Claims Management and the Consumer Duty. Fair Value?

This year marks the 4^th anniversary of the FCA’s ownership of regulation of the Claims Management sector. The Claims Management Company (CMC) landscape has undergone significant change in that time. CMCs who were successful in demonstrating they could meet the FCA’s higher standards for authorisation have since been subject to increased levels of reporting, new fee caps, and tighter rules regarding conflicts of interest, amongst other things.

In January 2023 the FCA published its portfolio letter for the CMC sector outlining its key areas of work for the coming two years. This was followed up by the FCA’s business plan, published in April, which outlined the regulator’s focus on becoming a “outcomes led” regulator.

Reviewing these two publications provides us with an insight as to where the FCA’s focus will now be for Claims Management firms. Further change is also underway with the introduction of the Consumer Duty, a new set of rules which will affect all firms including CMC which comes into force on 31 July.

Key messages for CMCs in the portfolio letter

The FCA has combined its usual portfolio letter with its Consumer Duty communication this year, indicating how critical the Consumer Duty should be for CMCs in their business planning.

The FCA expects CMCs to deliver against all four Consumer Duty outcomes. CMCs will be expected to demonstrate they are able to demonstrate good outcomes for consumers in relation to:

• The governance of products and services
• Price and value
• Consumer understanding, and
• Consumer support

The letter also goes on to outline a commitment from the FCA to focus on three key areas of CMC activity over the next two years, with the goal of conducting proactive supervision work in the following areas:

• CMCs that conduct both unregulated and regulated activities;
• CMCs that use lead generators; and
• The general service standards of all CMCs.

Key messages for CMCs in the Business Plan

Turning to the Business Plan, the FCA also has Consumer Duty at the heart of its messaging. However, the Business Plan goes further than the general messaging to all firms and specifically calls out the role carried out by CMCs. This publication explains that one of the key objectives the FCA wants to achieve in the next two years is to “improve the redress framework” for consumers and to ensure that “The Claims Management Company sector delivers fair value”.

A direct read across can be made from these objectives to the “Price and Value” outcome under the Consumer Duty.

So, what exactly is this outcome trying to achieve?

The Price and Value outcome

Given the FCA has stated it will particularly focus on the “service standards” of CMCs in its portfolio letter, and followed this up by having a clear deliverable of CMCs offering “fair value” in their business plan, it is crucial that firms:

1. Have considered the value their claims management or lead generation services offer;
2. Can demonstrate the value of this to customers through the use of data; and
3. Can prove how they monitor these outcomes on a regular basis.

So, what is “Fair Value”?

The FCA has explained that this is about more than just the price a consumer pays for a service although this is one factor within its assessment. Fair value is about consideration of a range of factors, such as:

• Insights gained by benchmarking against similar services in the market to demonstrate how the service stacks up against its peers in terms of price and offering;
• The level of service the consumer receives for the service;
• The level of support the consumer receives throughout their journey;
• How consumers are supported should they not end their contract; and
• How a consumer’s data is used throughout the lifecycle of the product.

When applying this to the CMC portfolio, this last point is particularly relevant where a service is “free” for consumers, such as those firms who generate leads for others in return for commission. It is also worth noting that whilst the FCA introduced a fee cap for CMCs operating in the financial claims space, it expects firms to assess whether the fee it is charging is fair value even if it falls below this. It is also clear that CMCs have a responsibility even when they do not take on a claim on behalf of a consumer, that they are provided with information as to how they can still make a claim without the assistance of the CMC.

How is “Fair Value” assessed?

CMCs should have already considered how their claims management service offers fair value by now have prepared their implementation plans ahead of the deadline by conducting a “fair value assessment” on their service. This should include considerations such as those above.

Value assessments, which will be used to document why a CMC considers their products and services demonstrate “fair value” should be conducted at least annually. Whilst the Consumer Duty is due to go live on 31^st July 2023 and there are no set criteria for value assessments, the FCA has provided some feedback on implementation plans already from which we can surmise what a good value assessment should look like. Here are some pointers to help you achieve it:

1. Begin by identifying the products and services offered, fees and charges applied and their target market(s). This includes unregulated services you may provide such as translation services or (for lead generators) consider the costs and services provided by the firm you provide leads to.
2. Identify the costs of delivering the products and services per customer and benchmark the fees, charges, and services within the industry – how do you stack up within the market and how does this compare relative to the benefits and services your service provides e.g. do you offer additional support as part of the fee?
3. Review customer outcomes for the services received – how successful are customers in obtaining redress? What is their feedback on the service? How does this compare to other firms offering a similar service?
4. Consider how, all things considered, your firm can justify that the price the customer pays for the service is fair in relation to the service they receive and the outcomes they achieve.

In conclusion

The Consumer Duty will apply to existing products and services that consumers can sign up to by 31 July 2023. This is the date by which all firms including CMCs should have reviewed their existing service and shared information on these, such as features, benefits, limitations, target market and distribution channels, with any lead generators. Lead generators should have reviewed and be able to document how their service meets the four outcomes by this date as well. If CMCs cannot demonstrate that they are complying with the new rules from this date and cannot demonstrate that they are acting to deliver good customer outcomes, then the FCA is able to take action (including enforcement action in serious cases) against those firms for these breaches.

It is clear from the FCA’s messaging that the role of CMCs in helping customers obtain redress is crucial and this does not just apply to financial claims. The value assessments CMCs conduct on their services are central to this and clearly will be an area the FCA will require deep consideration of from firms backed up by clear rationale and data.

If you would like to talk to us about any part of the Consumer Duty, value assessments, the content of your implementation plans, training staff on the new Duty, or any other related questions, please don’t hesitate to get in contact.

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