House of Commons
|Session 2007 - 08|
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Public Bill Committee Debates
Draft Compensation (Claims Management Services) (Amendment) Regulations 2008
The Committee consisted of the following Members:
Sarah Hartwell-Naguib, Committee Clerk
attended the Committee
Third Delegated Legislation Committee
Monday 2 June 2008
[Mrs. Joan Humble in the Chair]
Draft Compensation (Claims Management Services) (Amendment) Regulations 2008
That the Committee has considered the draft Compensation (Claims Management Services) (Amendment) Regulations 2008.
As always, it is a delight to serve under your chairmanship, Mrs. Humble. I hope that you and every member of the Committee have come back fully refreshed from the Whitsun recess. Why we have a Whitsun recess so far away from Whitsun is beyond me.
The statutory instrument was debated in the other place on 20 May. It expands on two areas of the regulatory framework established under part 2 of the Compensation Act 2006. The first relates to professional indemnity insurance as a condition of authorisation, and the second to the power to take possession of written or electronic records found pursuant to a search authorised by a search warrant.
Although the Compensation Act received Royal Assent in July 2006, the regulatory framework came into force in April 2007. At that point it became an offence to provide regulated claims management services without authorisation or exemption. The regime brought previously unregulated claims management businessessometimes referred to as ambulance chasers, claims farmers or claims intermediarieswithin the regulatory net and it requires that they comply with the rules of conduct. Good progress has been made in the first year of regulation. Activities previously associated with some of those businesses, such as leaflet dropping in medical facilities and cold calling, have been virtually eradicated. Regulation has helped to raise the standards of services in the industry.
Last week, the Department published a review of the first year and an evaluation of its impact. Those were placed in the House Library. The evaluation highlighted that, despite introducing the new regulatory regime at some speed, the Department adhered closely to the principles of better regulation, in particular those contained in the statutory code of practice for regulators. We have been careful to minimise the regulatory burdens on businesses and have adjusted the fee scales for claims management regulation after one year of operation, reducing the fees payable for businesses with a very low turnover. That addressed specific concerns that were raised, predominantly by sole traders, and helped to ensure that the fees were proportionate. The same principles have been applied in developing the professional indemnity insurance requirement.
The annual review set out the priorities for the second year of claims management regulation. One priority will be to tackle unauthorised trading, meaning businesses
The draft regulations are made under the powers in sections 8(8), 9 and 15, and in the schedule to the Compensation Act 2006. Professional indemnity insurance comes under regulation 21 of the Compensation (Claims Management Services) Regulations 2006, which provides that the regulator may require an authorised person to take out a policy of professional indemnity insurance. We did not insist on professional indemnity insurance for authorised persons at the outset. It was clear from a consultation in summer 2006 that, although there was general support for that requirement, there were also concerns, particularly about the difficulties in obtaining cover at a reasonable cost in such a short time frame.
It was necessary to ensure that the requirement was appropriately introduced and that there was sufficient market capacity to provide the relevant insurance. We consulted on the requirement in February last year and commissioned an independent insurance expert to advise and to produce a report on the insurance market for professional indemnity insurance. That helped in reaching the conclusion that it would not be appropriate to impose the requirement on all authorised claims management businesses. Insurers and authorised businesses also expressed concern at the level of cover required.
We therefore sought views from the regulatory consultative group, which includes representatives from key industry interests, the Association of British Insurers, the Financial Services Authority and the Claims Standards Council, as well as individual insurers, about 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 authorised businesses that represent clients in the personal injury sector because that was where the greatest risk to consumers was 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 dealt directly with the insurance company of the person the client was claiming from, and agreed a settlement, professional indemnity insurance would be needed in case the business were negligent.
We believe that limiting the requirement in that way balances appropriate consumer protection with a proportionate impact on businesses. We considered the decision carefully and based it on a thorough consultation, supported by an independent insurance report and views from key stakeholders, including those likely to be affected. 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 have indicated that a number
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. Hon. Members who were present during the debates on the Compensation Bill will remember that that means a country that is a European economic area state or a full member of the Organisation for Economic Co-operation and Development, or that has concluded special arrangements with the International Monetary Funds general arrangements to borrow. We have issued draft guidance that provides more detail for businesses on how to identify a country that falls within the definition.
There will, of course, be additional costs to those authorised businesses that represent claimants in the personal injury sector. The premiums for insurance cover will depend on the state of the professional indemnity insurance market and insurers assessment of the likely specific risks for the individual companies. 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 to the power to seize records, under the Act the regulator has various investigative powers to review compliance with the regime. The 2006 regulations make provision for warrants for entry and search of premises in limited circumstances to ensure that claims management regulation can be enforced effectively. The 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 on 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. I should make it clear that the provisions do not provide an additional power to enter, but simply extend the existing powers with respect to taking possession of records for copying.
The power to take possession of records may be necessary when a large amount of relevant records are found during an authorised search of premises. The power will enable officers to take possession of those records for the purpose of photocopying, which will reduce the amount of time that they will have to spend on the premises being searched. However, we recognise that powers of entry and seizure must always be fully and clearly justified before use, because they may interfere with an occupiers 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 PACE. That will help to ensure that officers acting on behalf of the regulator act in a way that is reasonable and proportionate in all the circumstances.
The regulations expand on the regulatory framework that we have put in place to regulate the provision of claims management services. I believe that they are
Mr. Henry Bellingham (North-West Norfolk) (Con): It is a pleasure to serve under your chairmanship, Mrs. Humble, and I shall indeed be brief. I think that my colleague, the noble Lord Henley, took up 45 lines of Hansard and the peer who spoke for the Liberal Democrats took up six. Our target is to beat that todayalthough I have probably taken up a couple of lines already.
As the Minister explained, the main regulations come into force on 1 July 2008, but regulations 4 to 7, on search and seizure, do not come into force until 1 August. Why that difference in commencement dates? I thank her for providing a brief overview and for telling us that a recent evaluation showed that some of the worst practices, of cold calling and ambulance chasing, have been removed completely, which obviously is good news. However, why were the regulations not part of the original Compensation (Claims Management Services) Regulations 2006? Why have we waited this long for the regulations to put in place a requirement for professional indemnity insurance? Have there been problems with small claims management companies without PI insurance going out of business or having lengthy and burdensome third-party claims made against them, thus putting their clients under much financial pressure?
The Minister touched on consultation. For the average small claims management company, what will be the likely cost to put in place such insurance? Did that come out in the consultation? When the meetings took place with the regulatory consultative group, did every member of the group attend? How many meetings were there? Have any exemptions been put in place that are not mentioned in the regulations before us? She mentioned the minimum levels laid down, which we certainly support. My only slight concern, however, is about the excess level of £10,000 per claim, which obviously will be quite steep for many small companies. New regulation 21B(3) states:
Where the contract for professional indemnity insurance includes an excess, this must not be greater than £10,000 per claim.
That is actually quite a lot of money. I would have thought that a lower figure made sense. Was that part of the consultation? Will she comment briefly on that?
The Minister mentioned zone A countries, but what about EU countries? Presumably, they are included under the scope of the regulations, but will she clarify that? Finally, she mentioned that much of what we are talking about affects personal injury. The Government have released a consultation paper on the reform of personal injury law and case limits. Is the Minister in a position to tell us when the response of Her Majestys Government to the consultation will be made available?
I have no further questions. As the Opposition, we support what the Government are doing and we hope that the regulations will be in place as soon as possible.
Jenny Willott (Cardiff, Central) (LD): It is a pleasure to serve under your chairmanship, Mrs. Humble.
As the hon. Member for North-West Norfolk just said, we support the regulations as a whole. In particular, regulations 4 to 7 are very sensible. We also support regulation 3, but there are a number of questions that I want to raise about its implementation and its impact on small businesses. I would also be interested to hear the answers to many of the issues raised by the hon. Gentleman.
Since there has been no impact assessment specifically for these regulations, will the Minister reassure us that an assessment of these measures was considered as part of the regulatory impact assessment for the 2006 Bill, or was it included in the independent assessment? Will the Minister clarify whether the regulations were specifically looked at, as that would be helpful?
The requirement for companies to have PII is likely to have the largest impact on the smallest businesses. In 2006, the Department surveyed companies in the personal injury claims sector. Of the 1,300-odd companies that were surveyed, 930 had annual turnovers of less than £50,000, 120 had annual turnovers below £10,000 and 477 either broke even or lost money. Clearly, a large proportion of this sector comprises small businesses. If the changes, which could affect those companies the most, went wrong, they could fundamentally alter the structure of the sector. Will the Minister tell us what assessment has been done of the impact of the requirement on the ability of smaller companies to compete in the sector?
As the Department says, it is likely that some companies in the sector already have professional indemnity insurance. Therefore, what analysis has been done to identify what proportion of smaller businesses have such insurance, or is it only the larger companies that have it? Again, that could disproportionately impact on the make-up of the sector. Has the Department considered whether the requirements will disproportionately impact on smaller businesses? Is the Department confident that it will be an across-the-board change?
Smaller business could end up taking on more of the higher-risk or complex claims. Because of their market share, larger businesses can offer much lower prices for the simpler claims, and so might not consider it to be in their interests to take on the more complex cases. Has the Department considered the distribution of cases across the sector by the size of the company? If smaller companies are more likely to take on the complex cases, their costs in taking out professional indemnity insurance could be greater, as those cases are more risky. That could have a disproportionate financial impact on them.
With those questions, I support the regulations today.
Mr. Ken Purchase (Wolverhampton, North-East) (Lab/Co-op): The background to the regulations is that, once we introduced profit chasing into this area of work, it was inevitable that there would be abuses. I think that mainly those abuses have been tackled pretty successfully and the service is helping people who would otherwise not have been able to pursue legitimate claims. I look at the measure as an aid to public service in terms of
I do not believe that the professional indemnity insurance will not be taken up by the overwhelming number of practitioners in this sectorit would be exceedingly foolish not to but there is always the odd rogue who will avoid it and this will cover that. Perhaps the Minister could tell me who exactly will be covered by the professional indemnity provision. Will it get to the level of canvassers? Will the company be able to take on block insurance cover? Is it about individuals, and what will be the situation should a canvasser find himself drawn into deeper water and start to give advice that is clearly hopeless, erroneous and difficult? I have tried to read the measure as quickly as possible, but we need to know how far across the piece the indemnity will go and what insurance cover there will be. At every level in some of the companies, which frankly do operate with a few dodgy practices, we need to know that across the piece there will be cover for people who choose to use those services.
Bridget Prentice: Those are all very important and pertinent questions and I am grateful to the Committee for raising them If I miss any in my response, I apologise and I will write to the Committee with details as soon as possible.
The hon. Member for North-West Norfolk raised a number of points. He asked about EU countries. EU countries are part of the EEA and therefore are automatically included in the system. He also asked about the claims process consultation and the publication of the response to that. We will publish that as soon as possible. As he knows, I am always keen to have that in the public domain as quickly as possible. The proposals that the paper made were to streamline the claims process, particularly for lower value personal injuries claims, by providing early notification of the claim, removing duplication and providing for fixed, recoverable costs.
The hon. Gentleman asked why we did not introduce the provisions at the outset of the claims management regulation process. It has always been our intention that authorised persons would have to obtain professional indemnity and insurance, but having taken on board the views of stakeholders at the beginning, we decided that it was not appropriate to have a blanket requirement, but rather to have a phased approach that allowed for more detailed work to help to establish the exact nature of the insurance requirement. The consultation showed that the area most in need of that was personal injuries rather than other aspects of the regulation. That is why we have approached it in that way.
We said last year that that requirement would come into force on 1 July and that we intended to stick to that. We have left the other two at 1 August because we wanted to give our compliance unit more time to put in place the necessary procedures. There are no exemptions to the requirement other than what is on the face of the legislation.
The hon. Member for Cardiff, Central asked about the regulatory impact assessment. When the Compensation
The hon. Lady was right to raise the impact on smaller businesses. We are conscious to reflect everything proportionatelywe do not want smaller businesses to be disproportionately affected so that they are unable to compete with some of the bigger boys in the market. First of all, the measure is likely to apply only to a few businessesin a sense, it is a tentative first step and we will of course review the impact in a year. I have great confidence in the team of people who run our claims management regulationthey are quick to pick up changes in the market or any adverse impact on a business, and they will be quick to ensure that there is a level playing field between small and medium and larger businesses.
My hon. Friend the Member for Wolverhampton, North-East asked who would be covered by the requirement. We have limited that specifically to the personal injury sector, because that has had the greatest impact on claims for negligence. All the research and consultation confirmed that it would be rare in other sectorsfor example, it would be very unusual to see such a situation in employment, even though that is part of the regulatory framework. Many of the businesses in other sectors are smaller, sole traders that are unlikely to be affected.
Mr. Purchase: I picked up that the measure applies only to personal injury. However, to clarify, any number of people may be involved with a company. As I recall, there was quite a stern test to pass before people could get such insurancethey had to show that they were properly qualified to get professional indemnity insurance. None the less, some people will be tempted by circumstance to offer advice that they are
Bridget Prentice: I think that I can give my hon. Friend the assurance he seeks, but I will double check. The business will be insured, so it will be responsible. If someone at the bottom end of the hierarchy were negligent, the business or company would be responsible. I shall reconfirm that if necessary, if there is further detail that I can give.
The hon. Member for North-West Norfolk also asked about the cost of the requirement. As I said, there will of course be a cost to those that represent clients in the personal injury sector. However, we are fairly confident that the insurers will be able to offer reasonable premiums to balance that cost with the benefits. For example, we are aware that a large UK-based insurer is offering an annual premium of about £350. That is not unreasonable, given what it is being asked to cover. The hon. Gentleman then asked if we were aware of any businesses ceasing to trade. I am not aware of any that have gone out of business as a result of the requirement, but the situation will be monitored carefully over the next year.
Jenny Willott: I raised one further issue, and I should be grateful if the Minister were able to respond, although I appreciate that she may not have the information with her today. Is there a different type of case, perhaps more complex, that is taken up particularly at the smaller end of the market? Has the Department done any research into the matter?
Bridget Prentice: I apologise to the hon. Lady for not responding to that point. We have not researched that matter, but I am sure that it will not be hugely difficult to find out. If we can, we will do so, and I shall ensure that the Committee is given the information. It would be interesting to know if a particular type of case were being dealt with by one part of the sector, with other cases being dealt with by another part of the sector, and whether further issues need to be considered as a result. It is a fair point.
I hope that I have persuaded the Committee to accept the regulations.
Question put and agreed to.
That the Committee has considered the draft Compensation (Claims Management Services) (Amendment) Regulations 2008.
Committee rose at one minute past Five o'clock.
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