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Legal Services Act 2007 (Claims Management Complaints) (Fees) (Amendment) Regulations 2017

Volume 777: debated on Tuesday 20 December 2016

Motion to Approve

Moved by

My Lords, the Legal Services Act 2007 (Claims Management Complaints) (Fees) Regulations 2014 enable the Lord Chancellor to charge fees to regulated claims management companies to recoup the costs of the Legal Ombudsman’s work in handling complaints from consumers about claims management companies. It is right that the costs of handling such complaints fall on the claims management services sector and not on the taxpayer.

The draft regulations before us amend the level of fees set out in the existing 2014 fees regulations for the financial year beginning 1 April 2017 and for subsequent years. Revising the level of fees will ensure that the Lord Chancellor can accurately recover the costs of the Legal Ombudsman dealing with complaints about the claims management services industry in the 2017-18 financial year. In addition to the Legal Ombudsman’s expected costs for 2017-18, we also need to take into account an overrecovery in the amount recovered by the end of 2016-17.

Taking both elements into account, the total cost to be recovered from the market for 2017-18 of around £1.6 million is lower than last year’s £2.3 million. There has been a reduction in the size of the market since last year, but the assumptions about future market change used in our fee model are still valid. Taking into account both the total to be recovered and the current market, the fees need to be reduced.

Noble Lords will be aware that it is intended to move the regulation of the claims management services sector to the Financial Conduct Authority, and in tandem with this it is intended to transfer the complaints handling for the sector to the Financial Ombudsman Service. Until this occurs, however, it remains appropriate for the Legal Ombudsman to deal with complaints about the sector.

I know that noble Lords welcome the fact that the Legal Ombudsman’s costs relating to complaints about regulated claims management companies continue to be met by the claims management services sector, in the same way that the costs relating to complaints about the legal services sector are met by that particular sector. Fees do, however, need to be reduced where this is appropriate to ensure that the fees charged mirror as closely as possible the actual costs of the Legal Ombudsman in handling complaints. I commend these draft regulations to the House.

My Lords, we support the transfer of responsibility for regulating this somewhat parasitic industry to the Financial Conduct Authority, not least because my noble friend Lady Hayter played a part in making the necessary legislative provision for the step that the Government are now taking.

Most of us, I suspect, will have been subjected to cold calling from a range of outfits of this kind. I confess to sometimes being tempted to adopt the approach that I heard someone once advocating—saving the presence of the right reverend Prelate—of saying, “I am so glad you called, I would like to talk to you about Jesus”. That could have the effect of shortening the conversation, although in practice, like most people, I simply put down the phone. But this is an increasing nuisance that we all have to contend with.

It is a nuisance that the industry has failed to tackle. It has an appalling record. Fines of over £2 million have been levied since 2015, and 1,400 licences have been revoked. In the current year there have been some 40 investigations, 16 of them leading to withdrawal of a licence. In 2013 there were 8,500 complaints, and no less than 76% of customers in a survey were doubtful about the benefits of using these companies.

The Brady report, which recommended the change in regulation, stated that,

“there is a widely held perception among stakeholders and government that there is widespread misconduct among Claims Management Companies”.

They flourish in part, of course, because of the withdrawal of legal aid, which, together with changes to court fees, has curtailed access to justice for many who need properly qualified advice and representation. The Government are consulting on the small claims limit, below which it will not be possible for a successful claimant to recover costs. Is not that move likely to increase the role of CMCs, as the Transport Select Committee warned as long ago as 2013? Moreover, we are dealing only with registered claims management companies. Are there statistics on the number of unauthorised companies which may be operating? What is the Government’s estimate of that number, and how can the companies be dealt with?

As the Minister said, regulation of the sector needs to extend beyond the—admittedly crucial and obvious—financial aspects to monitoring how it performs on behalf of clients and requiring minimum standards, preferably before licences are granted. This will no doubt fall to the Financial Ombudsman Service, as opposed to the Financial Conduct Authority. I take it that the two organisations will remain in close touch. It might have been better if one could have contrived a situation in which a single authority dealt with both aspects. However, presumably there will be communication between the two. In the meantime, should not the Government or one of the authorities involved warn the public about the risks involved in engaging with such organisations and offering independent guidance on which companies they should consider instructing on the basis of their past performance?

As I said, we welcome the approach taken here. Perhaps the Minister can indicate when the further change of responsibility involving the Financial Ombudsman will take place; it looks as though it will be some time in the coming year. We very much support the Government extending that element.

I am obliged to the noble Lord, Lord Beecham, for his observations on this matter, and I note the general level of support given to the regulations and their amendment in the current circumstances. On his last point, the transfer to the Financial Conduct Authority and the Financial Ombudsman is anticipated to be implemented by April 2018 under the present procedure.

As for the conduct of CMCs, the particular concern expressed is with regard to cold calling—unsolicited calls. That issue is being addressed as a priority. Indeed, the Claims Management Regulation Unit works continually with the Information Commissioner’s Office and Ofcom, which are the primary enforcement authorities in the field, to share intelligence and to target and investigate CMCs that indulge in inappropriate behaviour. The noble Lord himself observed how many fines and investigations there had been.

Of course, we know that many of these claims management companies are fleet of foot and alter their business model in the face of further investigation. For example, they no longer carry out this form of cold calling themselves: it is carried out by third-party bodies, which then seek to sell the product that they have harvested to the claims management companies. Steps have been taken to deal with CMCs which illegally purchase or acquire such unsolicited data; again, fines will follow. I acknowledge that this is an ongoing and developing problem. The Claims Management Regulation Unit is developing its response with Ofcom and the Information Commissioner to try to deal with that, but it is very difficult.

The noble Lord alluded to the introduction to the market of unauthorised operators, to whom I just referred in passing. Of course, the very fact that they are unauthorised and unregulated makes them very difficult to identify, pursue and deal with—but where they are identified, steps can be taken.

With regard to independent guidance about which claims management companies to go to, I hesitate to suggest that the guidance might be very short. It would be difficult to advance such guidance when in other sectors we do not provide such independent guidance. For example, we do not provide guidance as to which solicitor a person should consult or which barrister should be briefed. It would be very difficult to single out claims management companies in this context.

The increase in the small claims limit was mooted in the recent consultation document that was issued. We shall look at that; it may impact on the role of CMCs. Equally, a process of educating people as to the simplicity of making PPI claims may result in a reduction in recourse to the CMC companies. It is well known that what often happens is that these claims management companies harvest claims and essentially pass them to the banks to process. They do nothing other than act as a middleman, endeavouring to take a cut of the proceeds. Again, production of the consultation document and other steps are being taken to address that issue—in particular, the question of how far CMCs can go in securing fixed fees and, in addition, a percentage of the recovery they can take. Steps are being taken in that regard.

On the question of statistics on unauthorised operators, I understand that we do not have those statistics at present. I rather suspect that they would be extremely difficult to ingather—but if there is some data about the scope of unauthorised activity in the market, I will arrange to write to the noble Lord and place a copy of such a letter in the Library if the data are available. But I venture to doubt that such data are available in any meaningful sense. By that I mean that, beyond the fact that we know they do operate, it is very difficult to determine and measure the extent of that operation. I hope that that addresses the principal points raised by the noble Lord, and in those circumstances I beg to move.

Motion agreed.