Figures recently released by the Ministry of Justice (MOJ) identify that hundreds of companies that handle compensation claims on behalf of the public have now left the industry. The figures suggest that new rules implemented to address bad practice and the operations of rogue firms are showing signs of success in cleaning up the industry. Yet contraction of the industry and its new regulatory framework could risk limiting consumer choice.

• Dr. Angus Nurse is senior lecturer in criminology at Middlesex University’s School of Law. He was formerly an investigator for the Commission for Local Administration for England (the Local Government Ombudsman) and has worked in and written on complaint investigations and legal compliance issues

Reductions in service
Figures from the MOJ’s annual report show that the number of claims management companies registered to handle personal injury claims fell from 2,435 in March 2012 to 1,700 in June 2013.

The MOJ believes that the decline follows changes to the law around no win, no fee arrangements passed by the Government in 2012 and brought into effect in April 2013. These rule changes included a ban on the referral fees which used to be paid between no win, no fee lawyers, claims firms and others for profitable claims.

The changes in the law were largely intended to protect consumers from bad practice in the claims management sector. The Compensation Act 2006 requires any business providing regulated claims management services in England and Wales to be registered (with the exception of certain organisations like solicitors or insurers). Regulated businesses have to be authorised by the Ministry of Justice and are subject to a range of statutory conditions, including compliance with conduct rules geared firmly towards consumer information and safeguards. Businesses that fail to comply with industry requirements (which include conduct rules) can be subject to enforcement action by the MOJ’s Claims Management Regulation Unit.

Protecting the consumer
The original Compensation Act 2006 was introduced as a result of fears about industry bad practice and the perception that claims management companies fuelled a compensation culture within the UK. Particularly in the area of personal injury claims, a number of high profile cases identified problems in the industry. The Accident Group, for example, collapsed in 2003 with reported debts of £100 million.

The company’s collapse was attributed to: inadequate screening of weak cases, fraudulent reporting of claims and problems with the company’s referral process. The business model employed by such companies also meant that in extreme cases a claimant could be successful in their case yet see the majority of their settlement negated by excessive fees (see HERE).

The Compensation Act 2006 addressed these problems by requiring registration and authorisation of a range of activities including the marketing or soliciting of claims, investigation and management of claims and provision of advice on claims.

However a number of problems still existed in the market so that new rules introduced this year include:

• A ban on firms taking fees from customers before a written contract has been agreed and signed. This is intended to prevent companies from taking fees based on a phone agreement.
• A ban on adverts which offer potential customers cash or gifts for bringing profitable claims to companies.
• An order that firms must inform clients within 14 days if enforcement action has been taken against them.
• A ban on the payment and receipt of referral fees in personal injury cases came which came into effect on 1 April 2013, as part of reforms to the costs and funding of civil litigation. The ban captures all regulated businesses who used these fees including solicitors, Claims Management Companies and insurers. Breaches of the ban will be subject to regulatory action

Kevin Rousell, head of the MOJ’s Claims Management Regulation unit, said:

‘It is our absolute priority to protect customers and we are making certain that firms are following the rules at a time of major change for the Claims Management industry. We do not tolerate bad practice and continue to take action against companies which break the rules, including removing their licence to trade. We shut down more than 200 last year.’

The MOJ’s Claims Management Enforcement unit has been enforcing the new rules since April, visiting more than 450 companies in England and Wales – leading to further investigation of 141, action taken against seven and 13 surrendering their licence to trade. The MOJ has also stopped four firms discovered trading without authorisation from carrying out their business.

A changing landscape
While the reforms to claims management regulation will doubtless weed out some rogue firms and should lead to a better regulated industry The changes could well have some unintended consequences. The rogue companies would appear to be only a small element of the industry which currently boasts 2,693 firms according to MOJ figures to the end of March 2013. The MOJ reckons that during this period 211 firms had their authorisation cancelled, 677 surrendered their authorisation and 285 had warnings issued. There may be some overlap in these figures (e.g. firms who received warnings and subsequently surrendered their authorisation) but the relatively low number of firms subject to enforcement action that prevents them from carrying out regulated claims management activities does not suggest an industry entirely out of control.

That enforcement action is being taken against those companies that flout the rules is undoubtedly a good thing. But leaving the regulated sector does not necessarily mean that claims management companies will entirely cease their activities. While there are legitimate concerns about the levels of compensation clients are receiving and in many cases claims management companies are not needed to pursue a claim, it should be noted that for many people claims management companies are an essential component in receiving access to justice.

In 2012 giving evidence to MPs, the Financial Services Ombudsman identified that in the area of financial services, the claims management industry grew as a result of the banks’ failure to properly investigate the mis-selling of PPI.

The recent Justice Gap essay collection on public legal education also highlighted the fact that many consumers are unaware of their legal rights. It is also worth noting that some vulnerable groups are intimidated by or apprehensive about dealing with the legal profession and may not be able to afford to do so. As a result, claims management companies represent an attractive option for people wishing to pursue a claim but who may be nervous about engaging with legal technicalities. Whether the departure of these firms will make things better or worse for the consumer remains to be seen.