Compensation (Claims Management Services) (Amendment) Regulations 2008

18:11:00

The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Hunt of Kings Heath)
rose to move, That the Grand Committee do report to the House that it has considered the Compensation (Claims Management Services) (Amendment) Regulations 2008.

The noble Lord said: This statutory instrument expands on two specific areas of the regulatory framework established to regulate claims management services under Part 2 of the Compensation Act 2006. The first area relates to professional indemnity insurance as a condition of authorisation and the second relates to the power to take possession of written or electronic records found pursuant to a search authorised by a search warrant.

The Compensation Act received Royal Assent in July 2006. The regulatory framework came fully into force in April 2007, when it became an offence to provide regulated claims management services without authorisation or exemption. The Compensation (Claims Management Services) Regulations 2006 provide further details of the regulatory arrangements.

The regulatory regime brought previously unregulated claims management businesses within the regulatory net and requires that they comply with rules of conduct. I am delighted to say that good progress has been made in the first year of regulation. Activities previously associated with some of these businesses, such as leaflet-dropping in medical facilities and cold-calling in person, have been virtually eradicated. The regulation has helped to raise the standards of services in the industry.

Later this week, the department will publish a review of the first year of regulation and an evaluation of its impact. This will be placed in the Library. One of the general points this evaluation will highlight is that, despite introducing this new regulatory regime at some speed, the department has adhered closely to the principles of better regulation, and in particular those contained in the statutory code of practice for regulators. For example, our enforcement policy reflects the principles of the Macrory and Hampton reviews and has guided enforcement actions to ensure that they are proportionate and risk-based.

We have been careful to minimise the regulatory burdens on businesses, and adjusted the fee scales for claims management regulation after one year of operation by reducing the fees payable for businesses with a very low turnover. This addressed specific concerns that had been raised predominantly by sole traders and helped ensure that the fee levels were proportionate. The same principles were applied to the development of the professional indemnity insurance requirement.

The annual review also sets out the priorities for the second year of claims management regulation. One of these will be to tackle unauthorised trading—in other words, businesses that are providing claims management services without authorisation, either knowingly or unknowingly. The consumer, however, remains at the heart of regulation and we will also be continuing our efforts to ensure that client contracts are fair.

These regulations are made under the power in Sections 8(8), 9 and 15 of the schedule to the Compensation Act. Regulation 21 of the Compensation (Claims Management Services) Regulations 2006 provides that the regulator may require an authorised person to take out a policy of professional indemnity insurance. However, we did not insist on professional indemnity insurance for authorised persons at the outset. It was clear from a previous consultation undertaken during the summer of 2006 that, although there was general support for this requirement, there were also concerns, particularly about the difficulties in obtaining cover at a reasonable cost in such a short timeframe.

It was necessary to ensure that the requirement was appropriately introduced and that there was sufficient market capacity to provide the relevant insurance. We specifically consulted on this requirement in February 2007 and commissioned an independent insurance expert to advise and produce a report on the insurance market for professional indemnity insurance. This helped determine that it would not be appropriate to impose this requirement on all claims management businesses. Authorised businesses and insurers had also expressed concern at the levels of cover required. We also sought the views of the regulatory consultative group, which includes representatives from the key industry interests, the Association of British Insurers, the Financial Services Authority and the Claims Standards Council, as well as of individual insurers, to address their concerns about the sector. The final requirement was adjusted to take account of the views and comments received and was published in November 2007.

The requirement has been restricted to those businesses that represent clients in the personal injury sector because this is where the greatest risk to consumers has been identified. An authorised business would therefore need to have professional indemnity insurance if it represented a client in relation to a claim for compensation. For example, if an authorised business deals directly with the insurance company of the person the client was claiming from and agrees a settlement, professional indemnity insurance would be needed in case the business were negligent. We believe that limiting the requirement in this way balances appropriate consumer protection with a proportionate impact on businesses. This is a carefully considered decision, based on a thorough consultation and supported by an independent insurance report and views from key stakeholders, including those likely to be affected by this requirement. If an authorised business is unable to meet its liabilities, the provisions will ensure that appropriate compensation is available where, for example, claims have been lost as a result of negligence.

The draft regulations introduce minimum terms to ensure that authorised claims management businesses have a minimum level of professional indemnity insurance. The minimum terms include a minimum level of indemnity of £250,000, a maximum level of excess of £10,000 for a single claim and cover for legal defence costs. Discussions with insurers and insurance brokers over the months since the 2007 consultation have indicated that a number of insurers will be able to provide cover exceeding the minimum terms. The minimum terms covering the levels of excess and indemnity were adjusted in light of the conclusions of the independent insurance report and the consultation exercise to make sure the requirement did not impact disproportionately on small businesses.

Insurers wishing to provide professional indemnity insurance to claims management businesses must be based within a “Zone A” country, if outside the UK or its dependencies. This means a country that is either a European economic area state, a full member of the Organisation for Economic Co-operation and Development or a country that has concluded special arrangements with the International Monetary Fund’s general arrangements to borrow. We have issued draft guidance which provides more detail for businesses on how to identify a country that falls within the definition. The department will review the professional indemnity requirement after one year to evaluate its impact and consider whether it should be extended to other regulated claims management sectors, reduced in scope or left unchanged.

As regards the power to seize records, under the Compensation Act, the regulator has various investigative powers to review compliance with the regulatory regime. The 2006 regulations make provision for warrants for entry and search of premises in limited circumstances to ensure that claims management regulation can effectively be enforced. These powers are modelled on those in the Police and Criminal Evidence Act 1984 and the relevant codes of practice under that Act. The draft regulations build upon the powers by enabling officers acting on behalf of the regulator to take possession of written and electronic records found pursuant to a search warrant for the purposes of taking copies.

The power to take possession of records may be necessary when a large amount of relevant records is found during an authorised search of premises. The power will enable officers to take possession of relevant records for the purpose of photocopying, which will reduce the amount of time that officers spend on the premises that are being searched. However, we recognise that powers of entry and seizure must always be fully and clearly justified before they are used because they may interfere with an occupier’s privacy or personal property. The exercise of the power to take possession of records is therefore subject to certain safeguards, including the relevant codes of practice issued by the Home Secretary under the PACE legislation. This will help to ensure that officers acting on behalf of the regulator act reasonably and proportionately in all circumstances.

The regulations expand on the regulatory framework that we have already put into place to regulate the provision of claims management services, and I commend them to the Committee. I beg to move.

Moved, That the Grand Committee has considered the Compensation (Claims Management Services) (Amendment) Regulations 2008. 17th report from the Joint Committee on Statutory Instruments.—(Lord Hunt of Kings Heath.)

Lord Henley
Again, I am grateful to the Minister for explaining the regulations. I hope that I can be fairly brief, but as I saw the large team of officials that came in to offer him assistance, I was reminded of a Permanent Secretary in a department in which I served some time ago who, on seeing a similar sight, said, “Ah, large team, weak case”. I just hope that the case is not weak on this occasion.

First, the Minister actually gave a firm time when he said that the department will publish its review into these matters later this week. I look forward to that coming out before we break up on Thursday. I hope he will ensure that a copy is sent to me as speedily as possible, and that the department will manage to produce other items that it has promised on time and when it says that it will.

Secondly, will the Minister say a word or two about the regulatory impact assessment? The Explanatory Memorandum made it clear that a regulatory impact assessment of this statutory instrument has not been produced. A full regulatory impact assessment for claims management regulation was published to accompany the Compensation Bill, details of which are given on the website. I looked at it on the website. It was signed off by the Minister’s predecessor, the noble Baroness, Lady Ashton, who is now the Leader of the House, in late 2005, and it put forward various options that imposed quite high costs on the claims management companies. No doubt that has all been dealt with. Am I right that no further costs are being added under the regulations, and that the costs referred to in the 2005-06 regulatory impact assessment are already there?

Thirdly, and briefly, is the Minister happy about the £250,000 for a single claim and £500,000 for aggregated claims in new Regulation 21B, “Minimum terms of professional indemnity insurance”? Will he say a little more about what consultation the Government had and whom they consulted to reach those figures?

Finally, on the power in the final regulation to seize records, I take it that no power of entry is being granted to officials at this stage and that it is merely a power to seize records where necessary and to return them in due course, as set out in the regulations. I have no further questions.

Lord Thomas of Gresford
The Liberal Democrats have supported the principle of the regulation of the claims management services. It is a very good thing, and we are very pleased that compulsory insurance is being introduced—a necessary corollary of that regulation. I have nothing to add. We welcome these regulations.

Lord Hunt of Kings Heath
I thank both noble Lords for the general welcome they have given to these regulations. I agree with the noble Lord, Lord Thomas, that this provision was much needed, and the indications are that it has been effective. I know I was not present during the debate, but I was part of the ministerial group considering what is loosely called the “compensation culture” issue. The Committee will know that during the work undertaken by central government it was difficult to find absolute proof of a compensation culture, but the problem is that there is such a perception. I hope that the necessary regulation of the services is but one element in changing that general perception.

I always welcome the pithy comments of the noble Lord, Lord Henley. I have noted what he said about large teams and weak cases. I am glad to have the support of my colleagues behind me, but I think the case is pretty strong. He pressed me to define what “later this week” means in Ministry of Justice terms. He knows that this is a matter that I have resisted and will continue to resist, but I will ensure that both noble Lords receive the report as soon as it is published. Should we be so unkind as to publish it on Friday, if he lets me know where his holiday home is, we will guarantee to send it to him so that he can thoroughly enjoy his holiday.

Regarding the minimum terms, in my opening remarks I read out—or at least referred to—the list of organisations that have been consulted. The general view is that the minimum terms are satisfactory. There was always a balance here between increasing cost and better regulation. That is why a proportionate approach has been taken and the decision was made to identify only part of the business that is to be covered by the current provisions. The other point to make to the noble Lord is that discussions with insurers and insurance brokers have indicated that a number of insurers will be able to provide cover exceeding the minimum terms as well. Those terms were adjusted in the light of the conclusions of the independent insurance report and the consultation exercise to make sure that the requirement does not impact disproportionately on small businesses. We have attempted to strike the right balance.

The noble Lord is right about the power of entry. The power under the current law enables records to be taken, photocopied and returned. It does not advance the law further than that.

Regarding professional indemnity and the RIA, the provisions before the Committee do not go outwith the original work that was undertaken under the RIA. The RIA did not cover a detailed cost-benefit analysis of this requirement, but what is being done is entirely consistent with the conclusions of that RIA.

On Question, Motion agreed to.

Committee adjourned at 6.29 pm.