‘Now that both application windows for CMCs are closed, we are seeing evidence that the FCA has identified a number of areas which are causing concern. These are clearly set out in their Dear CEO letter from June and their more recent press release from the 23rd of August highlights a particular concern with advertising standards. We anticipate that the regulator will continue its focus in the coming months and expect it to use a range of regulatory tools, including the use of Skilled Person reviews’
Richard Barnwell, BDO Partner, Financial Services Advisory
Temporary permissions and authorisation
From 1 April 2019, the Financial Conduct Authority (FCA) took over regulation of Claims Management Companies (CMCs). Previously regulated by the Claims Management Regulator (CMR) under the Ministry of Justice, CMCs have registered for temporary permissions to continue with claims management related regulated activities whilst full applications for authorisation are considered.
The FCA staggered the application periods, according to the sector CMCs operate in; regulated activities have been split across 6 claim sectors, 6 activities and with 2 levels of permissions. Both application periods are now complete and firms should have submitted their full applications with supporting evidence to demonstrate how the FCA’s Threshold Conditions, including compliance with Claims Management Conduct Of Business (CMCOB), are met.
Supervision and areas of focus
The journey to authorisation for firms who are new to FCA regulation can vary, at times it can be lengthy and resource intensive with requests for further information and discussions to understand a firm’s understanding of risks, business model and financial/non-financial resources.
Given CMCs continue to operate with temporary permissions whilst they are assessed, the FCA CMC team are working closely in both an authorisation and supervisory capacity to identify and address areas of potential harm in the market. Initial concerns include conflicts of interest, lack of due diligence on leads and financial promotions.
The Director for Supervision for Retail and Authorisations issued a ‘Dear CEO’ letter to CMCs in June 2019 identifying early problem areas as:
- CMCs acting for customers without obtaining appropriate consent or letters of authority
- CMCs submitting letters of authority and claims in fictitious customer names
- No relationship existing between the customer and financial service provider receiving the claim
- Financial promotions do not comply with FCA rules
In light of tougher rules, further supervisory contact has also been made on an ad hoc basis to firm’s holding client money including remedial work around the controls required.
Most recently the FCA issued a press release on the 23rd of August outlining concerns across the sector with respect to advertising standards.
Given the potential for consumer detriment, the FCA may use its formal regulatory tools to require CMCs to appoint a ‘Skilled Person’ in accordance with section 166 of the Financial Services and Markets Act (FSMA) to monitor and assess a CMC’s compliance with the FCA rules and guidance.
Risk, Governance, Systems and Controls
With the FCA acting quickly on the various behaviours they identified in the market, it is increasingly important for CMCs to have robust risk identification and management frameworks to demonstrate appropriate non-financial resources, and ensure the FCA’s Threshold Conditions are met.
With the introduction of the Senior Manager and Certification Regime (SM&CR) for all FCA regulated firms by December 2019, CMCs will need to have appropriate governance structures with key individuals taking specific responsibilities for the manner in which the firm is managed.
How can we help you?
We have strong regulatory experience with firms who are new to FCA regulation, obtained through working with existing CMCs and firms within the consumer credit and payments sectors that have been on the same journey. We have assisted a variety of clients with enhancing their risk and governance arrangements; our Financial Services Advisory team is well prepared to advise and assist CMCs. We offer a range of services to help firms that are tailored to a firm’s business model, governance structure, SM&CR category and operations. We also provide ongoing regulatory and compliance support to firms on a retained basis.
In addition to the above, BDO also has extensive experience in relation to Skilled Person reviews (appointed to conduct over 20% of the skilled person reports commissioned by the FCA in 2018/2019) across a variety of sectors.
For more information, please contact Richard Barnwell or Zahra Ellahi to discuss further.