Adapting to a future with CMCs

Thu 14 Feb 2019

By Anthea Coulter, Account Director

Consumer credit firms are increasingly targeted by CMCs, we explore how this adversarial relationship is changing in the face of new legislation.

Claims Management Companies (CMCs) have worked their way into Financial Services and become FCA regulated from April 2019. The Financial Lives survey commissioned by the FCA revealed that 67 percent of claims made over the past three years would not have been brought without CMC assistance. CMCs are likely to reduce in numbers, however, they will continue to be a threat to firms and the viability of the consumer credit business model.

For evidence of how devastating CMCs can be, we need look no further than Payday lender, Wonga. Shortly before filing for administration back in August, a spokesperson said, “the number of complaints related to UK loans taken out before 2014 has accelerated further, driven by claims management company activity”. Wonga claimed historical claims made by CMCs swallowed up the £10 million cash injection from shareholders meant to sustain the company.

So what can be done to bolster your resilience?

Adversarial relationship

11.1.jpg

At the present time, the relationship between the two factions is certainly adversarial. CMCs have been openly criticised by the Consumer Credit Trade Association (CCTA) for bringing cases that are more than six years old, in direct contravention of Financial Ombudsman Service (FOS) rules, and for dodging FCA regulation by aligning their business model with that of solicitors. With each FOS case incurring an administrative cost of £550 regardless of the outcome, this has increased the average cost of complaints for the sector. As a result, the CCTA estimates the Consumer Credit market has shrunk by a third since 2013 and warns this will result in fewer loan products, reducing choice and competitiveness.

Will FCA regulation of CMCs help the sector?

Provisions laid out in the FCA’s draft proposal (CP18/15: “How we propose to regulate claims management companies”) address the CCTA’s concerns directly: For the first time, CMCs will no longer be allowed to exercise the same rights as a legal firm; CMCs must keep correspondence records for at least a year, helping to reduce mass claims; and, they will need to comply with the Supervision manual (SUP), while a consultation proposing CMCs adhere to the Senior Managers and Certification Regime (SM&CR) will make personnel more accountable.

This should create more resilience in the sector in turn helping to protect consumer credit lenders by making CMCs more accountable. For instance, the largest CMCs will be required to reserve more capital, helping to prevent the liquidation of firms seen in the past when CMCs were fined or have had their authorisation withdrawn.

Level playing field

New legislation will go some way towards levelling the playing field between CMCs and firms, helping to ensure that each side abides by the same processes, but it is by no means the sole solution. Firms will also have to counter the allegations made by CMCs.

Previously, firms have struggled to fend off claims because they simply weren’t adequately prepared. The onslaught of complaints and the need to remediate monopolised resources while the business sought to demonstrate it had observed affordability requirements. In some cases, even when the firm was above repute, it ran out of time and resource, or was unable to lay its hands on the necessary documentation, preventing it from defending against these claims.

To prevent this scenario, firms need not only to have carried out due diligence as part of the loan but must also have the necessary resource in place to quickly and efficiently counter claims. This can be achieved by bolstering defences in the following ways:

  • Complaints handling – With robust internal processes and treatment strategies for each cohort of product or cause, complaints can be streamlined, reducing resource costs by making the process as efficient and productive as possible.
  • Documentary evidence –Be able to readily produce evidence to support the position that the loan was affordable and the recipient well informed.
  • Capital reserves –Ensure sufficient financial reserves are in place to manage and defend claims, including historical claims, to avoid the spiral of decline we saw with Wonga.

By preparing early and reviewing past business, before the CMCs cases arrive, you will be in a stronger position to defend increases in complaints.

Equiniti Hazell Carr has the expertise to work with your firm to test your complaint outcomes and help you to be better prepared and able to defend claims made. Contact us to find out more.