The watchdog barks

The regulation of claims management companies (CMCs), like it or not, will have implications across the entire insurance sector. While this band of businesses may appear to be peripheral to insurers and brokers, it is clear that the Claims Standards Council (CSC) is preparing to fight for a level compliance playing field.

Until recently, the debate focused on whether insurers that capture third party claims should come under the CMC regulation banner. The FSA said that insurers dealing with their own policyholders are regulated, but when contacting third party claimants they would be deemed another insurer's policyholder and therefore not under the FSA remit.

But behind the scenes the Department for Constitutional Affairs (DCA) was working furiously to persuade the FSA that third party capture should be heavily policed. The FSA said it had not received any complaints about the procedure. But the CSC has highlighted complaints which had landed at its door regarding the practice. Finally, the DCA wrote to the ABI clarifying that third party capture is under the FSA remit.

DCA agenda
It is worth noting that if CMCs were left unregulated the FSA would certainly have left third party claims capture well alone. It is only because the CSC is insisting that insurers should be regulated to the same extent as CMCs that this practice has crept quietly onto the DCA agenda.

In fact, further tightening of FSA rules are expected when CMC regulation takes full force. "The Law Society and the FSA will raise their game to fit in with CMC regulation," says Mark Boleat, the DCA's appointed claims management regulator.

Furthermore, if the CSC is successful in collating more official evidence of abuses of the system, then the FSA will have its hand forced and will investigate the sector.

Boleat says: "It is alleged that insurers abuse third party claims and we have had a few complaints raised. But the FSA has not received any complaints until recently. If it is presented with abuses it will investigate." And those complaints are likely to come from the CSC.

Andrew Twambley, chairman of the CSC and senior partner at claimant law firm Amelans, says: "If claims management companies have to operate within set standards, so must insurers."

He continues: "We have our regulator and we will ensure that our opponents act at the same standards. We will make sure the FSA regulates on a level playing field."

Already the FSA has established a unit to look at third party capture. For insurers this could result in a change of procedure, namely that they will be unable to make cash offers to claimants direct, or if they can, it will be a severely restricted practice. With the current referral fee system under threat, insurers could soon see a lucrative income stream cut off.

Norwich Union has declared it would stop paying and being paid referral fees if the government proposed a new personal injury system which put claimants at the heart of the process.

At the same time, Zurich is steadily pulling back from the process. Meanwhile, other insurers are believed to have seen the writing on the wall and are cashing in while the opportunity still exists.

One AXA insider says the insurer has abandoned referral fees altogether, but a claims management source says this is because AXA has found another label for the income stream.

This, says Boleat, could be a major problem. According to Boleat, a ban on referral fees "would not work".

"You would have subscriptions instead. At least with referral fees there is a chance of it being transparent."

Yet the Lord Chancellor, Lord Falconer, would prefer to see the practice abandoned altogether. Further pressure is expected to be put on the Law Society and the FSA to investigate referral fees by CMCs as more malpractices are uncovered.

While insurers may be licking their wounds from this latest round of regulation, brokers are likely to be much more adversely affected.

Just this week Boleat told CMCs: "The FSA does not regulate brokers which refer cases to insurers. That activity comes under the remit of the CMC regulator."

Likewise brokers that act as introducers will have to make themselves known to the regulator. Boleat says where business is incidental to CMCs, brokers will not have to comply at the same level as CMCs.

The DCA has also put a limit on how many cases can be referred to insurers by brokers and other introducers - 25 every three months. Those that break through the limit will be forced to register with the regulator. These companies may not have to abide to the same level of compliance as CMCs, but do not expect the CSC to readily accept this.

For many brokers the risk of CMC regulation on top of FSA regulation could be enough to push them out of the introducer business. But then some newspaper advertising, such as in the Daily Mirror, introduces their readers to "reputable" CMCs.

The broker referral limit will severely restrict their business and, say sources, could force claimants to go direct to solicitors for advice. Yet again this brings the argument back to referral fees. If solicitors are selling and buying cases, then how can claimants possibly be getting a fair deal?

"They aren't," says one leading legal source. "Referral fees cannot be transparent on any level. If claimants knew that their cases were being sold for up to £1,000 a go, they would be likely look elsewhere for a fairer service."

At its inaugural EGM the CSC declared it would push for a level compliance playing field. This, says Boleat, is a fantasy. But already the new rules will have implications for brokers and insurers alike.

As 2007 approaches, expect plenty of noise from the CSC - Biba busily fighting dual regulation, the FSA zooming in on third party claims capture and the Law Society frantically reviewing the referral fee system.

As one insurer put it: "We are standing on a knife edge, there are plenty of changes happening behind the scenes and only when CMC compliance is made effective will brokers and insurers wake up to the consequences it will have for their industry."