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Wider choice and better protection: A consultation paper on the regulation of legal services in Scotland

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Chapter 9: Regulation of claims management

9 This chapter considers whether there is a need for regulation of claims management companies, and sets out possible options.

Introduction

9.1 Although there is little objective evidence of malpractice in Scotland, there is some unease amongst professional and consumer bodies about the lack of regulation of the claims management industry, and the potential to exploit that lack to the detriment of the consumer.

9.2 Claims management companies are businesses that offer claims management services to the public. These consist of advice or services in respect of claims for compensation, restitution, repayment or any other remedy for loss or damage, or in respect of some other obligation. Claims management services might be offered by a firm of lawyers, in which case, there would be regulation by the Law Society of Scotland. Other claims management firms might employ a solicitor, in which case that solicitor would be regulated by the Law Society, though other employees of the firm might be unregulated. But in many cases, there is no solicitor in the business. If so, the services in a Scottish firm are unregulated, whereas in England and Wales there is regulation by the Claims Management Services Regulator set up under the provisions of the Compensation Act 2006 ("the 2006 Act").

Background

9.3 In 2000, the Lord Chancellor ended the availability of legal aid for personal injury claims in England and Wales. As a result, the practice of using conditional or speculative fee arrangements (known colloquially as "no win, no fee") grew. Consequently, the number of claims management companies increased, many of which were just "middlemen" with no solicitors. These companies with no solicitors had to employ solicitors if and when a case was going to court and it was only at this late stage that a legal opinion was given on the chance of success. 49

9.4 There is a strong case that, in the English and Welsh context, claims management companies have increased access to justice. Some claimants who would otherwise not have been able to afford to take action, have managed to obtain redress. But there has also been a downside to the growth of these companies. Some claims management companies used questionable techniques to persuade clients to sign up including approaching people in hospital, the use of market stalls, and cold calling. Some companies also used practices such as persuading clients to give false information about the event that caused injury, wildly over-stating the chances of success, and grossly exaggerating the possible compensation that the client might receive. 50

9.5 Many companies did not explain the full implications of after-the-event ( ATE) insurance to clients. An ATE policy is required to pay the other side's award in the event of a client losing a case. The premiums for this insurance are high (currently £300-£900, though it can be much more in complex cases). As many of the clients had modest financial means the companies set up high cost loans for their clients to pay the premiums.

9.6 Sometimes, ATE insurance came with conditions. Firstly, the insurance company could direct a client to accept an offer from the other side rather than go to court. This has led to cases where settlements have occurred which subsequent legal opinion has considered to be substantially less than the client would have received if the case had gone to court. (There are also cases recorded where claims management companies with no legal opinion have pressurised clients to accept a low offer.) Secondly, the insurance company may insist on the client seeing and paying for an examination by its own medical practitioner. (Since January 2005 ATE insurers and claims management companies that are also insurers have been subject to regulation by the Financial Services Authority in respect of their insurance activities.)

9.7 The result of all this is that people who thought that they had nothing to lose because it was "no win, no fee" found themselves in considerable debt, as it had not been properly explained to them that the slogan only referred to the claims management company's fee. Even some of those who won their cases found themselves in debt because medical fees and/or the cost of the ATE insurance amounted to more than the sum awarded.

9.8 Anxieties about the situation with claims management companies and the "compensation culture" that they were perceived to be encouraging, led to a report by the Better Regulation Task Force. 51 As a result, Ministers at Westminster decided to regulate these companies. The regulation was achieved through implementation of part 2 of the 2006 Act. The Claims Management Services Regulator 52 was created by section 11 of the 2006 Act. The regulator was required to:

  • authorise and regulate claims management companies;
  • set and monitor standards of competence and professional conduct;
  • promote good practice, in particular as to the provision of information about charges and other matters to users;
  • promote practices likely to facilitate competition; and
  • ensure that arrangements are made for the protection of users, including complaints handling.

9.9 The Ministry of Justice has evaluated the effects of claims management regulation. The evaluation's executive summary states: "The regulatory regime for claims management activities is considered to have had a significant effect in reducing malpractice in its first full year of operation.

  • Cold calling in person has been significantly reduced. This has reduced the number of frivolous claims and helped defuse the perception of a "compensation culture".
  • Unauthorised marketing in hospitals has been largely eliminated.
  • A strategy has been developed for dealing with contrived accidents, with the Department also taking a co-ordinating role for the various enforcement agencies and the insurance industry.
  • Malpractice by companies handling claims against the Criminal Injuries Compensation Authority has been significantly reduced, including through some companies voluntarily leaving the market.
  • Misleading use of the expression "no win, no fee" has largely been eliminated.
  • Misleading claims on websites have been almost entirely removed and rules requiring websites to give a physical address are being complied with.
  • What little malpractice there was in respect of handling endowment claims has largely been removed.
  • The growth of claims handlers dealing with bank charges has been controlled, preventing significant malpractice from developing." 53

9.10 When the Compensation Bill was being drafted and introduced at Westminster, consideration was given as to whether it should be extended to cover Scotland. At that time (2005), there was no evidence of similar problems with claims management companies north of the border and the decision was taken not to extend the Bill to Scotland. The view was taken at the time that this was a devolved matter and that Scottish Ministers could in future decide to regulate if deemed necessary.

The present situation

9.11 We have consulted with the Society of Chief Officers of Trading Standards in Scotland, the Office of Fair Trading, the Ministry of Justice, Citizens Advice Scotland, the former Scottish Consumer Council 54, and the Law Society of Scotland. Though there is some anxiety, not one of these groups was able to supply any evidence of a complaint in Scotland.

9.12 In this consultation, we wish to consider the extent of any difficulties with claims management companies in Scotland.

Summary and conclusion

9.13 The Scottish Government considers that there is a place for speculative fee arrangements in relation to personal injury matters, although the ongoing availability of legal aid, and the recently proposed extension of eligibility limits, may limit their extent for the foreseeable future. Other stakeholders agree as to the desirability of allowing speculative fees. 55

9.14 The provisions of the Bill would mean that where a claims management company is an ABS, it will be regulated under the provisions for regulating such firms. This still leaves a question as to what happens when, as is often the case, there is no legal professional within the firm and the company is not subject to any regulation.

9.15 The Government is considering whether regulation should be introduced similar to that in England and Wales. The aim of this regulation would be to protect consumers by requiring all claims management companies offering services in Scotland to be placed on a register. The Bill would provide for a set of regulatory rules and provide enforcement measures and sanctions. More specifically, it would provide for a regulator which will:

  • authorise, license and regulate claims management companies;
  • set and monitor standards of competence and professional conduct;
  • promote good practice; and
  • make sure that arrangements are in place to protect the public and to provide for the handling of complaints.

The options

9.16 There are three options available to the Scottish Government.

  • Do nothing.
  • Regulation by a non-departmental public body ( NDPB).
  • Introduce a regulatory framework similar to that which exists in England and Wales (as created by the 2006 Act).

Option 1 - do nothing

9.17 The do nothing option would leave claims management companies unregulated in Scotland. This means that Scottish consumers will continue to have less protection than their counterparts in England and Wales. There is a risk:

  • that unscrupulous service providers could operate unregulated with little consumer protection: and
  • of dubious service providers moving to Scotland to avoid the regulation in England and Wales.

Option 2 - a new NDPB

9.18 A non-departmental public body would provide an independent regulator. The greatest difficulty with this option is the burden on the taxpayer. If a new body were to be set up, the costs of so doing are likely to be significant. The creation of a new NDPB would also be inconsistent with the Government's aim of simplifying the public sector. Using an existing non-departmental public body is likely to involve less cost but identifying a suitable body might be difficult.

Option 3 - regulate by Government with contracted out operation

9.19 Finally, the Government could follow the model used in England and Wales which was introduced by part 2 of the 2006 Act, where it was recognised that much of the regulatory work was similar to that undertaken by local authority trading standards departments. Staffordshire County Council was selected, after an open tender process, to provide a Monitoring and Compliance Unit under contract to the Ministry of Justice. The unit reports directly to the ministry and all regulatory decisions are made by the ministry. A similar tendering exercise and regulatory model could be undertaken in Scotland with Justice Ministers taking the regulatory decisions. Set-up costs would still be involved but are likely to be less than the option of using a non-departmental public body. The aim would be that running costs should be recovered through licensing fees. The biggest risk is that no body tenders for the regulation.

Questions

35 Do you consider that regulation of claims management companies operating in Scotland is necessary?

36 If you think that regulation is necessary, which option do you favour?

  • Regulation through a non-departmental public body.
  • Regulation by Scottish Ministers with licensing and administration contracted out to trading standards department or similar body.

37 Are you aware of any issues in Scotland with "no win, no fee" arrangements where the cost to the client was greater than the award?

38 Are you aware of any poor practices by claims management companies in Scotland, for example:

  • questionable advertising, and/or
  • practices such as cold calling, market stalls, or approaching people in hospital in Scotland, and/or
  • inappropriate pressure to settle a claim?