cold calling in person; transparent contracts and disclosure of referral fees; complaints procedure; and clients’ accounts if clients’ money is held. Key stakeholders and claims management businesses were consulted on the rules, which have now been approved by my noble and learned friend the Secretary of State.

Consumers also need protection when things go wrong. The regulations create powers for the regulator to require an authorised person to have professional indemnity insurance. The rules require authorised persons to have a clear mechanism for dealing with complaints. The regulator can review the handling by an authorised person of a complaint and can give directions in regard to complaints handling and related matters. When an authorised person has failed to comply with the rules, the regulations provide for a limited power to require redress. This is a significant part of the regulator’s power to protect consumers from unsatisfactory work or other improper practices by those providing claims management services. The regulator may direct the repayment of unjustified fees—that is, a fee that should not have been charged. It cannot order a cash payment for redress; that will follow when complaints handling comes within the Office of Legal Complaints proposed in the Legal Services Bill.

It is imperative that regulation can be enforced effectively. The regulations therefore create powers for the regulator to investigate breaches of the rules, to require the provision of documents, and to enter and search premises and take copies of documents. The regulator’s investigatory powers are exercisable in relation to an allegation or a suspicion that a person is providing a regulated claims management service without being an authorised or exempted person or having the benefit of a waiver of the obligation to be authorised or that an authorised person is acting in contravention of the rules.

The regulator must first seek information from the person or authorised person by serving a notice requiring the provision of specified information or documents. If the information or documents are not provided, or they reveal further grounds for investigation, the regulator may apply to a judge or justice of the peace for a search warrant. The regulator will also be able to impose sanctions, including suspension, or, ultimately, cancellation of authorisation. There is a right of appeal to the Claims Management Services Tribunal against a suspension or cancellation, and from the tribunal to the Court of Appeal.

I am sure that noble Lords will agree on the importance of regulating claims management services and putting in place safeguards for consumers. Regulating claims management services is a necessary step for protecting consumers. The arrangements under the regulations I have briefly outlined will help to achieve that aim.

The Compensation (Specification of Benefits) Order 2006 is made under Section 4(5) of the Act and will bring claims management services provided in relation to industrial injuries disablement benefits within the regulatory net. These are compensatory benefits and include reduced earnings allowance, retirement allowance and industrial death benefit. This order will ensure that consumers seeking such benefits and engaging the services of a claims management business will be protected by regulation.

I shall speak to the Compensation (Regulated Claims Management Services) Order 2006 and shall refer to it as the scope order. It is made under the power in Section 4(2)(e) of the Act. The definition of claims management services in the Act is wide to ensure that there are no loopholes. Such services are regulated only if they are prescribed by order. The scope order sets out the range of activities that are to be regulated as claims management services and in relation to what kind of claim. It will cover, for example, advertising for or otherwise seeking out persons who may have a claim, advising persons on the merits of a potential claim, referring details of such claims and investigating the circumstances or merits of a claim.

The types of claim for compensation in relation to which the above activities will be regulated initially include claims relating to personal injury, criminal injuries compensation, employment, housing disrepair, claims in relation to financial products or services, including the emerging area of excessive bank charges, and, finally, industrial injuries disablement benefits.

We are targeting these areas because we believe that they are where there is the greatest risk of firms engaging in claims handling practices that are against the public interest and lead to consumer detriment. Any person providing a regulated claims management service in those areas will need to be authorised, exempted by order or have the benefit of a waiver. The Compensation (Exemptions) Order 2006 was laid on 28 November and specifies those who will be exempted from the obligation of authorisation. I look forward to a full debate on that order in the new year.

Defining sectors to be regulated by order provides flexibility to allow new areas to be brought within the scope of regulation when problems surface and for areas to be removed from the scope if no longer in need of regulation. I should make clear that services provided to a defendant are outside the intended scope and are not regarded as being within the definition of claims management services in the Act.

I commend the orders and regulations to the Committee.

Moved, That the Grand Committee do report to the House that it has considered the Compensation (Claims Management Services) Regulations 2006. First Report from the Statutory Instruments Committee and 2nd Report from the Merits Committee.—(Lord Evans of Temple Guiting.)

We have some brief observations on two of the three orders to which the Minister has spoken, the Compensation (Claims Management Services) Regulations 2006 and the Compensation (Regulated Claims Management Services) Order 2006. We wish to raise two matters on the Compensation (Claims Management Services) Regulations 2006: overlapping regulatory systems and authorisation.

As far as overlapping regulation is concerned, as I understand it, the claims management services regulations apply where there is an element of uninsured risk. The most common example is where a customer has a no-fault insurance motor claim but has sustained injuries and does not have a before-the-event legal expenses policy. Many brokers, including insurance brokers, have been fully regulated by the Financial Services Authority since mid-2005; yet the new claims management services regulations will apply to all organisations that offer a claims management service, including those already regulated. Rather than simply applying the new regulations to organisations currently outside the existing regulatory regime, the insurance brokers, for example, which are offering claims management services, will be regulated twice over.

We believe that all aspects of claims management services provided by brokers should be exempt. The current draft of the new regulations provides for a limited level of exemption, which in our view is far too narrow. It is surprising that the Government have not listened to those who have raised this point, because their approach under the order goes against the whole risk-based approach that they now tell us informs all their regulatory activity. The brokers to which I have referred now face a situation where two separate bodies are involved in regulating intermediary claims activity. This cannot be in the best interests of either the efficient running of the businesses or their customers.

On authorisation, Regulation 12(5)(c) states that a business must take responsibility for those who introduce business to them, but that the individuals—the business introducing individuals—do not require authorisation. Is that the right approach? It is the activities of those who introduce business that have caused most of the damage to the sector’s reputation; that is, the damage that the Government have aimed to tackle through the Compensation Act. The unregulated behaviour of speculative canvassing has misled consumers and generated thousands of spurious claims in the past. This needs to be addressed at the source rather than policed ineffectively by proxy. Many of these individuals are freelance and not tied agents.

I do not think that it can be said against me that a requirement for authorisation is over-regulation. Without a requirement for all individuals and businesses involved in the claims process to be authorised in their own right, the unregulated market in claims introductions will continue and the Government will have failed in their aim to regulate out bad practitioners. Why is a requirement for individuals to seek authorisation impractical? How would a system such as the one proposed by the Government be overseen by the regulator? How can the regulator be confident that it will generate the results that the Government seek? What will the requirement be for businesses to ensure compliance in those from whom they obtain referrals—people who are not in any way authorised at all? All those points seem to be germane to the issue.

The Minister will be pleased to hear that I turn now, more briefly, to the Compensation (Regulated Claims Management Services) Order, on which I wish simply to raise one point. Paragraph (3)(e), states that claims management activities include, subject to paragraph (4), referring details of a claim or claimant or a course of action or potential claimant to another person, including a person having the right to conduct litigation. Paragraph (4) makes it clear that,

“the service of referring a claim’s or a claimant’s details to another person is not a regulated claims management service if it is not undertaken for or in expectation of a fee, gain or reward”.

The Government will allow a limited number of referrals for a fee if they are incidental to the main business of an organisation. An illustration of this might be a vehicle repair firm being paid by solicitors to refer customers who have been in road traffic accidents to those solicitors. In our submission, the Secretary of State as regulator should ensure that all persons carrying out any activity described in one of the categories that I have set out in paragraph (3) are properly regulated. How will a judgment on referrals that are incidental be made, whether in terms of numbers per month or the scale of the fee paid? To allow up to 100 claims per year for each body shop across the country, for example, would permit a very substantial number of unregulated claims generating significant income outside the regulations.

If a garage or body shop is to be able to pass on referrals to solicitors for a fee, outside the regulatory system, that would undermine the whole principle of consumer protection enshrined in the Act. Body shops are often the first port of call for consumers following road accidents. Opportunities for disreputable practice in this market need to be addressed. It is not right that body shops should be free to refer claims for financial incentives while avoiding regulation to which others are subject. There is no justification whatever for incidental referrals for a fee, reward or gain to fall outside the scope of authorisation as regulated activities. Can the Minister guarantee that garages and body shops that pass on referrals for a fee, reward or gain will be covered by regulation?

We on the Liberal Democrat Benches give a broad welcome to the regulations. They provide for additional consumer protection in an area that has long been the subject of abuse. Some years ago, a Granada Television programme that conducted a sting operation on doctors who were providing bogus medical reports to a claims farming organisation showed up an anomaly. The doctors were severely disciplined by the General Medical Council, but the claims farming agency was free from discipline and regulation. I hope that the orders will remedy that situation and provide increased consumer protection.

In relation to two points made by the noble Lord, Lord Kingsland, we support the dual approach to insurance brokers, because we are talking in these regulations about consumer-accessible structures, much more so than the rather more strategic exercise carried out by the Financial Services Authority. It is extremely important that consumers who feel aggrieved and may well have a justifiable complaint can go to a regulator who is readily accessible to them in a simple way. So far as the regulation of those who refer the claim is concerned, we could go on regulating and regulating and regulating backwards, but surely the point of the exercise is to regulate those who process the claim on behalf of the consumer.

The complexity of all these regulations tends to justify the observation of an old-fashioned lawyer such as myself, who used to appear in many personal injury actions, that probably the best way to process any kind of claim, whether for personal injury, compensation for damage to a motor car, criminal injuries or anything similar, is to find a solicitor who is prepared to do the job for you, even on a conditional fee arrangement—and do it in that way. It is self-evident that the simplest form of regulation is one-tier—and that is the case in respect of solicitors. It is currently being changed, but there is a reasonable expectation that it will work.

In relation to solicitors, a compensation scheme does not exist at this stage in the structures set out under these regulations. I hope that the Minister can confirm that the Government intend that there should be at least the kind of compensation scheme available to people who suffer damage at the hands of solicitors. In my professional capacity, I have handled a few cases in which solicitors had acted either criminally or negligently, so I can tell the Committee that in many cases compensation is provided at a reasonably early stage. I recall one case in my last days as a Member of another place where substantial compensation was provided when there had been dishonesty in the conduct of some conveyancing several years earlier.

I would like to raise a few other points. Under one of the regulations, it is countenanced that fees will be payable and regulation available when people make claims for statutory benefits to which they are entitled as of right and as a matter of law. Certainly it is right that there should be regulation if people are rewarded for making such claims on a consumer’s behalf. Would the Minister clarify the position of voluntary agencies such as citizens advice bureaux, because I have not been able to find the answer in my, albeit short, researches into these matters? If they carry out work of this kind, will they be subject to regulation and, if so, can that be justified as an extra tier of management for an already hard-pressed voluntary sector, bearing in mind that CABs will often advise people to go elsewhere if better services are available? However, sometimes it is difficult to find alternatives, particularly in rural areas.

We hope that fee levels can be regulated so that, when statutory benefits are being claimed, it will not be possible for a large percentage of the return to be creamed off by the referral agency. Criminal Injuries Compensation Authority claims can be large, but it does not provide significant compensation for the cost of obtaining the compensation itself. We hope that the Minister will confirm that in such claims, which are routinely handled by solicitors and others, it is intended that the fee levels should take into account the statutory entitlement to the money being obtained and that that should be reflected at a low fee level.

The Minister said that it was intended that persons providing a regulated claims management service must have professional indemnity insurance in due course, but we regret that it is not being introduced immediately. If it is to be introduced only in time to come, there will be a difference between the use of a solicitor and the use of a claims management service, to the detriment of the consumer.

Finally, we hope that the Secretary of State will be regulator for only a short period, albeit with a structure beneath him. Regulation of claims of this kind may involve substantial casework. The sooner it becomes a free-standing, independent body recognised as having the powers of other independent professional regulation bodies, the better it will be.

I am most grateful to the noble Lords, Lord Kingsland and Lord Carlile of Berriew, for their consideration and questions on these three orders. I shall attempt to answer their points. First, the noble Lord, Lord Kingsland, asked about overlapping regulations, and why insurance brokers should be regulated again. When insurance brokers are providing a service regulated for the purposes of the Financial Services and Markets Act 2000, they will be exempt. However, providing services for a claim concerning an uninsured loss is not a regulated activity under the 2000 Act. Insurance brokers will therefore require authorisation.

I could not agree more that the same activity should not be regulated twice. However, that does not mean that in some cases a particular business will not need to be regulated by more than one regulator for different activities. We are working closely with the Financial Services Authority to ensure that the boundary issues that the noble Lord, Lord Kingsland, mentioned are appropriately dealt with.

The noble Lord also commented on introducers under Regulation 12(5)(c). The regulations will apply in limited circumstances, as set out in Article 12 of the exemption order. We will have an opportunity for a full debate on that early in the new year. A number of introducers are exempt. Many businesses refer a small number of cases either to solicitors or claims management businesses. It would be disproportionate for such businesses to be individually authorised. However, it is important that all businesses comply with the rules of conduct. The exempt introducer status has been introduced to deal with this situation.

The noble Lord, Lord Carlile of Berriew, asks why the Government do not insist on professional indemnity insurance at the outset. It was clear from responses to a consultation exercise during the summer that, although there is general support for authorised persons to have professional indemnity insurance cover, there are concerns about some businesses’ difficulty in obtaining cover at a reasonable cost in such a short timeframe. The Government intend to require authorised persons to have professional indemnity insurance, but want to ensure that the requirement is appropriately introduced and that there is sufficient market capacity to provide the relevant insurance. It has therefore been decided not to introduce a blanket requirement at the outset; we instead favour a phased approach. We are undertaking more detailed work on this to establish the exact nature and level of the insurance requirement, and how best it could be phased in during 2007-08.

The noble Lord, Lord Carlile, also asks about the citizens advice bureaux. I confirm that not-for-profit and charitable organisations providing claims advice will be exempt. Again, this will be debated in the new year with the exemption order.

The noble Lord also asks me to confirm that fees for criminal injuries and benefits claims will be prescribed. It is not intended that the regulator would prescribe or regulate fees which authorised persons may charge. However, authorised businesses will be required to operate transparently, including providing full information to consumers about the various charges and commissions paid when cases, insurance and loans are arranged in relation to consumers’ claims. Authorised persons must always act with honesty and integrity. This is a key principle of the conduct rules.

At the point of authorisation, the regulator will consider the applicant’s practice or proposed practice in relation to the provision of information about fees. There will be firm rules of conduct. If companies break these rules of conduct, the regulator will take action, which can include suspension or cancellation of authorisation.

The noble Lord, Lord Carlile, asked for confirmation of a compensation scheme in respect of solicitors. A compensation scheme is already available to persons making complaints about solicitors. This regulation is not intended to apply to solicitors, as they are regulated by the Law Society.

I think that the Minister misunderstood my point and I am sure that it is my fault. I used the existence of the compensation scheme against solicitors as a justification for a similar scheme against people who come within the regulations. My question was whether it is intended that, in early course, a compensation fund should be established for clients of this group of professionals, just as there is a compensation scheme for clients of solicitors. I am afraid that that is what comes of reading someone else’s note.

The noble Lord, Lord Carlile, will be delighted to hear that his question is answered in the next paragraph of my speaking notes. We have a power under the Compensation Act to set up a compensation scheme for claims and regulation. However, as we made clear during the passage of the Bill, it would not be possible to set this up at the outset. The Legal Services Bill regime will ensure adequate compensation arrangements for all regulated areas.

On Question, Motion agreed to.