Radar warning – a bad time to appear on the FCA radar

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1st April saw the introduction of the new regulatory structure comprising the FCA, PRA and Bank of England. It has, thus far, passed off fairly quietly. Most of the rules in the FCA Handbook have remained the same or very similar and the new regulators have not yet had time to flex their muscles to exercise any new powers or even impose their regulatory stamp on the sectors for which they have assumed responsibility.

My consistent advice to my own regulated clients has been that the next year or so will be a particularly bad time to appear on the regulatory radar – like any new broom the new regulator will be keen to make its mark and possibly make an example of any miscreants to show that it means business. So a good time to keep your head down and your nose clean.

Shortly before 1 April the FCA, the most relevant regulator to the advice sector, published its Risk Outlook and Business Plan for the coming year – this is always an opportunity to see what is taxing the mind of the regulator and what it is likely to be focussing on in the year ahead. In this case it is also an opportunity for the new regulator to set out it stall and how it may do things differently.

There is a lot for the FCA to improve upon. The FSA has lurched from one crisis to another with the latest blow being the Banking Commission report on HBOS which pointed out the obvious – that the FSA, with Sir James Crosby on its board, was hopelessly conflicted during the period when HBOS was setting itself up for later spectacular failure, as well as being asleep on the job.

The FCA Risk Outlook and Business Plan do throw up a few interesting items indicating its priorities and approach in  the year ahead:

Product Intervention – this features heavily in both documents. The FCA are talking a good game on early intervention where they see “toxic” products being launched by firms. The plans are however a little short on detail. Leading up to 1 April the message on product intervention has been confused and it remains to be seen whether the FCA can make this work. If it can then early intervention may be a largely positive development for the advice sector which too often seems to be left carrying the can for the failures of others;

Supervision – the FCA is promising to be a “…more proactive regulator, acting earlier and decisively….allowing us to address them [risks] before they cause harm.”.  It refers to the “Firm Systematic Framework” (FSF) that it will use to focus supervision on the key conduct risks in firms. At the heart of the FSF is the question of whether the interests of customers and market integrity are central to how the firm is run. Does this sound familiar to anyone? It appears to be TCF repackaged. The FCA also states that business model and strategy analysis will be included within the FSF – as the FSA never demonstrated a clear understanding of financial adviser business models, let us hope that the FCA gets a firmer grasp of those issues before implementing the FSF;

Consumer Protection  – as ever this will be a key priority. An issue taxing the FCA is that in a low interest rate environment consumers can have a “Poor understanding of risk and return.. and be tempted to “..take on more risk than is appropriate..”. This should sound a clear warning to advisory firms that the FCA is likely to continue to expect firms to put a lot of effort into ensuring that the recommendations made to clients are suitable. A low yield environment can provide a great opportunity for firms to show clients the value of taking proper financial planning and investment advice but firms must remain vigilant, ensuring that clients have a proper understanding of any risk assumed and that the client’s capacity for loss has been properly considered by the firm (and indeed understood by the client themselves). As ever when it comes to mitigating the risk of giving advice a focus on suitability will remain key. One danger if the FCA go in too hard on this issue (and indeed on product intervention) is that innovation in the market is stifled and firms are continually pushed towards a narrow band of advice that they fell able to give safely (and which is insurable) which overall would not be a desirable market outcome.

Enforcement – there doesn’t appear to be much that is genuinely new in the FCA’s enforcement priorities. It does however state that “..removing from the industry the firms or individuals who do not meet our standards..” will be one of those priorities. Again the FCA will have to match its tough talk with similarly tough actions. The multi billion pound industry-wide PPI misselling scandal did not result in the FSA pursuing any individual executives at the firms concerned whilst the FSA was always prepared to take on small IFA firms and their principals. The FCA will have to show that it is capable of taking a more balanced approach and be prepared to take on individuals at the highest level in the biggest firms when the conduct of those firms falls so far short of what is expected that the executives must take responsibility.

In summary the FCA is talking a good game but the acid test will be whether it can match that talk with the appropriate actions. A more effective and accountable regulator would be a positive thing for the financial services sector. Whether some structural tweaking resulting in largely the same staff implementing much of the same rules and legislation through several new and different bodies can achieve the real cultural change required at the regulatory level remains to be seen. We will all be watching closely over the months and years to come.

Alan Hughes

Partner

Foot Anstey Solicitors

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Cows will teach you a lot about human behaviour

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You can learn a lot from animals, particularly their character, moods, idiosyncrasies, and the way they respond to the world especially in a group.

Cows are great studies of human behaviour.

Growing up on a dairy farm was a great study in all sorts of behaviours, I just didn’t know it at the time. When you spend a lot of time with cows [and a dairy farm has you do that] you get to know most of the herd pretty well.

You see them twice a day everyday of the year. We milked for town supply so every day was the same routine. 4 o’clock in the morning, when your alarm would go off to get up and going, and 4 o’clock in the afternoon when milking would be starting.

We, like the cows, had an inbuilt clock that had us heading for the milking shed, almost on autopilot.

You’d get to know the cows and their personalities. Those that were docile and amiable, those with a sense of frivolity, those that were loners and those who were leaders.

Twice a day, every day for most of their adult life, they would enter the yard at the cowshed with the other 250 odd cows and go through exactly the same process. Being intelligent animals and quick to learn, they knew all about what milking entailed.

72 was not a pretty cow, not by Friesian standards. She didn’t have that handsome black and white coat that is so synonymous with Friesians, and most of the rest of the herd. Hers was a muddy brindle and black colour.

Perhaps it was professional jealousy, perhaps she was bullied by the others, perhaps she had no friends, but there was one consistent thing you could count on—her belligerent attitude.

Her demeanour, her stance, behaviour, attitude when milking; she just disliked the world and was happy that everyone should know. When milking, she would stand with her head down, ears back tail swishing vigorously, trying to catch any poor unsuspecting human who wasn’t watching, across the face.

And she would kick four or five times like clockwork. Once when you washed her, once when you started her [ready for milking], once when you put the milking cups on and once when you took them off. Often for good measure she’d kick them off in the midst of milking as well.

You knew and would watch out for her. Only if you were particularly tired or not concentrating would you get caught. In the middle of winter, with a substantial frost on the ground and wet hands, your fingers felt like tender little numb stubs on the end of your hands. Collecting a hoof right across your fingers would hurt, a lot, and remind you that you should have been paying more attention.

Why was 72 always like that? I never studied cow psychology but she just didn’t like the world. So, what for many cows was merely a routine part of life was for her a constant reminder of her need to rage against bovine oppression.

I’ve met clients like 72.

You can look at their situation and in a few minutes sum up the numbers and work out the issues. Financially everything should be working well, but it’s not. And the reasons are clear.

The challenge is getting acceptance that the numbers are telling a story and that what is required is not a new and sexy investment program, nor an app for their smart phone. What is required is to acknowledge that there is little or no connection between money coming into the household and what’s going out. Cashflow.

It’s as plain as day, but goes totally unrecognised.

And this behaviour may be decades old. Just like 72 that’s the way it is. More to the point that’s the view from where they stand and it’s normal.

So apart from stating the ‘bleeding’ obvious—what is the resolution?

In the face of facts they will state the need to invest, get better rates, get a salary increase. The reality is they need to watch what goes out of the house. Actually take some notice and manage it better. When we’ve helped them do that successfully, then and only then will they have the platform on which to build everything else. Failure to that will build a house of cards that will fall over, as it often has several times before. Until then it will be another year of the same old outcome.

So why do people choose to ignore that facts and do the same things over and over and expect a different result?

I don’t know, I never studied cow psychology.

Rex Wood Director

Iridium Financial Services

Sydney, Australia

Iridium Financial Services works exclusively with people between 40 and 50 who have been earning pretty good money, but realise that their net worth doesn’t reflect the amount of money they’ve earned or the hard work they’ve put in over the last 20 years or so.
They feel like they’re falling behind and want to catch up, before it’s too late

London woman names daughter ‘Hashtag’

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When I read this I was speechless and frankly this headline taught me that you can never ever predict the strange things people will do.

There are always new ways to innovate, but was this a step too far? It was Bill Gates who said, “The Internet is becoming the town square for the global village of tomorrow”.

In the ’90’s many businesses, and especially those in financial services, didn’t see why they needed a website, or indeed email or mobile phones. Just think, where would your business be now without any one of these?

Social media is exactly the same, not everyone gets why they need it, but eventually everyone will.  The sooner you and your business adapts, the sooner you’ll start to see the results. Social media will help your business flourish in so many ways today and will be an essential tool to the success you no doubt want in the future.

Social media goes from strength to strength. According to Incite’s recent Social Media Report, consumers continue to spend more time on social networks than on any other category of site, roughly 20 percent of their total time is online via PC and interestingly 30 percent of total time online via mobile devices.

Additionally, total time spent on social media in the USA across PCs and mobile devices increased 37 percent to 121 billion minutes in July 2012, compared to 88 billion in July 2011.

The recent proliferation of mobile devices and better, faster connectivity helped fuel the continued growth of social media and in the UK some 5% of UK households now own an Internet connected smart TV.

But social media is less about technology and more about relationship building; we are starting to see more women have a heavy influence, if not dominant role in the social media space. It’s no wonder that Facebook is being run in part by Sheryl Sandberg.

The range and diversity of social networks is also on the up, social media users are rarely tied exclusively to just one social network. Indeed, the interaction between different social sites is immense. Users dart between multiple networks in order to chat to their various groups of friends and associates.

But with financial services, the desire to embrace is countered by the urge to regulate it, and regulation and the Internet are not easy bedfellows. Indeed the Internet treats censorship or control as a ‘malfunction it does not compute’ and navigates around it.

Barrack Obama said recently, the Internet didn’t get invented on its own. Government research created the Internet (a British invention) so that all the companies could make money off the Internet. The point is that when we succeed, we succeed not only because of our individual initiatives, but also because we do things together”.

So why is financial services slower than most to engage?

Well, it could be an age thing, with so many within the adviser community being 60 or more, but I think it runs deeper than that. It is a simple fear of trying to understanding how, what, where, when and importantly the “is it compliant” impact upon the ease for them to engage.

Providers are very concerned that by engaging with social media it will open the floodgates for a tsunami of negative comments that they cannot control thus creating brand damage.

People and businesses care most about what their peers think and the technology is there for information, good and bad, true or false, to be quickly shared on products and services.

Getting information off the Internet is like taking a drink from a fire hydrant on full flow.

But by engaging with that social media flow, influence can move both ways. Because you or your business do not have a presence on Twitter, LinkedIn or Facebook does not mean anything bad or negative will be said about you. By being there at least you can put the record straight and to the same audience.

Google’s Chairman Eric Schmidt said, “The Internet is the first thing that humanity has built that humanity doesn’t understand, the largest experiment in anarchy that we have ever had”.

The FSA was not too keen on the use of social media or indeed anarchy and that is because it cannot control either. The guides that came from Canary Wharf about the consumer detriment 140 characters can cause is not grasping an understanding at all of the fact that increasingly, consumers don’t search for products and services, rather services come to their attention via social media, warts and all.

The FCA seems to be adopting a more considered position, Martin Wheatley, clarified the regulator’s intentions to make better use of Twitter in an interview with the Daily Mail in the days leading up to the transfer of power from the Financial Services Authority.

The Internet is now way beyond just making money. It is about brand awareness, reputation, creation, influence, opinion seeking or forming and much more.

But not definitely not control and certainly not by regulation.

To assist in creating a better understanding within our community, we just launched our Panacea Social Stream service.

It provides a great service that gets around all the problems so many advisers have about time constraints regarding how, what, where, when and importantly the “is it compliant” impact upon the ease to engage.

It will help you to develop your business in this field, engage with you clients and get the most from social media. This resource will grow richer each month, adding to the 70,000 plus site pages with new ideas and of course opportunities.

The power of social media is that it forces necessary change, any regulator, any adviser and any consumer, should see that as a very big and positive outcome.

It’s about the “Money, money, money”

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How to build a super-profitable advisory firm

We recently noticed some very interesting tweets on “How to build a super-profitable advisory firm” and after reading and digesting them we felt it was worth a conversation with the “Tweet” source- a forward thinking accountancy firm, the WOW Company.

As accountants, they’ve worked with hundreds of small businesses over the years, from start-up to £5m turnover and with this in mind we asked them to share their thoughts and experiences with the community, we are sure you will find this an interesting and informative read.

Enjoy.

“We’re constantly fascinated by the difference between those that make it big and those that just tick along, so we thought we’d find out what separates these two groups and share with you the things you need to be thinking about if you’re serious about building a super-profitable advisory firm.

Get cash in quicker

Some quick tips to get your cash in quicker (particularly relevant post RDR):

  • Ask for deposits – Do not start work on a project until you have been paid a deposit. If the client is not willing to work in this way, walk away. They will only be a nightmare further down the line.
  • Staged payments – Don’t leave a massive payment to be made at the end, split the project up into its key milestones and look to invoice regularly throughout.
  • Reduce your payment terms to ‘by return’ – If you give 30 days credit, you cannot start asking for the money for 30 days. This is crazy – it is the banks that should be lending to businesses right now, not you! Change your payment terms on invoices to ‘by return’ and you’re then able to ask for the money sooner.
  • Be upfront – State your terms in your ‘terms of engagement’ document. It won’t stop clients trying to negotiate, but at least you can start the discussion on your terms, not theirs.
  • Retain leverage – Don’t e-mail over the final report or complete the pension transfer until they have paid for it. Once the project is completed, you’ve got no leverage.
  • Have a system for getting cash in – Review your debtors at least once a week and allocate time to make phone calls to get the cash in. If you’re not comfortable doing it, find someone that is.

Really get to grips with the numbers

Unless you really understand the important numbers in your business, you’ve got no chance of increasing your profit. And we’re not just talking about understanding your accounts here. There are everyday numbers within your business that will be crucial guides to how you are doing. We help our clients set up dashboards for their businesses, to ensure you are regularly reviewing the numbers that are important to you.

Every business is different, so we’re offering 30-minute telephone reviews for any small business who needs help setting up their dashboard. Get in touch if you’d like to arrange this (no charge for this initial chat).

Prioritise sales & marketing

We’re Accountants, so we’re not going to start dispensing marketing advice. However, when we did our research, we noticed that the clients that make the most profit mentioned that a key turning point for them in their growth journey was when they decided to prioritise sales and marketing. We spotted a number of common traits amongst the top performing advisory firms. They all had the following:

  • An individual responsible for sales and marketing (it didn’t fall in between 2 directors).
  • Allocated time to complete sales activity, e.g. every Tuesday & Thursday, or the first 2 hours of each day.
  • Targets for generating opportunities, e.g. number of meetings required per week.
  • Kept track of the key stats, e.g. where the client heard about them, number of meetings, value of assignment, conversion rate, final project value.
  • A plan – Not ‘War & Peace’, but a simple one page plan that showed them what they were going to do this month to generate clients.

Do you prioritise sales and marketing in your business?

Make your projects more profitable

It’s one of the biggest challenges that advisory firms face: Delivering great client service, whilst still making a profit. We see so many firms walking the tightrope between keeping the client happy and ensuring that the scope of the job doesn’t creep beyond the original boundaries – how many times have you said yes to the question “Can you also help me with this?” but then not charged for this additional help? The reality is that there is no simple answer to solving this challenge, but there are lots of little things that you can do to help you achieve more profitable assignments.

Much will depend on how you are doing things at the moment, so get in touch to discuss how you can create more profitable projects. We’ll happily spend 30 minutes on the phone chatting through a few ideas that we have up our sleeve.

Get out of the day-to-day

This is easier said than done, but unless you step away from the coal face, you’ve got no chance of generating sustainable profits. We noticed that the top performing clients we surveyed were masters at delegating and building teams around them that could do the work. The founders were brave when it came to recruiting (they did it early) and were constantly looking ahead to help plan what resource they’d need, including investing early in apprentice paraplanners and training them up for the future.

If you feel that you’ve not got the right team around you to delegate to, then you need to do something about it…. and fast. You’re also going to have to get really good at letting go of the day-to-day tasks, to allow you to concentrate on the bigger picture.

If you’d like to build a super-profitable advisory firm and are looking for an accountant to help you get there, get in touch via info@thewowcompany.com

Peter Czapp;  thewowcompany.com

 

 

Mine’s bigger than yours!

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It was reported a week or so ago that IFA network Best Practice has raised the bar for its would-be members, requiring them to be QCF level 6 qualified.

The ‘posting’ outcry that followed highlighted the adviser qualification schism that has developed both leading up to and beyond RDR.

This is very sad, counter productive and in many ways misses the many valid points made by advisers about the purpose and application of qualifications linked to doing the best for your clients.

Some perspective is called for in this debate as it is clear that the industry is a sum of its many and varied parts. How this applies to fostering strong consumer relationships is in many ways not always about how well qualified an adviser is.

In August last year the IFS launched a level 6 qualification program.

In their notes on the subject they said:

The new Level 6 qualification builds on the success of the Institute’s Diploma in Financial Advice, the Advanced Diploma in Financial Advice is aimed at advisers who want to differentiate themselves from their peers and demonstrate their commitment to professional development and standards by going beyond the threshold qualification level.

To be eligible for the programme, applicants must already hold a QCF Level 4 qualification, such as the Institute’s Diploma in Financial Advice or an equivalent qualification in financial advice and planning.

Best Practice was founded in 2003 and in 2009 gained the Chartered accreditation to achieve the highest levels of qualification and professionalism.

Any firm planning to join their network must have a principal or director qualified to level 6, holding either the chartered or certified financial planner qualification. Around half of their 90-member network already holds level 6.

There will be commercial benefits attached to this decision. For example the network should be able to obtain better PI terms based upon a combination of higher levels of qualifications and any uplifted compliance and best practice rigour that is put in place.

Best Practice state that they “have a belief that all practices are different with their own set of goals and way of working” 

Qualifications are important but it is how they are put into practice, how they relate to a client needs and most importantly do their clients see enough value in this to pay for it.

Higher qualifications do not always guarantee good outcomes.

We only need to look at NHS nursing today to see that the standards and expectations of patient care, that were fostered and promoted pre degree entry to the profession, have fallen in to great disrepair.

Many new nurses, now with a degree qualification as a requirement to do the job, no longer see that caring about patients is not always about the professional qualification to do the job.

It is about sometimes doing often dirty unpleasant work, about empathy, compassion, pride, humour, understanding, hope and above all never say never.

For those advisers that do not see the need or the value for QCF level 6 to best serve their clients interests it is most likely that they and their clients value more their empathy, compassion, pride, humour, understanding, hope experience and above all never say never attitude that has been established over many years in addition to their QCF level 4.

And really there is nothing wrong with that.

Best Practice are right in saying: all practices are different with their own set of goals and way of working” and as an industry we should see that there is no right or wrong, no good or bad, no better or worse.

It is what works for your firm and your clients, who after all are the ultimate arbiters in deciding your success or failure.

Back in March 2011, MM’s Paul McMillan was asking if level 6 will become the new minimum standard and I suspect that within 5 years it may well be heading that way.

If so, any raising of the academic qualification bar should be done with a clear purpose, way beyond just achieving higher qualifications for qualification’s sake.

Stinking badges removal. CMC update.

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Alan Lakey reports, that at long last, Parliament has entered into the debate regarding claims management fraudsters.

Labour MP Nic Dakin stated in unequivocal terms that fraud is rampant, that the free to use FOS is being utilised as a weapon by CMFs who can lie and deceive secure in the knowledge that it costs them nothing yet may win them 30% of some fraudulent compo.

Whilst the MOJ does its best it is under-resourced and bogged down by ineffective rules. Hopefully this additional pressure will ensure that the conmen and opportunists will be driven from the sector. Claims Management Companies.

The following transcript makes for a positive and worthwhile read:

Commons debate transcript from the Motion made, and Question proposed on 19th  March 2013

7.4 pm

Nic Dakin (Scunthorpe) (Lab): The claims management industry has grown dramatically in recent years. In 2007, it was estimated that there were 400 claims management companies. There are now more than 3,000. The value of the industry in terms of annual turnover continues to grow and is now estimated to be £774 million, which is up 33% on last year.

Unfortunately, not all claims management companies behave responsibly. Consumer research conducted by the Association of British Insurers found that about four out of five adults in the UK had received unsolicited texts encouraging them to pursue claims for accidents or mis-sold financial products. In just 8% of cases, the individual who was contacted had had an accident or held a policy against which there might be a claim.

A Which? mystery shopping exercise found widespread rule breaches, misleading statements and unfair contract terms by a significant number of claims management companies. If you have received a text message or seen a TV advert telling you that you have thousands of pounds of unclaimed payment protection insurance, Mr Deputy Speaker, you are not alone. The research by Which? shows that 93% of people have.

In 2011-12, the claims management regulator received 10,000 complaints about claims management companies from consumers and firms. The cold calls, high-pressure tactics and misinformation that are used mean that the behaviour of some CMCs is extremely damaging to members of the public, particularly elderly and vulnerable people. Furthermore, the damage to businesses from the tenacity and dishonesty of some CMCs is very concerning. As the Motor Accident Solicitors Society points out, problems with the regulatory structure have allowed such bad practices to flourish. That is why that organisation and others have called consistently for better regulation.

The mis-selling of payment protection insurance by banks was one of the biggest mis-selling scandals ever. The courts have rightly said that those who were mis-sold PPI must be compensated. However, when claims management companies enter into the fray, further injustices occur, as a scandal of mis-selling begets a scandal of misclaiming. The claims management companies wilfully exploit the structures that are in place to protect consumers by submitting countless claims that have little or no merit, with no fear of a financial penalty. They have nothing to lose and everything to gain.

Jim Shannon (Strangford) (DUP): Every one of us as elected representatives has had complaints from our constituents on this matter. One of my concerns is that when people who are vulnerable financially receive information about such claims, they think that there is nothing to lose and that they will get the money. Does the hon. Gentleman think it is time that these companies were regulated so that they do not raise people’s expectations so that they think they will get the money, when at the end of the day they will not and, indeed, will be out of pocket?

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Nic Dakin: The hon. Gentleman makes a good point. A constituent of mine who works for a company told me recently that a member of the public, on the advice of a claims management company, had rung it up and given it the spiel. My constituent said to her, “I’m sorry, but we haven’t been selling PPI for the last 15 years.” The lady on the other end of the phone said, “Oh, I’m really disappointed. I thought I was going to get some money.” The hon. Gentleman is exactly right that such companies raise expectations and exploit vulnerable people at a difficult time. That really should be stopped.

Based on their cold-calling fishing expeditions, claims management companies write numerous letters to businesses simply because a client recalls that they may have had a financial transaction with a company, even though no evidence is provided. The CMC-generated letters always accuse the businesses of mis-selling, citing a stock list of reasons, despite the fact that in many instances no PPI was ever sold. CMCs also buy leads, many of which have been generated by companies that follow up accident whiplash claims and then try to instigate other claims where no client discontent exists.

Ironically, members of the public do not need to use any kind of intermediary to submit a PPI claim. The consumer will be charged about 30% of their compensation if they use a claims management company, but nothing if they submit the claim themselves. The consumer group Which? estimates the average PPI claim to be £2,750, costing the consumer around £835 in CMC fees.

Claims management companies are not just unnecessary, they can be damaging to both consumers and businesses, and an example from my constituency shows how serious that can be. Ian Broadbent’s company, Blue Sky Mortgages, has to respond to a continuous stream of vexatious claims from claims management companies on behalf of clients who have never been sold PPI by his business. In some cases, his business has had no dealings with the claimants whatsoever.

That is more than a mere annoyance. When a company disputes a PPI claim, the Financial Ombudsman Service steps in. However, there are clear problems with the way in which disputed claims are handled. Businesses are charged up to £850 per case, whatever its merits, and although no fees are charged for the first three claims against a company—soon to be extended to the first 25 claims—the rate at which CMCs generate claims, often with the most scant client information, means it is not long before a business has to pay out large sums of money for doing absolutely nothing wrong.

FOS investigations further damage businesses by dragging claims on, and it can take several years for a dispute to be resolved. That can be extremely damaging for businesses, with the uncertainty and unpredictability of FOS investigations adding further pressure to businesses struggling to survive in these austere times. Businesses have no right of appeal against FOS decisions—a right that consumers and claims management companies retain—and that is at odds with some fundamental principles. Claims management companies can file claims with absolute impunity. There are no charges for false claims, and if a claim succeeds, they know the decision is final.

Jackie Doyle-Price (Thurrock) (Con): I congratulate the hon. Gentleman on securing this important debate on an issue that has concerned our constituents for

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some time. Does he agree that it is perhaps time that this became a less risk-free business for claims management companies, particularly in the field of PPI where, frankly, reckless profiteering is being carried out by companies with absolutely no risk to them?

Nic Dakin: The hon. Lady makes an excellent point. We have a situation in which claims management companies can never lose, however vexatious the claims they pursue, while businesses targeted by those companies always lose. She is right: it is time to balance the risk in a different way.

Kate Green (Stretford and Urmston) (Lab): I am glad that my hon. Friend has initiated this debate. Does he agree that some of the Government’s policies that will mean people are no longer able to access lawyers—the fast-track small claims procedure, for example—will mean that claims management companies are able to expand their businesses? People will not be able to go it alone, but neither will they be able to access proper legal advice?

Nic Dakin: My hon. Friend draws attention to a very real danger in the current changes.

In his letter to me, Mr Broadbent drew attention to the following unsatisfactory way in which the FOS acted. After downloading the FOS standard PPI claim form, a client completed it. He answered the questions honestly in the form of tick boxes, and stated that he did not recall the sale process. The claim was declined, yet nine months later a CMC made the same complaint on behalf of the same client. In this case all the boxes were ticked, stating that the client had a clear recollection of the sales process and how the product was mis-sold. That was not considered a vexatious complaint and it is being considered by the FOS. It says that it must ignore the original complaint and review it on the basis of the claim submitted by the CMC. That will not strike anyone as a sensible, fair or efficient way to proceed.

The FOS does good work resolving disputes in many areas, but its ability to deal appropriately with PPI disputes is compromised by the sheer volume of complaints it receives. Last year, complaints about PPI made up 60% of all complaints dealt with by the FOS, yet CMCs made no contribution to the running costs of the FOS. Greater control over CMCs, and a system where they will be charged for making unsuccessful claims, would help free up the FOS to deal more effectively with other matters in its inbox.

The Ministry of Justice is to be applauded for making some headway in its control of CMCs, but there is more to do. The ban on referrals in personal injury cases, which is due to come into force in April, will hopefully reduce harassment of members of the public who have been involved in accidents. The flipside of that is that claims management companies may focus more on PPI claims and look to diversify into new areas of vexatious claiming. Indeed, there is already some evidence that they are turning their attention to mortgages.

The Financial Services Authority acknowledges that there has been no wholesale mis-selling of mortgages, yet some claims management companies are already sending template letters to businesses, claiming that

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mortgages were mis-sold. The letters are easily produced but take a lot of time to answer—sometimes as long as 10 or 12 hours—because of the complexity of the mortgages.

The claims management regulator set up by the Ministry of Justice regularly shuts down CMCs that deliberately submit vexatious claims, but the number of claims companies is too high for the regulator to keep up. The number of companies is rising—it has doubled in the past two years to more than 3,000. The competition between them results in more vexatious claims and ever more aggressive tactics. In the years 2011-12, the regulator undertook only 150 visits and audits of firms, which is fewer than 5% of authorised CMCs.

I would be grateful if the Minister responded to a number of questions in her reply. Does she support the call of Which? for improved regulation of CMCs? Will she take steps to ban cold calling and cold texting? Will she take action to ensure that, in any advertisement, CMCs make clear to the client the benefit of their taking their claim directly, without intermediary, to the FOS? Will she place a duty on CMCs to ensure that the claims they submit contain accurate information? Claims companies should be required to exercise due diligence and must reasonably believe that there is a possibility of a valid claim. They must not be allowed to continue to fish for claims with very little consequence.

CMCs play an influential role in the UK’s compensation and redress regimes. They are responsible for almost half the complaints sent to the FOS, but make no financial contribution to its operating costs of around £107 million. In the light of that, will the Minister explore how CMCs can make a financial contribution to FOS running costs? For example, CMCs could be required to pay the £500 FOS case fee when they have not undertaken adequate checks to ensure there is a policy in place. The FOS dismisses charging for CMCS in “Charging for our work: modernising our case fee arrangements”, saying that charges will be passed on to customers. A simple solution would be to ban the collection of up-front fees and cap the percentage of a claim that a CMC can take. That would prevent their passing on to customers the reasonable charges that I argue should be levied on the industry.

Will the Minister take steps to ensure that CMCs accept leads only from organisations that are also regulated by the claims management regulator, organisations that are exempt introducers, or organisations that are regulated by another body, such as solicitors? There is concern that the FOS is insufficiently independent of the regulator, which is currently the FSA. Can that be scrutinised? Can appropriate action be taken to ensure a clear separation of powers and responsibilities? It seems unreasonable that a business must adhere to the adjudicator’s findings without a right of appeal and with no knowledge of the adjudicator’s qualification for making a decision. Can that be looked at with a view to equalising the playing field?

Finally, can steps be taken to ensure that the Ministry of Justice and the CMR have sufficient powers and capacity properly to regulate the business in a way that is fair to consumers and businesses? After all, we should support businesses such as Mr Broadbent’s. His business lends to other businesses and helps them to expand, fuelling the growth of the economy.

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Claims companies are making huge amounts of money and filing huge numbers of claims against whatever businesses they can, regardless of whether they have mis-sold or even sold a PPI. At their worst, CMCs do not help the consumer, and damage businesses and clog up the regulators. Their proliferation must be stopped.

7.18 pm

The Parliamentary Under-Secretary of State for Justice (Mrs Helen Grant): I congratulate the hon. Member for Scunthorpe (Nic Dakin) on securing this debate on claims management companies, which remain topical. Clearly, there are serious conduct problems among a minority of CMCs, but it is worth remembering that some provide a useful service in identifying consumers who have suffered loss and supporting them in obtaining redress when they would otherwise receive nothing. While we have made good progress since the start of regulation, I acknowledge that there is more that can be done and should be done to improve the conduct of CMCs, and to strengthen consumer protection across the claims management industry. To that end, the Ministry of Justice claims management regulation unit remains committed to providing a stable and robust regulatory system that the public can trust. I am glad that the hon. Gentleman acknowledged the good work that the CMR unit is doing. It is stepping up its approach to improving CMC compliance and strengthening enforcement action through a range of measures.

The CMR unit has established a specialist compliance team to deal with poor practices used by some CMCs when handling claims for mis-sold payment protection insurance. In the past year, the compliance team has conducted more than 100 audits of CMCs assessed as high risk, issued warnings, and taken other forms of enforcement action where problems have been found. This work continues and includes targeting CMCs that are submitting poorly prepared or spurious claims, charging up-front fees and operating call centres, to ensure that sales calls are compliant.

On the problem of nuisance calls and text messages, we fully support the work of the Information Commissioner’s Office in enforcing the legislation that protects individuals from this form of direct marketing. We also recognise the benefits of a joint approach to tackling the problem. Before I go further, however, it is important to point out that spam texts that market claims services are generally not sent by CMCs, but by other organisations that generate leads for other businesses, including CMCs. The CMR unit is working with the ICO to investigate and take enforcement action against CMCs accepting leads or claims from this type of marketing.

Within the personal injury claims sector, most of the issues relate to businesses or organised groups attempting to defraud the insurance industry. The CMR unit contributes valuable intelligence and expertise, and has worked with a range of organisations and agencies to tackle fraud, including the Insurance Fraud Bureau, and police forces on a number of operations throughout the year. Those operations have resulted in arrests, charges and convictions. Much has therefore been achieved at a time when resources are limited. Since regulation began in 2007, the CMR unit has removed the licences of more than 900 CMCs across the sector. More recently, a major crackdown resulted in more than 400 CMCs

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being warned, suspended or having their licences cancelled. That has been done with no impact on the public purse, as regulation is self-financing.

So far, I have covered the good work that the CMR unit is doing to drive out malpractice. What I want to do now is to look further ahead to the programme of reforms we are introducing this year. Our reform plans give us all huge opportunities to do things better and to ensure that the regulatory framework continues to deliver effectively. This year’s reform agenda includes four main measures. Following a consultation exercise, we are proposing to tighten the conduct rules for CMCs. Most critically, we are proposing that contractual agreements between CMCs and consumers must be signed by clients before any fees can be taken. CMCs will only be permitted to refer to being regulated by the claims management regulator, rather than by the Ministry of Justice. CMCs will have to inform their contracted client of any variation or suspension of their authorisation. We intend to publish our response to the consultation shortly and, subject to the relevant Government clearance processes that can take some time, we expect implementation of the proposed changes to follow this summer.

Last year, we ran a public consultation on imposing a ban on CMCs offering financial rewards, or similar benefits, to potential claimants as an inducement to make a claim. The ban will come into effect from 1 April. Also from 1 April, we are implementing the primary recommendations contained in Lord Justice Jackson’s review of civil litigation costs, including in particular a ban on the payment and receipt of referral fees in personal injury cases and fundamental reform to the no win, no fee conditional fee agreements. That will include, in particular, a ban on the payment and receipt of referral fees in personal injury cases and fundamental reform to the no win, no fee conditional fee agreement.

Kate Green: I am aware of the changes being made to referral fees, but is the Minister aware of the concern that, because they will be brought within the ambit of the conditional free arrangements, CMCs will be able to use those CFAs as a means simply of replacing referral fees?

Mrs Grant: I think that our reforms have looked into these issues carefully and we have anticipated many of the issues to which the hon. Lady is alluding. I was going to touch on this in my speech anyway. We feel that our reforms have been carefully considered and are proportionate, appropriate and balanced, and that we now have to start to attack our compensation culture, which has been building up for many years. Obviously, the reforms will be reviewed within three to four years, and if further changes need to be made in order to create further balance and fairness, of course that can be considered.

Nic Dakin: The Minister is spelling out some of the good work being done through the Ministry of Justice and the CMR, but may I pick up on the point made by the hon. Member for Thurrock (Jackie Doyle-Price) about the balance of risk? The Financial Ombudsman Service places all the risk with businesses, which means that CMCs can act with impunity and without risk. Is the Minister talking to her colleagues across government to ensure that the excellent work being done by the MOJ is met in parallel by the other Departments and so can be reinforced?

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Mrs Grant: Again, I am grateful to the hon. Gentleman for acknowledging the good work of the CMR unit in the MOJ. Of course, we are working across government to try to get this right. I hear exactly what he says, but we need to take a balanced approach and to accept that not all CMCs are bad. We want targeted, appropriate and proportionate action against the bad companies, but we also want the good ones to continue.

Lastly, this year we intend to commence powers under the Legal Services Act 2007 to extend the Legal Ombudsman’s restriction in order to provide an independent complaints and redress scheme for clients dissatisfied with the service provided to them by the CMC they have contracted with. Consumers will benefit, because the Legal Ombudsman has wider powers of redress, including the ability to order compensation.

I want to pick up on some of the issues raised by hon. Members. I believe that I have already touched on my attitude to balance and our civil reforms to funding and the costs. I would like to reassure the hon. Member for Scunthorpe that I firmly believe that, notwithstanding the reforms, meritorious claims will still be permitted. It is avoidable and spurious claims that we want to stop.

On the issue of banning cold calling and texting, I should say that nuisance calls and text messaging are a serious problem that can cause considerable annoyance, as clearly it has done in the case of the company in the hon. Gentleman’s constituency. The Information Commissioner’s Office can take enforcement action and has lead responsibility in this area, but we of course work very closely with it, and will continue to do so. The commissioner can impose penalties of up to £500,000 for serious breaches of privacy. Indeed, I was informed a few days ago that for the first time it recently issued fines totally £440,000 to two illegal marketers responsible for distributing millions of spam e-mails.

In our opinion, a blanket ban on cold calling would be disproportionate. Other businesses operating in similar industries such as debt management are not subject to a blanket ban. Next year, CMCs will have to have a signed contract before they can take any up-front fees from an individual, and that will tackle the main detriment resulting from cold calling.

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On the issue of charging CMCs, we fear that that could penalise consumers who find the services of CMCs helpful in making complaints. We worry, too, that any fee would be likely to be passed on to the consumer. Also, we do not believe that charging a fee is the correct approach to protecting consumers. Protection will ultimately be achieved by effective regulation.

Jackie Doyle-Price: I hear what the Minister is saying, but I draw her attention to PPI claims, for which the banks have well-established processes that involve only the filling in of a form. The presence of an up-front fee might make consumers think twice about giving their business to a company, and about doing the work themselves instead.

Mrs Grant: I hear what my hon. Friend is saying, but I am afraid that I fundamentally disagree with her on this point.

The hon. Member for Scunthorpe asked who might be the best regulator for these purposes. I believe that the MOJ is in a good position to continue in that role. We can act now, and we are doing so. The CMR unit has a good track record of making a difference using relatively limited resources, and we have had a good response from stakeholders, who are supporting the regulation remaining with us. I also believe that it is not a good idea to transfer responsibility at a time of substantial change.

In conclusion, the CMR unit will step up its approach, and resources will be devoted to tackling the underlying problems that exist in the conduct of some CMCs. I do not believe that institutional reform is necessarily the answer, especially at a time when the industry is undergoing such fundamental change. The industry will of course have its role to play in driving up standards. CMCs must give consumers and defendants more confidence in the system by ensuring that they comply properly, fairly and adequately with the rules.

Question put and agreed to.

7.32 pm