The FSA has launched an investigation into bad practice among insurers that deal direct with personal injury claimants who are not policyholders.

The regulator is prepared to take action against the culprits, and change its rules, widening its remit to tackle the problem.

It is examining whether insurers are contacting personal injury claimants directly and settling out of court for small sums of money.

The insurance industry claims that it contacts third parties directly to save time and unnecessary fees, and that settlements tend to be generous. The ABI said the debate highlighted the need for an overhaul of the personal injury claims system.

The FSA has asked lawyers and trade unions to submit evidence of bad practice among insurers that deal direct with personal injury claimants who are not policyholders, in what are known as third party capture cases.

An FSA spokesman said: “Several groups have raised concerns with the FSA about how insurers are dealing directly with third parties who have claims against its policyholder. We have requested material from the groups to support their concerns.”

The spokesman added that the FSA is now reviewing the submitted evidence to see if the cases break existing regulations, and confirmed that the FSA would be willing to consider “additional rules”.

Thompsons Solicitors is one of the firms to have submitted evidence. Partner Tom Jones was scathing in his criticism of the practice, saying: “There can be little doubt that settling direct saves money and time – no lawyers, less hassle. But what does it say about the insurance industry’s real view of the consumer? And how will the consumer view the industry when the injury they settled for a derisory sum on the back of no medical of a cursory report drags on for years?”

Earlier this year, the FSA met trade bodies which were calling for action on third party capture (News, 1 February).