The Financial Conduct Authority has introduced new restrictions on claims management companies (CMCs) today (1 March).
These new restrictions will prevent them from charging excessive fees to consumers owed compensation from financial services firms. They generally exclude pre-existing contracts already in place.
The maximum consumers can be charged will depend on how much redress they are due.
An example provided by the FCA shows that consumers could only be charged a maximum of 30% of their claim for a redress amount below £1,500 which is £420.
The changes are expected to save consumers up to £9.6m a year and thousands of pounds on some individual claims.
Redress bands
| Redress band | Consumer redress obtained | Max % rate of charge | Max total fee | |
|---|---|---|---|---|
| Lower (£) | Upper (£) | |||
| 1 | £1 | £1,499 | 30% | £420 |
| 2 | £1, 500 | £9,999 | 28% | £2,500 |
| 3 | £10,000 | £24,999 | 25% | £5,000 |
| 4 | £25,000 | £49,999 | 20% | £7,500 |
| 5 | £50,000 | NA | 15% | £10,000 |
The FCA became responsible for the regulation of claims management companies in April 2019, following a government review.
Since then, it has dealt with 1,030 applications for authorisation, with around 25% of CMCs leaving the sector.
So far 699 firms have been approved, while 43 have been refused or rejected.
In addition, 207 applications have been withdrawn, 75% of which followed FCA scrutiny, which showed the firms were unlikely to be ready, willing and organised to be authorised.
FCA executive director of consumers and competition Sheldon Mills said: “Our rules protect consumers from losing a significant amount of their compensation in excessive fees, particularly when there are ways for them to make claims without incurring any fees.
“The changes are part of our ongoing work to drive a fundamental shift in industry mindset so we can stop consumer harm before it happens, and to ensure more consistent standards of protection.”
The cap will apply to most claims where a consumer is awarded monetary redress from a financial services firm.
This will be done either directly from a firm, via the Financial Ombudsman Service, or from the Financial Services Compensation Scheme. The FSCS will be in charge in cases where a firm has gone out of business.
For other financial services claims, the rules require charges to be reasonable. The new rules do not apply to PPI claims which are already subject to a 20% cap, set by parliament.
In addition, CMCs must also disclose key information to consumers before entering a contract.
That includes giving more detail about how fees will be calculated and making sure they are aware of the free routes to redress available.
For instance, if consumers make a complaint or a compensation claim themselves to FOS or FSCS, they will keep all redress awarded.
Today, the FCA has also set out a new employment offer today that is designed to reward strong performance, aid career development and close pay gaps.
