Lloyds London

ACSO responds to the FCA consultation on preventing claims management phoenixing

Posted on Tue, 22/06/2021

The Association of Consumer Support Organisations (ACSO) has responded to the Financial Conduct Authority (FCA) consultation ‘CP21/14: Preventing claims management phoenixing’.

Claims management ‘phoenixing’ occurs when an individual or individuals connected to a financial services firm that has gone out of business later reappear in connection with a claims management company (CMC) and charge consumers for seeking compensation against their former firm’s poor conduct by bringing complaints to the Financial Services Compensation Scheme (FSCS).

Of the 250 CMCs regulated by the FCA with permission to manage financial services claims, at least 18 (7 per cent) have connections to former financial services firms. This could allow individuals from those CMCs to benefit from the firms’ previous poor conduct. This is not to suggest that all 18 firms are practising claims phoenixing, only that they have the potential to do so. However, the FCA does not always have access to the information it needs to identify connections between CMCs and the claims they manage or seek to manage. This means that it is difficult to determine the true extent to which phoenixing might be occurring.

Rachel Cairnes, policy and public affairs advisor at ACSO, stated “[g]iven the significant harms that arise from claims management phoenixing, ACSO support intervention by the FCA. The prohibition should be supported by all reputable claims management firms, as is by those in ACSO membership.

“The practice incentivises financial services firms to wind up when redress liabilities arise in the knowledge they have the potential to charge consumers fees of up to 40 per cent for any future claims management activity (although we note the FCA’s ongoing review of restricting/ capping CMC charges for financial products and services).

“In terms of market confidence, the FCA is right to highlight the reputational damage for the CMC sector that arises from claims management phoenixing. Well-governed and effectively regulated CMCs play an important role in helping consumers to secure redress, not least for those who may otherwise be unable or unwilling to bring a claim themselves. Consumers should feel confident that their chosen firm is acting in their best interest. As such, claims management phoenixing damages public confidence in the CMC sector, as well as the financial services sector more broadly.

“Phoenixing has an impact upon fair competition and it creates an advantage for those firms that have preferential access to or advance knowledge of redress claims. This competitive advantage is particularly concerning owing to the significant consumer detriment and reputational damage caused by the practice of phoenixing.”

The FCA is proposing to prohibit CMCs from carrying on any regulated claims management activity in respect of a claim or potential claim to the FSCS in the following circumstances:

  • Any employee of the CMC, or any member of its governing body, was directly involved in or had responsibility for managing the financial services activity that is the subject of the claim or potential claim; and/or
  • A member of the CMC’s governing body is related to a person who was directly involved in or had responsibility for managing the financial services activity that is the subject of the claim or potential claim; and/or
  • The CMC or a member of its governing body has transferred or agreed to transfer a financial benefit to a person who was directly involved in or had responsibility for managing the financial services activity that is the subject of the claim or potential claim.

ACSO agree with the FCA’s proposals, although note that the FCA “is right to grant CMCs the ability to apply for a waiver from the rules in the event that a relationship between persons exists without any material connection or flow of benefits between parties.

“Likewise, if a person has direct involvement in a related financial services activity and subsequently received a financial benefit from the CMC for a reason that is unconnected with the regulated activity of the claim arising from it, the CMC in question should be able to apply for a waiver from the rules. This will stop the proposals unfairly preventing CMCs from managing claims in some circumstances and will ensure consumers continue to receive access to justice through their chosen claims management firm.”

Cairnes continued: “The FCA’s prohibition on phoenixing should apply to any firm carrying on any FCA-regulated claims management activity for FSCS claims and potential claims. In agreement with the FCA, this should include firms carrying out lead-generation activity. Despite there being no evidence to date of failed financial services firms phoenixing into lead-generating activity, the same incentive exists.”

ACSO members can read the submission in full on the members’ area of the website.