New regulatory rules aim to clamp down on “phoenixing” were firms close down their businesses to avoid paying customer compensation, but then re-emerge under a different name.
The Financial Conduct Authority is consulting on new regulation, which has been welcomed to by the Financial Services Compensation Schemes
The FSCS says this is a “big step forward” and should improve consumer protection.
It says the new rules specifically target the poor practice of many ex-financial advisers, who then become authorised Claims Management Companies (CMCs) targeting their former clients who they misadvised with a claim on their behalf to the FSCS.
The FSCS says this behaviour costs consumers, with CMCs typically charging up to 40 per cent of any compensation awarded as a fee. It points out that it also causes reputational damage for the industry and poses unfair competition to those CMCs doing honest work for their customers.
If the proposals go through, it will mean authorised CMCs will be banned from making claims with FSCS for customers where they have a direct or indirect connection to the subject of the claim.
FSCS chief executive Caroline Rainbird, says: “The FSCS has proven incredibly effective at identifying cases of phoenixing and sharing them with the FCA and others.
“We have reported over 120 cases of this type of phoenixing, but frustratingly action was not always possible as much of the behaviour we were seeing was not explicitly against the FCA rules. However, these proposals change that, and rightly mean these practices will be banned.
“Customers can claim directly with FSCS for free, but if they choose to pay what can be a significant portion of their compensation to a regulated CMC, they should feel confident that their chosen CMC is acting in their best interests.
“This progress is a direct result of FSCS and the FCA proactively working together on this issue and demonstrates the power of FSCS’s unique perspective as an independent claims service.”
FSCS chair Marshall Bailey, adds: “Instilling better standards such as those being proposed today will keep bad actors out of the market, which will help protect vulnerable consumers from poor outcomes and drive down the FSCS levy that follows.
“These proposals are undoubtedly a big step forward. FSCS will continue to be actively involved in preventing harm and finding the right balance between consumer protection and consumer responsibility. Collaborating with the FCA and others in this mission remains a core part of FSCS’s strategy.”
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