Draft Compensation (Claims Management Services) (Amendment) Regulations 2014
The Committee consisted of the following Members:
Abbott, Ms Diane (Hackney North and Stoke Newington) (Lab)
† Aldous, Peter (Waveney) (Con)
† Burt, Alistair (North East Bedfordshire) (Con)
† Champion, Sarah (Rotherham) (Lab)
Gilbert, Stephen (St Austell and Newquay) (LD)
† Heath, Mr David (Somerton and Frome) (LD)
† Kane, Mike (Wythenshawe and Sale East) (Lab)
† Lansley, Mr Andrew (South Cambridgeshire) (Con)
† Metcalfe, Stephen (South Basildon and East Thurrock) (Con)
† Offord, Dr Matthew (Hendon) (Con)
† Raynsford, Mr Nick (Greenwich and Woolwich) (Lab)
Shannon, Jim (Strangford) (DUP)
Sharma, Mr Virendra (Ealing, Southall) (Lab)
† Slaughter, Mr Andy (Hammersmith) (Lab)
† Spelman, Mrs Caroline (Meriden) (Con)
† Turner, Karl (Kingston upon Hull East) (Lab)
† Vara, Mr Shailesh (Parliamentary Under-Secretary of State for Justice)
† Wallace, Mr Ben (Wyre and Preston North) (Con)
Danielle Nash, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Wednesday 5 November 2014
[Mr Mike Weir in the Chair]
Draft Compensation (Claims Management Services) (Amendment) Regulations 2014
8.55 am
The Parliamentary Under-Secretary of State for Justice (Mr Shailesh Vara): I beg to move,
That the Committee has considered the draft Compensation (Claims Management Services) (Amendment) Regulations 2014.
It is always pleasure to serve under your chairmanship, Mr Weir.
The regulations before us amend the Compensation (Claims Management Services) Regulations 2006 with regard to the available enforcement sanctions of the claims management regulator. Specifically, they enable the regulator to impose financial penalties on regulated claims management companies for a number of matters, including breach of the conduct of authorised persons rules; failing to comply with a code of conduct, directions relating to indemnity insurance, directions relating to redress and complaints handling, or an information notice from the regulator; and obstructing the execution of a warrant. The regulations provide the regulator with enforcement tools similar to those of other regulatory bodies such as the Financial Conduct Authority, and amend the 2006 regulations to provide for certain situations in which CMCs will not be able to surrender their authorisation without the consent of the regulator. That will help to ensure that a CMC cannot avoid investigation and enforcement action by the regulator by simply surrendering its authorisation.
The purpose of the new financial penalty powers is to provide an additional deterrent to malpractice in the regulated claims management industry, ensuring that the regulator is able to continue to operate a robust and appropriate regulatory system in England and Wales. Businesses providing regulated claims management services in England and Wales under the Compensation Act 2006 must be authorised to do so by the regulator, which forms part of the Ministry of Justice. Once authorised, those businesses are known as authorised persons, but are more generally referred to as regulated CMCs.
Claims management regulation covers a number of sectors, most notably the personal injury and the financial products and services sectors. Once authorised, regulated CMCs are required to comply with certain conditions of authorisation, including adherence to the conduct of authorised persons rules. Where breaches of the conditions of authorisation are identified, enforcement action can be taken by the regulator. That action can take the form of a variation of the regulated CMC’s authorisation, such as placing additional conditions on it, or suspending or cancelling its authorisation.
Poor practice by some regulated CMCs operating in the financial services sector in particular has created poor outcomes for consumers and businesses. Existing enforcement powers have not been sufficient to deter many CMCs from engaging in speculative behaviour or
other forms of malpractice, leading to delays in receiving compensation for some consumers who have legitimate claims and to increased costs for defendant financial services firms where claims are unsubstantiated. The power to impose financial penalties on non-compliant CMCs acts in the best interests of consumers and businesses by ensuring that the regulator has proper tools to deter non-compliant behaviour. The regulator has done well to stamp out non-compliant behaviour and continues to take strong enforcement action where required, but the power to impose a financial penalty provides a more proportionate tool for use in certain circumstances.A public consultation on the proposals received wide support from the claims management and banking industries, as well as from those with an interest in claims management. Responses to the consultation suggested that the proposed measures would improve regulation while providing a necessary, additional deterrent to malpractice.
The measures amend the regulations to include provisions on the process that must be followed for the regulator to impose a financial penalty—incidentally, the same process as is used for the imposition of existing forms of formal enforcement action—and set out the requirement to consider the nature and seriousness of the breach by the regulated CMC. The turnover of the regulated CMC will be taken into consideration when determining the amount of the penalty to be imposed, up to a maximum of £100,000 for regulated CMCs with a turnover of less than £500,000, and 20% of turnover for regulated CMCs with a turnover of £500,000 or more. There are also provisions on the deduction by the regulator of any administration costs incurred in collecting or enforcing the payment of a penalty before the remainder is paid into the Consolidated Fund. In addition, the provisions set out how the penalty can be enforced by the regulator as a debt if necessary, and restrictions on the surrender of authorisation by an authorised person without the consent of the regulator.
The regulations provide the regulator with additional powers to ensure that a range of robust and proportionate enforcement options exist. It is vital that the regulator has the necessary tools to impose a full range of appropriate sanctions that deter malpractice and encourage regulatory compliance.
9.1 am
Mr Andy Slaughter (Hammersmith) (Lab): It is a pleasure to serve under your chairmanship, Mr Weir.
We all agree on the nature of the problem that the regulations are designed further to address, namely rogue elements in the claims management industry, and the problems our constituents tell us about with cold calling, fraudulent or negligent claims—especially in relation to payment protection insurance and other financial services—as well as excessive fees. The vast majority of CMCs operate in either the personal injury sector or the financial services sector, although not always exclusively. There was a huge growth in the number of companies, which has now been reversed.
In debates on this subject with the Minister and his predecessors over the past four years, we have argued that the Government’s approach to dealing with the problem was slow to begin with and did not tackle
issues such as referral fees quickly enough. Regulation of CMCs by the Department has been quite poor. It appeared for a time that the Government were going off on a frolic of their own and effectively seeking simply to limit the number of claims through changes brought about by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and other measures. That was a crude way of dealing with the problem—suppressing legitimate claims rather than tackling the abuses, which, belatedly, the Government now seek to do.It is instructive to look at the level of regulatory activity. The number of authorised CMCs at the end of the last financial year was down to just over 2,000, from a peak of just over 3,000. The number of authorisations has slowed dramatically and has almost halved between the last two financial years. The number of cancellations is running at about 200 a year and the number of surrenders at over 600 a year. Those are significant figures. I accept that there is now a substantial amount of regulatory activity. That is the context in which we need to look at the new measures: the Government initially were not in favour of such measures, but they have now changed their mind about whether there should be financial regulation of the sector. We are not against their position and will not oppose the regulations, but I have some questions for the Minister.
Is the purpose of introducing the financial penalties simply to increase flexibility and put another weapon in the armoury of regulation? Are the changes designed to ensure that a greater number of penalties are imposed—that is, the number of companies whose authorisation is suspended or removed will not decline, but financial penalties will be used to deal with others in the sector that are currently not subject to any penalty—or are they designed to lead to fewer suspensions or cancellations? If the latter, is that a weakening of regulation in the sector? I am concerned about some of the language: the Minister said that the measures are designed to be “more proportionate” and the consultation actually stated:
“The financial penalties policy has in fact been designed to provide a more proportionate enforcement option where current provisions may be too harsh.”
Will the Minister say a little more? In what way does he consider the current regime to be too harsh? I doubt that that is the public’s view.
In relation to the quantum of penalties, we do not object to the 20% of turnover level, but I do not understand why there is to be no minimum. That is not explained; it simply says that it is more flexible not to have a minimum. That is literally true, of course, but what is the actual reason for not having a minimum penalty, as originally proposed by the Government? What levels of penalty do the Government envisage? It is all very well saying that there is a maximum of 20% of turnover, which for larger companies could be very large sums indeed, and obviously the Government have no experience in this sector, but they do have experience in other areas which are regulated by the FCA where a similar regime pertains—that is, 20% of turnover. What are the average fines likely to be? Could the average be only 1% or less than 1% of turnover? It is an old Government trick to say, “We are taking this very seriously, because we have a high maximum penalty.” Lord Chancellors are constantly increasing the maximum penalty for criminal offences, but when one looks at the
impact statement or assessment, one sees that it will not result in either additional revenue or additional custodial time. Never mind the maximum; what sort of level of penalty is envisaged in these cases?The Opposition see the virtue of the measure—as the consultation paper states, the purpose of financial penalties:
“a sanction should aim to change the behaviour of the offender, eliminate any financial gain or benefit from the instance of non-compliance and be proportionate to the nature of the offence or harm caused.”
I imagine that there are cases where authorisation is suspended, the directors of the company set up a new company and effectively no penalty will have been applied, other than an administrative one. I can see the purpose of having financial penalties and for that reason the Opposition will not oppose them.
I had a look at the response consultation, because the explanatory note was not very clear about the responses. In fact, there are only seven responses from CMCs to the consultation, out of the several thousand such companies that exist. Does the Minister have any explanation for that? One would have thought that his Department would have engaged with the sector and expected some level of response. Seven seems very low.
9.9 am
Mr Vara: The questions and criticisms the hon. Gentleman makes are not surprising, given his track record. May I remind him that that this Government inherited this mess and we have had to clear it up? If he looks carefully at the figures, he will find that the number of CMCs that have been suspended or removed is considerable. They grew up partly because of the culture of fees and the compensation culture brought in by the previous Government, and not least among the beneficiaries are solicitors such as Thompsons, who do so well out of the trade union movement. I will not take any lectures from the hon. Gentleman on clearing up his Government’s mess.
In terms of proportionality, I point out to the hon. Gentleman and his colleagues—[ Interruption ] —who are chuntering because they do not like the mention of trade unions or their friends, be they solicitors or other people—
The Chair: Order. The Minister is speaking.
Mr Vara: In terms of proportionality, the intention is to have flexibility, so that the measures are applicable to both sole traders and larger companies. We also have to recognise that a cancellation does affect existing consumers, so the regime is intended to make sure not only that a penalty is imposed, but that work may be done for existing consumers.
Mr Nick Raynsford (Greenwich and Woolwich) (Lab): I do not think that the Minister has responded to the questions raised by my hon. Friend the Member for Hammersmith about the consultation. Looking at the explanatory notes, I notice that the consultation lasted for four weeks only, and that 72% of responses
“came from financial services providers, claims management company (CMC) trade bodies and other organisations”
and 28% came from regulated CMCs. What has the Department been doing about consulting the public,
who the Minister quite rightly recognised have suffered from unsatisfactory outcomes from the current arrangements?Mr Vara: To correct the right hon. Gentleman, I did not say that the public were not satisfied with the current regulations. I said that the public were not happy with the regulations under his party’s Administration. That is an important point.
On consultations, the right hon. Gentleman is a former Minister and knows only too well that before a consultation happens, there is a wide variety of engagement and conversations with a wide variety of stakeholders. In a free country, however, nobody is forced to make a submission and all sorts of views are taken into account.
Mr Raynsford: Four weeks does not give much time.
Mr Vara: Well, four weeks is longer than some consultations. Some have less time—[ Laughter. ] I fail to appreciate the humour. Given that the right hon.
Gentleman was a Minister, he ought to know better. It is amazing how memories can be so short: when people are in opposition, they forget their actions in government.Mr Raynsford: On a point of clarification, I was responsible for many consultations when a Minister. Most of them lasted for a minimum of 12 weeks to allow adequate time for the public to respond.
Mr Vara: As always, the right hon. Gentleman tries to clarify, but he said “most of them”. There are consultations and there are consultations. In this consultation, there was broad agreement and everyone who wanted to contribute was able to. I am sorry that he has to lower his reputation and that he can find nothing credible to say other than to criticise the duration of the consultation period.
The regulations are eminently sensible, and I will be surprised if there is any disagreement from the Opposition, other than nitpicking.