Playing the blame game

On 23 April 2007 a whole range of claims-related activities fell within the regulated sector for the first time. On that date Part 2 of the Compensation Act 2006, which set out the framework for the regulation of claims management services by the Department of Constitutional Affairs, now the Ministry of Justice (MoJ), was brought fully into force. As a result, it is now an offence for a person to provide regulated claims management services in the course of a business unless he is authorised, exempt, or the requirement for authorisation has been specifically waived. It is also an offence to pretend to be authorised. Those authorised to provide regulated services must follow strict rules of conduct.

The Act, and the various Regulations made under it, finally implement a comprehensive system of statutory regulation in an area in which the industry was woefully unable to put in place an adequate system of self-regulation following a number of high-profile disasters and continued criticism of high-pressure selling and low standards.

Better Regulation Task Force

As long ago as May 2004, the Better Regulation Task Force (BRTF) reported on the scope of the perceived compensation culture and on possible improvements to the compensation system. The BRTF identified in the report that: 'the claims management sector was characterised by hard-sell advertising and direct marketing which encouraged people to 'have a go' even if there was little chance of actually achieving the large payout being dangled as an inducement'.

The government accepted its recommendation that the sector should have until December 2005 to make self-regulation work, following which the Claims Standards Council (CSC) was established as a voluntary regulatory body. However the low membership of the CSC and the voluntary nature of its rules resulted in further calls for compulsory legislative intervention. The new system of regulation by the MoJ is intended to be an interim measure, pending the complete overhaul of legal services regulation and the establishment of a Legal Services Board and an Office of Legal Complaints.

Regulatory changes

The wide range of activities which are now regulated as claims management services, and the types of claim for compensation which are regulated under the Act, are set out in the Scope Order (the Compensation (Regulated Claims Management Services) Order 2006, SI 2006 No. 3319). Regulated activities include: advertising for or otherwise seeking out persons who may have a cause of action; advising a claimant or potential claimant; referring details of a claim or claimant to another person, including a person having the right to conduct litigation (that is, a solicitor); investigating the circumstances, merits or foundation of a claim; and representation of a claimant (whether in writing or orally).

The types of claim for compensation which fall within the scope of regulation include claims for personal injuries, criminal injuries compensation, employment, housing disrepair, claims in relation to certain financial products or services and industrial injuries disablement benefits.

Exemptions

There are a number of exemptions from the requirement for authorisation under the 2006 Act to cover professions whose conduct is already regulated and other classes of service provider regulated in other ways. These exemptions include the provision of services which would otherwise fall within scope by: legal practitioners, persons regulated under the Financial Services and Markets Act 2000, charities and not-for-profit advice agencies, the Motor Insurers' Bureau, the Medical Protection Society, trade and students' unions and services provided to a defendant (see the Compensation (Exemptions) Order 2007, SI 2007 No 209, as amended).

Compensation Regulations 2006

The procedure for the initial authorisation of claims management services providers is set out in the Compensation (Claims Management Services) Regulations 2006 (SI 2006 No 3322). There is a sliding scale of non-refundable application fee based on turnover, starting at £400 (the maximum is £800). The regulator must not grant an application for authorisation unless he is satisfied that the applicant is competent and suitable to provide the regulated claims management service in question.

The 'suitability' criteria are:

(a) that the applicant does not have a history of committing relevant criminal offences or breaches of any law or rule of practice regulating the provision of financial, legal or other relevant services;

(b) there are no relevant proceedings against the applicant in any court or tribunal;

(c) if the applicant holds or proposes to hold clients' money, that he has appropriate arrangements for holding such money; and (d) that the applicant has no arrangements with another person that might expose it to any conflict of interest.

The regulator may also have regard to a number of other matters, including the applicant's financial circumstances, management arrangements, and (if appropriate) staff training policies. There is a time limit of three months within which the regulator must make a decision on an application one way or the other. The Act provides a right of appeal to the Claims Management Services Tribunal against a decision of the regulator concerning an application for authorisation.

Professional conduct

Part 6 of the Regulations requires the regulator to prescribe rules for the professional conduct of authorised persons, and permits him to issue a code of practice. Rules already made under regulation 22 include the Conduct of Authorised Persons Rules 2006 ('Conduct Rules'); the Complaints Handling Rules 2006; and the Client Account Rules 2006. The Conduct Rules are split into general rules and client-specific rules.

The former require an authorised business to conduct itself with honesty and integrity; to conduct itself responsibly; to be directed by people with the necessary competence; to ensure that staff have the necessary training; and to observe all applicable laws and regulations.

The client-specific rules require a business to act fairly and reasonably in dealing with clients, and, where advice is given, to advise the client to pursue a case 'only if it is in the interests of the client to do so'. The contractual relationship with the client is now heavily regulated, with the rules requiring businesses to make reasonable enquiries as to whether the client has 'alternative mechanisms' for pursuing a claim, and to provide certain information to the client before the contract is concluded. This includes 'honest, comprehensive and objective' written information to assist the client to reach a decision including the risks involved in making a claim, in particular the possibility of losing money and, in the case of legal action, appearing in court; and details of any charges, including examples of charges made as a percentage of compensation payable.

'Cooling off' period

There must also now be a 'cooling off' period of at least 14 days after signing any agreement, during which period the client may cancel the agreement and be entitled to a refund of any payments made to the business or in connection with any insurance policy, loan or other agreement. Furthermore the client must now be permitted to withdraw from a contract at any time, with charges to be limited to what is reasonable in the circumstances to reflect work undertaken. The client account rules require authorised businesses which hold client's money to maintain client accounts, to prepare monthly reconciliations, and to deliver to the regulator an annual accountant's report in a prescribed form. The regulator has a broad range of powers to review complaints handling, to require redress, to inspect an authorised person's business records; and to investigate allegations of offences under the Act and complaints or suspicions of unprofessional conduct. There is no power to order a cash payment, although forms of redress may include requiring the redoing of work already done without charge, and the refund of all or part of the fee.

After investigation of an alleged or suspected failure by an authorised person to comply with a condition of authorisation, the regulator may cancel, suspend or vary the authorisation. As in the case of the regulatory powers to strike off a solicitor or medical practitioner, the purpose of the exercise of these powers is to protect the public. An authorised person whose authorisation is cancelled, suspended, or varied has the right of appeal to the Claims Management Services Tribunal and (with the leave of the Tribunal) to the Court of Appeal.

Taking enforcement action

The DCA originally set a deadline of 16 February for the receipt of applications to ensure authorisation by 23 April. Over 1,000 applications were received by the deadline, and around 800 organisations have so far been authorised. More than 300 applications have been received since the deadline, many apparently from businesses that were not previously aware of the need to be authorised.

The DCA has stated that: 'In the very short term, while these applications are being processed, DCA will not be taking enforcement action against businesses that are trading without authorisation provided that they applied as soon as they knew they had to, their application is complete and does not raise any queries and they comply with the Rules of Conduct' (Claims Management Regulation Newsletter, Issue 4, April 25 2007).