FCA announces plans to stop CMC phoenixing

The FCA has announced proposals to stop the practice of ‘claims management phoenixing’, by banning Claims Management Companies (CMCs) from managing Financial Services Compensation Scheme (FSCS) claims where they have a relevant connection to the claim. 

Claims management phoenixing occurs when individuals from financial services firms go out of business, but later reappear in connection with CMCs and charge consumers for seeking compensation against their former firm’s poor conduct by bringing claims to the FSCS.

The FCA has taken action where it has been possible to do so to prevent this practice, including where the managing director of a financial advice firm provided inadequate service to consumers. After the managing director was barred from acting as a company director, his wife set up a CMC.

The CMC represented customers claiming more than £5m from the FSCS in claims against the husband’s former financial advice firm. The FCA was able to refuse the authorisation of the CMC as the firm did not meet standards.

While the FCA was able to stop claims management phoenixing by refusing authorisation in this case, the new rules being proposed will put a stop to claims management phoenixing across the market.

Sheldon Mills, Executive Director of Consumers and Competition as the FCA, said:

‘Consumers should be able to choose to use a CMC to help them claim compensation from the FSCS. But paying someone to provide help who is connected with the firm that caused the consumer's loss is wrong, particularly where the firm had a responsibility before winding up to help its customers to obtain compensation.

‘Our proposals are designed to put an end to this practice and to increase consumer trust and confidence in financial services firms, CMCs and the redress system.‘

Claims management phoenixing generally requires the existence of a compensation scheme which will pay claims relating to the activities of financial services firms that have wound up and potentially owe compensation to consumers.

By stopping CMCs from managing FSCS claims with which they have a relevant connection, the FCA will ensure CMCs are not seeking to profit from past misconduct of individuals connected with the CMC.

The FCA wants to ensure that firms have customers’ best interests at heart and are not incentivised to treat customers poorly, that they will take due care in the provision of financial products and services and, when things go wrong, will take responsibility and put things right for their customers.

The consultation is open for comment until 21 June 2021.

CMCs exist to help customers make claims for compensation when they have suffered loss or damage. In the financial services industry these claims relate to losses caused by financial services firms.

The FCA became responsible for the regulation of claims management companies in April 2019, following a Government review. Since then, the FCA has dealt with 979 applications for authorisation, with around 20% of CMCs leaving the sector. 656 firms have been approved, while 24 have been refused or rejected.

In addition, 168 applications have been withdrawn with around 75% of these withdrawals occurring following FCA scrutiny, which showed the firms were unlikely to be ready, willing and organised to be authorised.

Notes to editors 

  • Read CP21/14  Preventing claims management phoenixing by financial services firms
  • Phoenixing occurs when a firm winds-up and an individual connected with it re-opens under a new guise to avoid the liabilities of the old firm. Typically, the directors, shareholders or senior staff, whose former firms owe significant sums and/or have engaged in misconduct, reappear in connection with a new firm doing very similar business. 
  • The FCA received data from the FSCS on 1,319 claims where phoenixing appears to have occurred. The cases cover a period of about 6 years, representing an average of 220 claims per year, with a total of £3.7m paid out per year. 
  • It is estimated that the 1,319 claims to the FSCS that involved phoenixing cost consumers on average £11k per claim in CMC fees, unclaimed losses and monetised time and worry. This means consumers annually lose at least £2.4m FSCS claims which might not have arisen or might have been resolved differently had claims management phoenixing not been possible. 
  • Since taking over the regulation of CMCs, the FCA has published: 

'Dear CEO' letters on financial promotions and acting for customers (June 2019) and the importance of carrying out due diligence to ensure the validity of claims (October 2019); 

A joint statement with the Information Commissioner's Office (ICO) and the Financial Services Compensation Scheme (FSCS), handling personal data and directing consumers to FSCS (February 2020); and  

A portfolio strategy letter, which sets out the potential harms that CMCs could cause along with supervision strategies for dealing with them. This followed a comprehensive analysis of the portfolio. 

  • In January, the FCA published proposals to introduce a price cap on the fees claims management companies (CMCs) charge their customers in relation to claims for financial products and services.