We are now four days into a new regulatory regime for claims firms.

    The regulation of claims management companies (CMCs) transferred from the Ministry of Justice (MOJ) to the FCA on 1 April.

    As discussed in our previous article, this new regime will mean advisers will have to tread carefully where they are helping clients with potential misselling claims, to avoid straying into regulated claims management activities. (You can catch up on that article here.)

    One of the four key tests for assessing whether a service is a regulated claims management activity is what’s called the ‘by way of business’ test. So what does this mean in practice?

    By way of business 

    There is no straightforward way to determine whether an activity is being carried on by way of business.

    Guidance from the MOJ states: “A person providing a regulated claims management service who is not paid in cash or does not receive any form of reward does not need to be authorised. This applies, for example, to volunteers or a friend giving advice.”

    It is not clear that an advice firm carrying out services for a client with whom it is in a business relationship could ever truly be said not to be acting by way of business.

    If an adviser, acting in his or her personal capacity, carries out claims management activities for a client of their firm, the position could well be different.

    Under the previous regime, it was sometimes argued that FCA-authorised advisers who provided claims management services for free simply did not need a separate licence from the MOJ.

    It’s not clear that the guidance, which was intended to cover assistance provided by volunteers, friends and the like, ever entirely supported this argument. It is even less clear that FCA guidance could now support a similar argument.

    According to the FCA’s guidance in PERG 2.3.3, this is “ultimately a question of judgement that takes account of several factors (none of which is likely to be conclusive).

    "These include the degree of continuity, the existence of a commercial element, the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated. The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis.”

    The key factor is likely to be the existence of a commercial element. An adviser charging for claims management services will find it difficult to argue they are not doing so by way of business, even if they are doing so on a one-off basis.

    But it doesn’t necessarily follow that advisers providing such services for free are not doing so by way of business.

    There will be an existing business relationship, and the activity could have indirect financial benefits. For example, this might be the ability in due course to charge for advice on how to invest any compensation, so there is arguably a commercial element in any event.

    Even if there is no commercial element, this is unlikely to be conclusive, especially if the activity is carried on with any element of continuity or scale. The FCA is entitled to take the view that an authorised adviser cannot carry out a service they don’t have permission for, for a client they already have a business relationship with.

    For these reasons any adviser providing these kinds of services without permission, on the basis they are doing so for free and therefore not by way of business, is taking a risk.

    It is unclear why an adviser would want to provide these services for free, because providing them at all involves a significant risk of liability for negligence. The fact they not would be doing so by way of business may mean that such liability is not covered by professional indemnity insurance.

    Referring clients for help

    Referring claims or potential claims will not be a regulated activity if it is done in a way that satisfies the following conditions – even if done by way of business.

    Firstly, the adviser must carry on no other regulated claims management activity, for example by advising clients or investigating claims.

    Secondly, any referral activity must be incidental to the adviser’s main business. Most advisers ought to be able to meet this condition.

    Thirdly, the adviser must be paid in money or money’s worth for no more than 25 referrals per quarter. He can make more than 25 referrals per quarter provided he is not paid for the excess and the activity remains incidental to his main business.

    Any adviser making this level of referrals should of course have robust systems and procedures in place to ensure they do not breach the cap.

    Fourthly, the adviser must only make referrals to legal practitioners (such as solicitors, barristers and legal executives) or authorised CMCs appearing on the FCA register.

    Lastly, in obtaining and referring details, advisers must comply with the relevant regulations including the General Data Protection Regulation and the Consumer Protection from Unfair Trading Regulations 2008.

    Key aspects of this will be ensuring that any privacy notice is adequately drafted, and that client consent is obtained before any details are referred. Some advisers may require legal advice in order to fully understand their obligations, but in theory should be able to show they are complying.

    This last condition does not apply if referrals are made only to legal practitioners, so advisers can avoid having to consider it further by adopting that approach.

    Who can advisers refer to?

    When making a referral, advisers can choose any type of legal practitioner or authorised CMC, but must pay due regard to their clients’ needs.

    Advisers may be unlikely to consider referring to a CMC, but putting that aside, there can be some distinct advantages of working with legal practitioners.

    The first consideration should be whether the firm has the right skills.

    Solicitors (who are by far the most common type of legal practitioner) are subject to rigorous training requirements. Some have specialist financial services teams and industry-recognised qualifications. Solicitors can pursue claims using every means available, including litigation, and can adapt their approach to suit the claim.

    CMCs on the other hand have no particular training requirements, and are likely to have less varied knowledge and experience, and cannot conduct litigation.

    Cost should also be a key consideration. There are few hard and fast rules about what solicitors and CMCs can charge in relation to financial services claims. CMCs tend to charge contingent fees of at least 25 per cent of any payout, whereas solicitors offer various fee options and the amounts charged for comparable services will often be significantly lower.

    Finally, it is always sensible to consider what could go wrong.

    CMCs are not required to hold any indemnity insurance in connection with financial services claims, and are not covered by the Financial Services Compensation Scheme.

    Solicitor firms are required to have indemnity insurance cover of at least £3m for any one claim, and often have much greater cover. If they fail to put in place the required cover and cannot otherwise meet their liabilities, a discretionary grant may be available from the Solicitors Compensation Fund.

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