Claims management companies (CMCs) will have to stump up more than £7m next year to set up a scheme to regulate the sector, the Financial Conduct Authority (FCA) has revealed. The sum to be paid in 2019-120 is 42% of the total initial cost of taking over responsibility for the sector, which under the Financial Guidance and Claims Act 2018 passes to the authority from the Claims Management Regulator on 1 April next year. In total, the authority will recover £16.8m from the sector by 2021, the regulator proposes today. 

In a consultation paper published today the FCA notes that it is funded entirely by the bodies it regulates - and that because of the claims management industry’s uncertain future it will need money up-front. When taking on new responsibilities, the authority can sometimes defer recovery of the project costs until ’a substantial body of fee payers’ is in place. ’However, the claims management industry is undergoing considerable change and this uncertainty limits our ability to defer recovery of costs.’

Reforms to the claims management environment, notably next August’s deadline for the submission of claims relating to payment protection insurance, ’may require CMCs to adjust their business models to continue providing claims management services for consumers, and some firms may exit the market entirely’, it notes. As a result there is a risk that project costs might fall disproportionately heavily on those firms that successfully apply for authorisation.

’It would be unfair for firms which take advantage of the regulatory gateway, but which leave within the first year, to pass their share of the project costs to those firms which continue to be authorised by us,’ the document states. ’For this reason, we have decided to collect a substantial proportion of our project costs in the first year.’ This will amount to £7.1m in 2019/20, around 42% of the total.

The proposals are set for a rough ride from the claims management industry. Andy Kay, director of operations at First4Lawyers, said that the government had recognised that the vast majority of CMCs will exit the market during 2019 ’at which point it will be left to those that remain to foot the bill for a regulatory service that was more appropriate to the PPI market than the PI market’.

He said: ’The government and FCA need to demonstrate that they understand how the claims management sector works and introduce a funding system that is fair for all, rather than a regime which will disproportionately hit successful, but law abiding, ethical businesses.’

The consultation on the proposals runs to 22 October. The FCA will publish a formal policy statement in December, for the rules to take effect from 1 January 2019.