Brakes are Slammed on Ambulance Chasers

The level of debate over the compensation claims culture and claims managers in particular has moved up a gear in the last couple of months.

Norwich Union, the UK's largest insurer, has said it believes that claims management companies have "exploited" the public's expectations of how much compensation they can win for personal injuries. According to employer representative bodies such as the CBI, the result is that vexatious claims have helped fuel rises in the cost of public liability insurance and employers' liability insurance.

Citizens' Advice discovered that some customers of claims managers have found that even when they win their case they are left out of pocket once they have paid for their "after-the-event legal expenses insurance".

It has said that consumers are subjected to high-pressure sales tactics by unqualified intermediaries interested in signing up as many clients as possible regardless of the clients' needs. It has called for frontline staff involved in selling "no win, no fee" products to be subject to independent regulation.

David Hartley, the director of Accident Line, writing in a Money and Business Personal View (December 11 2004), also called for the claims management industry to be regulated. Lord Falconer, the lord chancellor, has threatened regulation if the sector "does not put its own house in order".

Whether claims managers are driving growth in compensation claims or are just being unfairly made scapegoats will be hotly debated for some time. But one point that is certain and has been overlooked is that many claims management companies are already to become subject to regulation by the Financial Services Authority under rules applying from yesterday.

This regulatory initiative comes as part of the UK's implementation of the EU Insurance Mediation Directive. Perhaps it would be sensible to see how this regulation works before threatening further measures.

The directive is intended to regulate insurance intermediaries, but it in fact covers anyone who, as part of their business, advises on or arranges an insurance policy and receives remuneration for doing so.

The business plan of most claims management companies means that, as part of their business, they arrange or advise on after-the-event legal expenses insurance.

The new rules make it a criminal offence for any person to arrange or advise on any general insurance policy without being authorised by the FSA. Therefore, most claims management companies will have to gain FSA authorisation. Once they become authorised firms, claims management companies will have to comply with the FSA's rulebook.

The rulebook may clamp down on many of the abuses of which Lord Falconer and others accuse claims managers. Although claims management companies will still be able to advertise legitimately for business and encourage people to pursue claims, the advertising will have to be "clear, fair and not misleading".

Claims managers will not be able to recommend the customer to purchase an after-the-event legal expenses insurance policy unless it is suitable for the customer. To check whether the policy is suitable, the claims management company must seek specific information from the customer.

If customers do have a complaint about a claims management company, they will be able to complain to the independent Financial Ombudsman Service. The ombudsman will then be able to judge whether the insurance was mis-sold.

The firm must set out in writing why it has recommended the insurance policy, and must give the customer a policy summary setting out clearly the key terms and conditions of the policy. It has been suggested that in the past many customers did not know they were buying an after-the-event legal expenses insurance policy. That should be impossible under the new regulatory regime.

The FSA rules prohibit excessive charges and require customers to be given a clear statement of price, showing the cost of the insurance separately from the cost of other services provided by the claims management company. It should not be possible, under the FSA's regime, for customers to be signed up for insurance without fully understanding the liabilities they are undertaking - as the lord chancellor suggested had happened in the past.

Unless the FSA fails in its new role to regulate the industry, additional regulation as threatened by the government would seem unnecessary, except perhaps for any claims management companies that do not arrange insurance and therefore fall outside the FSA's gaze. FSA authorisation will not prevent pursuit of legitimate claims, but the rules do require firms to act with integrity.

The FSA has emphasised that, in addition to compliance with all its detailed rules, it expects authorised firms to treat their customers fairly. The FSA's core principles require all firms to conduct their business with skill, care and diligence, to observe proper standards of market conduct and to pay due regard to the interests of its customers.

The customers of claims management companies will also have access to the Financial Services Compensation Scheme if the company they have used is unable to meet its liabilities because it has become insolvent.

Depending on how the FSA decides to police the sector, the claims management industry could be forced to change the way it operates.

source: FT News (Last Updated: Saturday 15 January, 2005)

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