Jonathan Russell finds that allowing claims management companies to self-regulate has become a defining moment for the Claims Standards Council

For many in the insurance industry 2005 will be remembered as the year statutory regulation joined death and taxes as one of the few certainties of life. As of January insurance intermediaries started answering to the FSA for the conduct of their business.

While this has created untold arguments over the direction and design of the regulatory framework, few commentators have debated its necessity.

Statutory regulation is here to stay and is something that affects everyone.

Or does it?

As brokers are only too aware there are pockets of the industry that have miraculously escaped the FSA control. Travel insurance sold by travel agents is one such exception; claims management companies (CMCs) are another.

Somehow CMCs have managed to glide straight over the pitfalls of FSA regulation that have been threatening to trip up brokers. Time and again the government has ducked opportunities to include claims handlers in the regulatory framework.

Whether it is because CMCs act as intermediaries for both insurers and solicitors, or because of efforts made by the Claims Standards Council (CSC) to impose self-regulation is hard to explain, but it is an issue that causes concern throughout the sector.

Association of Personal Industry Lawyers (Apil) executive director Denise Kitchener says: "We welcomed the Clementi report (on regulatory review of legal services) but were disappointed that claims management companies seem to have slipped through the net.

"The government seems to be waiting for claims management companies to self regulate. But we don't feel that is enough."

Kitchener's concern is two fold - there is little transparency in the claims management industry, and commercial interests too often override those of the consumer.

She says: "We are worried about the diverse commercial interests of claims management companies. With more and more two or three-man bands popping up there needs to be some real regulation. We are not convinced the CSC can provide that."

But in the absence of statutory regulation the CSC is all the industry has. As CSC chief executive Tony Burns-Howell is the first to accept, self regulation is not easy and is something that can work only with the co-operation of a number of parties, not least the claims management companies concerned.

He says: "We have to address two areas. Companies that are unregulated and companies such as solicitors and intermediaries that are regulated but that use processes that are not regulated. The CSC believes it should regulate both.

Area of disquiet

"The reason the CSC was set up was to regulate in all areas that cause disquiet in handling of claims."

But as Burns-Howell accepts, and a number of insurers point out, one of the biggest areas of disquiet is that under a system of self-regulation it will be up to the individual company to decide whether or not they want to be controlled by the system.

Allianz Cornhill Legal Protection (ACLP) divisional manager Phil Ruse says: "The problem with self regulation is that people can opt in and opt out. And it is the people who opt out who are invariably the problem.

"From ACLP's point of view we do not see this as enough. There has to be regulation at some point in time and it has to be imposed and overseen by some regulatory body."

The problem is that no matter how much the various parties complain, the government does not seem to be listening to calls for statutory regulation. Indeed it now seems it is governmental bodies that appear to be trying most to weaken the CSC's effort to impose voluntary regulation.

The Office of Fair Trading (OFT) has recently warned the CSC that one of its main principles, the banning of high pressure sales tactics such as cold calling could be anti-competitive and therefore illegal.

Burns-Howell says: "The CSC first sought to ensure that its members do not engage in cold calling. However, the latest advice from the OFT is that a complete ban on cold calling could be anti-competitive and therefore unlawful. We want to address this issue. High pressure selling is the sort of conduct that will not be tolerated."

The two areas that most commentators agree are crying out most for statutory regulation are the practice of cold calling and imposing some sort of fiscal discipline on CMCs to try and avoid a repeat of the disasters that hit companies like The Accident Group and Claims Direct.

Bonding system

In response to these concerns the CSC has proposed a bonding system, similar to that operated by the Association of British Travel Agents (Abta).

For Phil Ruse this may not be enough.

He says: "How much customer confidence is there when claims management companies come and go with such rapidity? If you think in terms of a CMC how does its cash work? One of the major issues in the sector revolves around the liquidity of these companies and how much money they should leave in the bank to deal with on going work."

Through consultation the CSC hopes to deal with all these problems. However once it comes up with a suitable solution it still faces the problem of making sure everyone in the sector follows it. Burns-Howell accepts this is not going to be easy.

"There is no way we can compel members to accept regulation. What we have to do is publicise the benefits of dealing with companies that are regulated. What we can do is name and shame companies that are not regulated or have failed to meet the standards of regulation."

Whether this will be enough only time will tell, but one point members of the CSC stress is that even if statutory regulation were introduced, it could take two or more years to be implemented. This would be time enough for the industry to suffer at least one more high profile collapse in the mould of The Accident Group or Claims Direct unless a body like the CSC steps in to fill the vacuum.

So in the short or long-term the CSC is all the industry has to try to protect both the consumer and the business partners dealing with CMCs.

If the CSC is successful in setting claims companies on the road to self-regulation, it could lead to insurers having to pay out less for personal injury and other claims.

If it does not work, as many fear, the CSC has said it will be the first to call on government to step in and impose statutory regulation.

Burns-Howell says: "If it is at all evident that the industry does not wish to be regulated voluntarily or that the attempts to regulate voluntarily fail, I will be the first to stand up and say to government that statutory regulation is required. But we believe that voluntary regulation can and will work."

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